Your tax cuts

October 1st, 2010 at 9:12 am by David Farrar

On budget  Day I blogged:

The tax rate changes from 1 October 2010 are:

  • Up to $14K – tax rate goes from 12.5% to 10.5%
  • $14K to $48K – tax rate goes from 21.0% to 17.5%
  • $48K to $70K – tax rate goes from 33.0% to 30.0%
  • $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

And the reduction at each income bracket:

As I commented at the time, the reductions are pretty even, as a percentage of existing tax paid.

And this takes into account the likely impact on prices with the increase.

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41 Responses to “Your tax cuts”

  1. queenstfarmer (782 comments) says:

    I know this has been posted / referenced many times, but it is essential reading!

    Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. They could all just pay $10 since they all drank beer or if they paid their bill the way we pay our taxes, it would go something like this:

    The first four men (the poorest of the 10) would pay nothing.
    The fifth would pay $1.
    The sixth would pay $3.
    The seventh would pay $7.
    The eighth would pay $12.
    The ninth would pay $18.
    The tenth man (the richest) would pay $59.

    So, that’s what they decided to do.

    The ten men drank in the bar every day and seemed OK with the arrangement until one day, the owner threw them a curve. ‘Since you are all such good and faithful customers,’ he said, ‘I’m going to reduce the cost of your daily beer bill by $20. Drinks for the ten now cost just $80.’

    The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’.

    They realised if they divided the $20 savings by six they could each reduce the amount they were paying by $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer! So, the bar owner suggested that it would be fair to reduce each man’s bill the same way Tax Savings are dispersed, and he proceeded to work out the amounts each should pay.

    And so, the fifth man, like the first four, now paid nothing (100% savings) – so 5 men are drinking for free.
    The sixth now paid only $2 instead of $3 (33% savings).
    The seventh now pay $5 instead of $7 (28% savings).
    The eighth now paid $9 instead of $12 (25% savings).
    The ninth now paid $14 instead of $18 (22% savings).
    The tenth (the wealthiest) now paid $49 instead of $59 (16% savings).

    Each of the six was better off than before. And the first four continued to drink for free, now along with the 5th too. The tenth man, who received the smallest percentage saving, was now paying 61% of the total bill – up from 59% before.

    But once outside the restaurant, the men began to compare their total dollar savings. ‘I only got a dollar out of the $20′ declared the sixth man. He pointed to the tenth man: ‘but he got $10!’ ‘Yeah, that’s right,’ exclaimed the fifth man.
    ‘I only saved a dollar, too. It’s unfair that he got ten times more than me!’ ‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’. ‘Wait a minute,’ yelled the first four men in unison. ‘$20 was given back and we didn’t get anything at all. This system exploits the poor!’ The nine men surrounded the tenth and beat him up.

    The next night, the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

    And that, ladies, gentlemen and journalists, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

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  2. Pete George (23,559 comments) says:

    Can you summarise that in a simple sentence and send it to Phil Goff?

    Someone on $140,000 still pays ten times as much tax as someone on $30,000 (who got the biggest % decrease in tax).

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  3. bhudson (4,740 comments) says:

    DPF,

    A great move by National. No doubt about it. And I thank them for it.

    It did make me think though of a very old piece of humour about word meanings you can alter through the changing of a single vowel or consonant…

    INTAXICATION = the mild feeling of euphoria you experience on receiving a tax [cut] refund, before realising it was your money to begin with

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  4. Pete George (23,559 comments) says:

    Could also be INFOXICATION – a feeling you have been foxed into thinking you are being given something extra

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  5. david (2,557 comments) says:

    Pete, you would also need to get it into words of one syllable for it to sink in. After all “loser” has two syllables and look at the level of understanding about that.

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  6. MikeNZ (3,234 comments) says:

    Thank you QTfarmer
    That’s for the staff notice board.

