Low-tax threshold
Mark Keating proposes:
Most countries provide either a nil rate of tax on the lowest level of income or provide rebates and allowances that shelter such small amounts. For instance, Australia imposes no tax on the first $6000 of income earned. Canada provides a rebate for the first $1500 of income.
Only in New Zealand are all taxpayers, including children working part-time jobs, immediately brought into the tax net.
Surely the additional bureaucracy cannot be worth the small amounts of tax collected?
Introducing a small exempt-income threshold or low-income rebate in New Zealand would immediately compensate taxpayers for the small increase in GST proposed.
For instance, making the first $2000 of income exempt would provide an additional $270 to all low-income taxpayers and $420 for taxpayers on the average wage.
This is the most efficient way to ensure vulnerable taxpayers are not the losers under the tax reform proposals.
As a principle, I believe you should pay no taxation until you are earning enough to live on. Otherwise one is churning tax dollars into welfare support which is grossly inefficient.
However to do this, means a total rewrite of the tax and family support rates and policies. It is very difficult to do.
I have long advocated that Dr Cullen should have done what Peter Costello did, and increase the threshold at which you pay tax (it is zero in NZ). But instead he plowed all the money into Working for Families.
I’m not sure if I agree with his assertion that it means $270 for low income earners and $420 for average income earners. If you make the first $2,000 tax free, then it is the marginal rate for that first $2,000, which is 12.5% that counts, so it would mean $250 for every New Zealand who earns at least $2,000 a year.
According to Treasury we have 3.076 million NZers who have taxable income. The annual cost of a $2,000 tax free threshold would be around $750 million. Probably a bit less than that as benefits are calculated net, not gross, so benefit rates would adjust so the net benefit is unchanged.
As I said, I support in principle a tax free threshold. However many low income taxpayers effectively pay no tax at all – they receive far more from other taxpayers through WFF than they pay themselves. So rather than piecemeal introduce a $2,000 tax free threshold I would rather one rejigs the whole system, so that all low income earners pay no tax until they are on the minimum level needed to live on, but with far less money churned through welfare such as WFF. As I said it is a very complex thing to do, especially if you want to minimise “losers” from any change.
February 2nd, 2010 at 11:53 am
What is so complex about simply changing a couple of computer programmes at IRD?
No tax on the first $10k, reduce WFF largess by $1,950 and the job’s done.
(BTW, do beneficiaries pay tax?)
February 2nd, 2010 at 11:56 am
Cullen should be up on charges – IMO he sabotaged the countries economy with WFF. He put in place the equilavent of an addictive drug for familys to make them reliant on the state. Anyone in power who tries to remove that drug will not survive the election and he knew it.
February 2nd, 2010 at 11:58 am
Have you guys seen Stuart Nash’s post on Red Alert?
http://blog.labour.org.nz/index.php/2010/02/02/exploding-tax-myths-part-3/comment-page-1/#comment-29032
Is it just me or is does he really seem to think that 16% is more than 23%? Labour’s best and brightest. Awesome to behold!
February 2nd, 2010 at 12:06 pm
Pre-18 years of age I hated the fact that I had to pay tax, yet was unable to vote on how those tax dollars are spent.
Not for a second am I advocating a coupling of the voting age to first dollars earnt, more obviously, scrap tax for people <18 years of age
February 2nd, 2010 at 12:08 pm
Also – why is tax paid on a student allowance? surely this is adding complexity to the system i.e. the government taking back money that they just gave you…
February 2nd, 2010 at 12:17 pm
Agreed, the current system of taxing and then redistributing to the same people is ridicolously inefficient.
WFF currently is the biggest rat National swallowed, and Keys support of it was limited to the period of the recession (by memory). Accordingly this is one issue which National should begin to address before the next election, as it will take time to move from the current system to a more efficent one.
February 2nd, 2010 at 12:17 pm
Whats complex about it – its the way it used to be.
Furthermore the threshold went up if you had dependents – children, elderly parents or a non working spouse.
All of which encouraged people to take care of their own and lessened the need for social welfare but was an anathema to yuppies without children, who considered it unfair and socialists who wished to expand the state.
February 2nd, 2010 at 12:23 pm
Personally, I really like the principle that ALL income earners should pay some tax – even if is only a token amount. That gives everyone a stake in ensuring it is well spent by the Govt, and means we don’t have complete freeloaders in the system.
Secondly, a large proportion of the very lowest income earners are the second income in a household – eg Mum who works six hours a week while Dad earns $75k working full time. The case for their paying no tax is rather weak, and it would be hard to seperate these people out of the net.
Thirdly, a rebate or zero tax up to a low threshold means raising marginal tax rates for people earning more than that, and high marginal rates are an especial curse that we should be attacking not adding to.
