Cameron announces tax cuts

October 4th, 2014 at 7:00 am by David Farrar

The Guardian reports:

David Cameron launched an audacious bid to woo voters in next year’s general election by pledging to raise the personal income tax threshold by £2,000 a year as well as lifting the 40% tax band to £50,000.

Casting the Conservatives as the “trade union for hardworking” people, the prime minister reached out to aspirational voters in Middle Britain by unveiling a £7.2bn double tax cutting promise, which prompted a rapturous reception at the Tory conference.

Increasing the tax-free personal allowance from £10,500 to £12,000 would, Cameron said, ensure that full-time workers on the minimum wage were exempt from paying income tax.

Excellent. We shouldn’t tax low income workers, just so we can then top their incomes up with welfare. We should have lower taxes and less welfare.

Pledged to deal with “fiscal drag”, the process by which lower income earners are dragged into paying higher tax rates, by announcing the threshold at which the 40% tax rate is paid would be raised from £41,900 to £50,000 by the end of the next parliament in 2020.

Also good.

Would be good to have the NZ Government firm up its commitment to tax cuts.

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National’s tax cuts

September 8th, 2014 at 3:17 pm by David Farrar

John Key and Bill English have announced the parameters for tax cuts:

Allow around $1 billion a year for new spending, including between $600 million and $700 million a year more for health and education. This total new spending is consistent with the level of new spending in our last two Budgets and it’s well below the $2 billion to $3 billion spending increases under the last Labour government, which had little to show for them.

Reserve the remaining $500 million per Budget for modest tax reductions and further debt repayment, as economic and fiscal conditions permit. This portion of the allowance will be moved between Budgets and accumulated as necessary. Therefore, by the third year there will be around $1.5 billion available for tax cuts and debt repayment.

So if the economy grows as projected, then tax cuts of around $1.5 billion a year will be possible by year 3. The PM confirmed they will be targeted at low to middle income earners.

“It means that over the next four years, National will spend around $10 billion more in total, and most of that on health and education,” Mr English says.

if you are in surplus, you can increase spending and reduce taxes.

This is absolutely the right thing to do, and a normal thing to do. As the books move into surplus, a moderate Government will “spend” the surplus on a mixture of extra spending and tax reductions (plus of course maintaining a large enough surplus so that debt reduces). I expect all parties to do a mixture of extra spending and tax cuts. Sure left wing parties might do 80% spending and 20% tax cuts and right wing parties say 50% spending and 50% tax cuts. But Labour not only won’t give tax cuts, David Cunliffe has said their Capital gains Tax will see families and businesses eventually paying an extra $4 to $5 billion a year in taxes – and the Greens want to have the top tax rate of 40% – the highest we have had since Muldoon!

So what sort of tax cuts could you do in April 2017 with $1.5 billion?

  • The bottom rate could drop from 10.5% to 6% on your first $14,000 of income
  • The second bottom rate could drop from 17.5% to 14.5% on your income from $14,000 to $48,000.

$48,000 is close to the average wage. A 3% reduction in the second bottom rate would be almost $1,000 a year more cash in the hand for a worker.

A clear choice in this election – parties that would reduce taxes vs parties that want to tax New Zealanders more.

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No tax cuts

August 19th, 2014 at 12:00 pm by David Farrar

Have been in the two hour PREFU (Pre-election Economic and Fiscal Update) at Treasury. These are required by law, after that period in the 1980s and 1990 when incoming Governments got a nasty surprise when they found out the Budget forecasts were so far out of date.

Key points made by Treasury are:

  • Surplus for 2014/15 now projected to be $297 million, down from $372 million
  • Core crown expenses forecast to be 30.3% in 2015, down from 35% in 2011. This is the critical figure – making sure spending doesn’t increase faster than the economy.
  • Economic growth last year was 3.3% against 3.0% Budget forecast. For this year now forecast to be 3.8% against 4.0% Budget forecast.
  • Unemployment forecast to be 4.5% by 2018
  • Average annual wage forecast to increase by $6,600 to $62,000 by 2018.
  • Household disposable incomes rose 7.1% last year and forecast to increase 4.0% a year in future
  • Inflation forecast to peak at 2.5% in 2016
  • Annual increases in house prices has declined from 10% to around 6% in the last year
  • Total cost to taxpayers from the Canterbury earthquakes now forecast to be $15.8 billion
  • Economy still growing strongly and above potential
  • Fiscal restraint remains beneficial and important to stop inflation
  • Trading partners still expected to have strong growth
  • Terms of trade will ease up earlier than in Budget, but will remain above historic levels
  • Should utilise upswing to strengthen Crown balance sheet
  • Weakness in global dairy prices is more a short-term issue, not a structural issue, and not inconsistent with Treasury central forecast

It is a good reminder of how fragile our surplus is, and how we also need to start paying off debt. We are still forecast to have the best of all worlds – a growing surplus, higher after tax household incomes, inflation under control, more jobs, and less debt. I contrast that with the tens of billions being promised by certain parties that will mean higher taxes, more debt and probably no surplus.