    Great point BHudson

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  7. dime (9,972 comments) says:

    Oh yeah! I will be spending all my tax cut cash on hookers and liquor over summer :)

    Just a happy Dime.

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  8. RRM (9,916 comments) says:

    Fortunately, the tax system is designed by people who understand the tax system and what it does, not by ten guys down the pub.

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  9. KiwiGreg (3,255 comments) says:

    “Fortunately, the tax system is designed by people who understand the tax system and what it does”

    Hahahahahahaha. I used to design the tax system for a living and I still find this screamingly funny.

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  10. MikeNZ (3,234 comments) says:

    Yeah Right RRM, that’s why it’s a flat 15% for everyone :-)

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  11. Brabus (31 comments) says:

    Very happy with the cuts and given virtually all my money goes to the mortgage anyway the GST raise won’t affect me too badly.

    One thing however, where is the analysis of how much extra will be clawed back due to the ETS tax levied?

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  12. jcuknz (704 comments) says:

    I have been puzzled the last few months why the left try to spin this their way because their position simply doesn’t add up to anything other than a con game. True people will be worse off as of today but that is because of the extra costs which would have occurred under 12.5% and have nothing to do with the GST increase more than balanced by the tax cuts. But will the left agree to this … of course not … in this matter they are just being pigheadedly dumb. And as for no GST on Fruit and vegetables .. that’s another con the way they are playing it …. mind you abolishing the RHR is stupidity backed by dubious statistics coming from the other side.

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  13. bhudson (4,740 comments) says:

    RRM,

    Clearly you were a bit rushed when you typed your comments so I’ll help you with the correction to give your original intent:

    “[Un]Fortunately the tax system…”

    The example queenstfarmer listed is a very real explanation of how negatively distorting it is to try and apply progressive methodology to tax cuts under an already negatively distorting progressive tax system.

    If you apply tax cuts, you give back the tax whence it came. Any other way is distorting the system further (positively = give more back to the people you stole the most from in the first place, or negatively = giving more to the people who didn’t actually contribute it in the first place.)

    I’m afraid wikipedia has the definition of progressive tax wrong. Progressive tax is a tax that progressively rips people off the more they have the temerity to try and earn more. It seeks to create an unfair social environment by taking a disproportionate amount from those that strive to achieve, while fueling the benefit of adopting a hand-out model.

    Progressive tax is a keystone for the Left to try and maintain the notion of class conflict.

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  14. Rick Rowling (813 comments) says:

    Good one QTfarmer – I’d seen that before but it’s worth re-posting now.

    Bought some clothes last night (because it was late night shopping, not because of GST).

    The guy in the clothes shop said that the GST change didn’t affect staff in the shop at all because “of course we aren’t changing our price points”.

    Which I suspect is happening a lot. Not that you’d know it from Goff’s words of woe.

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  15. RightNow (6,994 comments) says:

    “why the left try to spin this their way”
    Never underestimate the gullibility of some voters. Labour doesn’t – they know if they say something often enough and loud enough then a number of their core constituents will believe it. I was surprised prior to 2008 election how many people actually believed their benefits would stop overnight if National was voted in.

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  16. wreck1080 (3,905 comments) says:

    This is really bad, why is our average wage so PITIFUL.

    What a backwater.

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  17. labrator (1,850 comments) says:

    I can’t understand why we tax people who earn less than $10k, they’d have to receive support to live on that amount so it’s just costly churn. Bring on flat tax with a minimum threshold as per Gareth Morgan.

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  18. backster (2,171 comments) says:

    “And this takes into account the likely impact on prices with the GST increase.”

    BUT not the impact of the Emissions Trading Scam and the extra charge on petrol for roading development….
    The only way to a true reduction is by abolishing the ETS Scam and reducing Government Expenditure and borrowing. The borrowing to extend welfare is only preparation for further tax increases as payback liabilities increase.