Also, I suggest that the simplest and best way to compensate for a rise in GST is to cut ALL the income tax rates. Because GST is a broader-based tax it is possible to do this in a way that will leave almost all income tax-payers better off.
Note that a 15% GST would apply on the pre-tax price of goods and services not the present GST-included price so the actual increase in the final price of a rise from 12.5% to 15% is only 2.22%. Furthermore, most people spend at least 20% of their net income on rent or buying a house (usually via mortgage) – costs that do not attract GST. Allowing for that most people will end up paying no more that 1.78% more. On the other hand, a 2% cut in income tax rates would lift the net income of an average earner by over 2.5% because they gain an extra 2% of the gross, not the net.
The Budget document Key Facts for Taxpayers (May 2009) suggests that the cost of a 2% cut to all rates would be $1.8 billion – less that the $1.9 billion revenue the Tax report said would accrue from the GST rise after super and benefit compensation.
February 2nd, 2010 at 12:32 pm
What a load of arse, if Key can introduce an entirely new tax system baesed on a fantasy then a minor alteration with a real one should be a walk in the park.
February 2nd, 2010 at 12:43 pm
I’m just happy that Labour have woken up to the fact that Cullen’s definition of rich was complete bollox. Still I don’t expect them to acknowledge that their previous master was a muppet and his policies created a domestic recession which started well ahead of the global crisis.
Labour policies without fiscal drag will be interesting to analyse. Can’t see Goff understanding that making a promise to tax less and spend more gets a little complicated. Will be good to see him do his usual foot in mouth u-turn on u-turn while all the time still claiming previous policies were sound. Muppet.
February 2nd, 2010 at 12:51 pm
We need to restructure WFF. Call it the “Kiwi Family Credit” and give away vouchers for it at election time – it’s the Labour way.
February 2nd, 2010 at 12:55 pm
As government does not create wealth, by definition *any* change they make will have losers compared to the status quo.
Some of those losers may well have been unfairly and unjustifiably benefited by previous government action, but you can still be sure they will complain bitterly.
February 2nd, 2010 at 1:18 pm
“Adolf Fiinkensein (1362) Says:
February 2nd, 2010 at 11:53 am
What is so complex about simply changing a couple of computer programmes at IRD?
No tax on the first $10k, reduce WFF largess by $1,950 and the job’s done.”
I agree 100%. There is only one option: form a specialist strike team (black tight clothing, lots of tech gadgets, code names, dramatic music etc) to bust into the IRD computers and rewrite the programmes. May need to kidnap Bill and John and hold them for 6 months in Dipton to allow new tax system to settle in and stop them interfering.
February 2nd, 2010 at 1:28 pm
February 2nd, 2010 at 1:28 pm
Prediction: Kullen & Kenglish will increase the WFF. Great way to attract votes. Power is what is what counts.
February 2nd, 2010 at 1:40 pm
“scrap tax for people <18 years of age"
That's what I, most of the self employed and over 1000 dairy owners would love to see.
We'd shift a fair proportion of the family income onto the kids. On paper, of course.
(It's called a loop hole Lyn
February 2nd, 2010 at 1:46 pm
I can’t see how this is so hard.
Dump WFF and all other programs that simply regurgitate tax and lower the tax rate accordingly including a zero rate for all income up to $10,000.
Must be a win/win if only because it cuts out the costs of WFF and any other “assistance” programs and simply leaves the money in peoples pockets.
February 2nd, 2010 at 2:13 pm
David, surely the saving would be greatest for those on the highest income. The marginal tax rate above 70k is now 38%. So someone earning over 72K would save $760.
Someone earning little less the saving would be $660,
February 2nd, 2010 at 2:14 pm
MT_Tinman
If you leave the money in their pockets you can’t make them grateful (vote for you) when you promise to let them have some of it back. I can see why you are not a major party popularist MP.
February 2nd, 2010 at 2:22 pm
Adolf, The fatal flaw is that it is impossible for any employer to predict the annual income for someone (from all sources) working a week and the tax is not calculated and deducted by IRD on a weekly basis. The only way therefore is to continue taxing all income but refunding annually to those who’s total income is less than a certain amount.
Otherwise as Petal said, there are loopholes big enough to drive a Mack 18 wheeler through particularly in association with family companies or trusts.
Most of our tax inefficiencies have been created to stop exploitation of loopholes created when loopholes were closed etc etc
Scrapping WFF has got to be the most efficient thing any Government can do.
February 2nd, 2010 at 3:07 pm
the NZ tax system is like a P addict It wants more and more for less and less. All Gumints over the past 40 years have increased the tax take in real terms to fund huge amounts of waste.