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  19. RRM (9,916 comments) says:

    FFS, no-one has been talking about “Key’s tax cuts looking after the rich” except for a few marginalised left-wing idiots that even I ignore.

    The ten men at the pub story has been circulating for years – mostly among people who know the dastardly gummint is keeping them down, but can’t quite say how or why…

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  20. Rich Prick (1,700 comments) says:

    “why is our average wage so PITIFUL”

    Very good question. I have often wondered how any one could be satisfied earning the average wage, below average wage (and that must be a lot given that it IS an average) or indeed twice the average wage.

    I think it has a lot to do with our aspirational mindset. Schools tell kids that a “C” or in today-speak “achieved”, is perfectly acceptable. Socialists tell us personal wealth is pure evil and unions portray a wage increase as the product of some kind of battle between the classes. All of which is pure BS. We reward poor performance with a progressive tax that favours mediocrity, and then credit every average wage earner if they have done nothing more than have a few kids.

    Imagine where we would be today if we had had a flat tax of 25% (or less) since 1989.

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  21. queenstfarmer (782 comments) says:

    RRM:

    FFS, no-one has been talking about “Key’s tax cuts looking after the rich” except for a few marginalised left-wing idiots that even I ignore.

    Ah, you must mean Phil Goff:

    Labour leader Phil Goff says there is nothing fair about the changes, and that they only benefit Mr Key’s “rich mates”.
    http://www.3news.co.nz/Key-targets-property-tax-loopholes/tabid/419/articleID/140973/Default.aspx

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  22. Short Shriveled and Slightly to the Left (786 comments) says:

    “INTAXICATION = the mild feeling of euphoria you experience on receiving a tax [cut] refund, before realising it was your money to begin with”

    that deserves a 10 out of 10! Good stuff!

    I completely forgot about the tax cuts until last week
    so it is extra sweet for me :-)

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  23. Ross Nixon (559 comments) says:

    Tax cuts are great!
    I can spend the extra money on higher ACC charges, higher petrol and car registration fees, higher electricity and gas costs (thanks ETS scam), and if I calculated it correctly am left with an extra $9 per week!

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  24. excusesofpuppets (132 comments) says:

    My family will be down $3 a week. Now I can’t buy that bottle of coke each week. Thanks for making me healthier.

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  25. bhudson (4,740 comments) says:

    excusesofpuppets,

    Perhaps all is not lost! When [God forbid] Goff gets in, he will erase the GST from your fruit & veges which will mean not only can you afford your bottle of coke again, but perhaps you will be able to afford a second bottle to make up for all that time you had to go without.

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  26. Gwilly (158 comments) says:

    Roger Douglas’ lastest poster ad sums it up well: http://www.act.org.nz/files/GST_Tax_Cuts.pdf

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  27. davidp (3,581 comments) says:

    Labour MPs used to be those kids who watched Robin Hood on the TV when they were children. They saw the Merry Men trying to hang out in the forest minding their own business and the Sheriff of Nottingham banging on about taxes all the time and decided that they wanted to be just like the Sheriff when they grew up.

    Labour supporters watched the same Robin Hood. They saw the Sheriff’s men sweeping in to some poor muddy village where they threatened the peasants and took all their money and decided that they wanted to be a peasant like that when they grew up.

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  28. RRM (9,916 comments) says:

    queenstreet – correct, though I view Goff as more marginalised than idiot.

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  29. YesWeDid (1,048 comments) says:

    So it seems that just about everyone is better off after the 1st October tax cuts even taking the increase in GST into account.

    What I don’t understand is how these tax cuts are ‘fiscally neutral’ i.e. they don’t affect the overall government tax take.

    And if they aren’t neutral why is it OK to be lowering the government tax take when the government is borrowing $240M a week (or whatever the figure is) just to keep us a float?

    Hey I’m happy to get a tax cut, thank you very much, but is it fair that I get a reduction in taxes and this is partly paid for by an increase in government borrowing and that my children will probably have to work to pay back this debt.