IMHO the starting point is 1999. The Tax take from that year plus inflation should be the Budget for 2010/2011.
Reason. The taxpayers cant afford anymore. Our society cant afford any more. We need to get back to individual responsibility and the concept than families take care of families.
The P addict needs to break the habit.
No ifs no buts no maybes.
Its time for some cold turkey folks.
February 2nd, 2010 at 3:45 pm
“Its time for some cold turkey folks.”
Lastmanstanding. WFF is a bad thing but if Key dumped it cold turkey as you suggest Labour would be in next election.
That is exactly how Clark and Cullen planned it. Just like buying the trains. Most of the reason for the purchase was to make things difficult for National if they got in.
The safest way to get rid of WFF is slowly. Try doing anyother way and there will be anomalies that translate ot lost votes.
February 2nd, 2010 at 4:00 pm
Chuck The porblem is for the past 40 years governments have been tinkering with the system and thats why its so broke now. keeping on tinkering will just be the same as feeding the P addict and hoping they will recover them selves.
If we tackle the government waste at the same time as we take away the WFF crutches then we will be able to offset any pain
We must reduce government waste (I dont call it spending because its not its waste) TINA. The government should be no more than 20% of an economy if we want to be a first world country.
We were at the same political point post November 2008 as we were post July 1984.
The problem is the 1984 Labour government moved fast and effectively to fix the problems it inherited.
By contrast the Nats have stalled and tried to be nice to everyone.
NZ Inc doesnt have the luxury of time. We must have a radical reform of the tax system with a max rate for personal trust and corporate taxes of 20% GST at 20% with a corresponding adjustment to compensate GENUINE beneficaries note the capitals.
It can be done but only by a government that has the will capacity and capability. I fear this government lacks in all 3 areas
February 2nd, 2010 at 4:11 pm
Practically or politically?
Important things, big things, are usually difficult to do. They don’t have to be done in one hit, a phased restructure would be easier to adapt to and less risky. It also makes it easier to adjust where necessary.
Sticking with the easy options, as has often been done, just leads to a harder job to eventually clean up the mess.
There is no better time than now to do what is difficult but essential.
That could be put another way – there is no worse time than now to do bugger all.
February 2nd, 2010 at 4:34 pm
My 2 cents
1. Why not allow income pooling of married couples that way the one earning 6 kpa can take some of the 75k off of the other and reduce tax.
we indirectly assist the family member at home (its just as important a job) and allow them to benefit without running money through the system where a % gets lost.
2. scrap ax on under 18′s and over 65′s.
3. reduce to a flat tax to encourage entrepreneurs and businesses or scrap income tax and only have a gst tax on consumption.
4. do not tax retirement funding both in (during working life) or out (when retired).
February 2nd, 2010 at 4:59 pm
Too simplistic DPF – something Government’s don’t do.
“Simplify” and “bureaucracy” are mutually exclusive terms, the ultimate oxymoron?
February 2nd, 2010 at 7:30 pm
This mornings experience:
Had to go to get my new earphones with blue tooth fixed. Lady who did the job, nice lady and on her first day back this year!
Tells me she screwed up hubby’s day today. He is apparently a house husband and her crime was to tell him that the kids all went back to school today. Well indeed the high school one did but the other two didn’t. No problem you would think.
well not really, cause he was playing in the golf tournament today and he couldn’t look after the kids either.
So I ponder, is he able to play golf tournaments cause they get xxx dollars of WFF and can do the house work in double quick time.
So my staff work their bums off to pay tax to support a golfer. ( and maybe a lot of others as well.) but are struggling with their own money problems.
Don’t seem right to me.
And I won’t tell you about the Lady from IRD that didn’t consider our working hard to keep our business growing to be important nor about the Amex lady who could barely speak English and to whom I had to repeat four times the same message and still she didn’t get it.
Clearly the worlds going to crap in a rusty bucket.
Oh and I won’t mention the grumpy customer for whom we had bent over backwards to meet her deadlines in preference to someone else.
Whats all this to do with low tax; beats me but I guess that if people had more money they wouldn’t be so fucking grumpy.
Ahhhhhhhhhhhhhhh!
February 2nd, 2010 at 7:43 pm
http://www.stuff.co.nz/business/blogs/stirring-the-pot/3286437/The-ins-and-outs-of-a-land-tax
http://www.stuff.co.nz/business/blogs/stirring-the-pot/1881729/The-20-20-20-tax-plan
February 3rd, 2010 at 1:04 pm
The annual cost of a $2,000 tax free threshold would be around $750 million.
Although some of that would be recouped from any spending – 12.5% (15%?) GST everyone pays on goods.
I’d prefer to see much bigger thresholds. No tax on the first 10K. 25% up to 200K.