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  30. bhudson (4,740 comments) says:

    YesWeDid,

    Perhaps because you have conveniently forgotten about the changes to depreciation on investment properties.

    The govt has factored that some people will spend their tax cut $, some will invest. This, combined with the depreciation changes, is expected to provide a fiscally neutral outcome.

    They have been clear that if more people save than spend, the rebalancing of saving vs consumption will still be a positive result for economy long term (even though govt revenue might decline a bit.)

    Their take on the borrowing is that they have to borrow to meet the previous govt’s commitments. They could have chosen not to proceed with this round of tax changes, but then the economic stimulus and rebalance would have been missed, yielding a worse long term outlook.

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  31. tvb (4,416 comments) says:

    The Labour Party response is to cut GST on veges and fruit and nothing said how the revenue shortfall will be made up. My response to the Labour Party is if you want GST free veges grow your own and don’t expect other hard working kiwis to pay for it through increased taxes.

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  32. bhudson (4,740 comments) says:

    tvb,

    Labour did in fact state how they would meet (most of) the shortfall. Apparently their plan (David Cunliffe on Q&A last Sunday) is to increase the tobacco tax and use the additional $200m p.a. to pay for 80% of the $250m cost of the GST plan.

    Two problems:

    1. They still need $50m p.a.
    2. They need people to continue to smoke and die to pay for removal of GST on fruit & veges

    The theory (and at least partial practice) is that higher tobacco prices leads to reduced consumption which then raises the question as to how much additional tobacco $ they will really see, so what is the true gap they would need to fund and where would that then come from?

    The answer would seem to be a mix of increased income tax (if you believe Rob Salmond – he claims Labour have signalled this already) and keeping the general level of GST at 15% (if you belive Phil Goff himself – yes, he said that)

    So, you are going to pay for this through increased taxes and they also are not going to drop GST from 15% after whinging about the increase to anyone who would listen.

    In essence, they scream out “Don’t trust us”

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  33. Pete George (23,559 comments) says:

    “The answer would seem to be a mix of increased income tax (if you believe Rob Salmond – he claims Labour have signalled this already) ”

    I have seen it elsewhere but this is confirmation enough…

    Goff: I’ll reverse unfair tax cuts for the rich

    Labour leader Phil Goff has come out swinging against National’s proposal to cut the top tax rate. In TV3′s The Nation Goff said he would reverse any reduction National pushes through of the top tax rate from 38 cents in the dollar.

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  34. side show bob (3,660 comments) says:

    I want to know why a flat tax rate would not work. I realise as a country we would probably have to borrow quite heavily to start with but once established I suspect the tax take would be higher then present. I can see two reasons why government would not like to implement such a system. 1) The accountants and those employed by IRD would very rapidly become endangered species. 2) Government would no longer be able to treat or bribe different sections of society by favouring those sections.

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  35. jackp (668 comments) says:

    “Roger Douglas’ lastest poster ad sums it up well: http://www.act.org.nz/files/GST_Tax_Cuts.pdf

    Gwilly, I am with you. Love the brochure. They should be on the billboards. It is so obvious, yet the majority of kiwis don’t want to see.

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  36. Steve (4,559 comments) says:

    The Govt does not need any more money via Tax. The more they get, the more they will spend.
    The increase of GST from 12.5% to 15% is a GST increase of 20% for the GST Account. Nice windfall. To think that Income Tax reduction will make it fairer is a pipe dream.

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  37. bc (1,367 comments) says:

    Petrol up 7c a litre, so every time you fill your car up and it’s bye bye tax cut.

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  38. bhudson (4,740 comments) says:

    bc,

    If you think 7c/litre kills off your tax cut, then I would be happy to buy you a smaller petrol tank

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  39. Pete George (23,559 comments) says:

    What I pay extra on petrol (about $2 per week) will be about 10% of what I get extra in the hand from tax cuts.

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