The downside scenario, if export prices drop down, and stay low, along with weaker household demand, would be no return to surplus until 2018. That is unlikely, but possible. Again, don’t spend the surplus until we have it.

There are a hint of possible tax cuts. Treasury say “The operating allowance has been added to expenditure as a working assumption, but in practice would be available for a mixture of expenditure and revenue initiatives”.  However Bill English stated unequivocally that there will be no tax cuts announced before the election. He says there is not enough fiscal room at this stage, but does make it pretty clear they do plan some in the future, if re-elected.

I do hope there are tax cuts in the next parliamentary term. They will of course be modest. But as the Crown accounts reach surplus, the surplus should go on a mix of extra spending, tax cuts and debt repayment. It is fundamentally unbalanced to only increase expenditure. Tax cuts are the only guaranteed way to increase household incomes. It would be sensible to target the lowest and second lowest tax rates, or the thresholds they apply at.

Due to fiscal drag or bracket creep and the like, tax as a percentage of GDP will rise without tax cuts.  It is forecast to go from 26.6% to 28.4%. I’d like to see it eventually around the 25% mark.  We should fund extra spending from a growing economy, not by increasing the share we all pay in tax.

It is worth stressing that even by 2018, the surplus is only projected to be $3 billion a year. That can easily be wiped out in a downturn. We do not have the fiscal latitude to embark on huge amounts of new spending – now this year, not next year, not the year after. We can afford some modest spending and modest tax cuts within the $1.5 billion annual operating allowance. We can’t afford promises of $2 billion here, $3 billion there.

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ACT’s tax cuts

August 4th, 2014 at 11:00 am by David Farrar

Stuff reports:

ACT says it can boost economic growth by a third with a policy to cut the company tax rate to 12.5 per cent.

Leader Jamie Whyte says this will increase investment, and job and GDP by one third, leading to higher wages.

He would fund the tax cut by slashing “corporate welfare,” worth about $1.5bn a year, and carbon trading, worth $164m.

Excellent. That would attract investment.

European and American studies suggest cutting the rate by 10 percentage points will make economies grow by between 1 and 2 per cent extra a year. Each 1 per cent reduction in the rate boosts wages by between 0.3 and 0.5 per cent, he said.

“No single policy proposal from any party in this election can do more to increase economic growth, create jobs and lift wages,” he added,

Company tax is a “terrible drag” on growth and wages while raising “relatively little” revenue, he argued.

Treasury estimates that every 1% reduction in the company tax rate has a fiscal loss to the Government of $220 million which is relatively modest.

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How about tax cuts Treasury, instead of jam jars?

July 8th, 2014 at 9:00 am by David Farrar

Vernon Small at Stuff reports:

Treasury is working on a radical plan to set up a new “jam jar” fund to hold extra tax revenue to smooth income variations.

It says the “stabilisation fund” could operate as a stand-alone agency and be put in place if further debt repayment became politically unpalatable.

The fund was one of three options outlined in a pre-Budget Treasury document late last year and released yesterday.

It said there were three broad, but not mutually exclusive, options for so-called “revenue surprises”.

They were to pay down debt, commit it to “one or more existing funds (or ‘jam jars’), and create a new form of fund or jam jar (eg a stabilisation fund)”.

I’m very disappointed that Treasury did not look at a fourth option for revenue surprises. That is tax cuts.

If the Government has more revenue than it expected, then why not allow hard working taxpayers to keep more of their income?

One could have a policy that any surplus funds, greater than forecast in the last Budget, be refunded to taxpayers at year end.

So if the surplus projection was say $2.1 billion and the actual surplus turned out to be $2.9 billion, then the $800 million extra gets refunded proportionally to taxpayers.


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Small tax cuts are better than no tax cuts

June 30th, 2014 at 1:00 pm by David Farrar

Stuff reports:

National is downplaying the promise of tax cuts, signalling that other policy pledges will take priority.

Prime Minister John Key yesterday said no decision has been made on whether the party would campaign on income tax cuts.

The Government returned the books to black in last month’s Budget, leading Key to dangle the prospect of some relief for middle New Zealand.

But as National wrapped up its annual conference in Wellington, he softened his stance.

“In reality we don’t have a lot of money to move on tax,” he said.

“I’m not saying we couldn’t put together a tax package but everyone needs to be realistic about how small that is.

I think it would be very regrettable if National does not offer some tax cuts. They should be the party of low tax.

Of course they would be modest, and not able to occur until 2015/16 at the earliest. But small tax cuts are better than no tax  cuts.

Tax cuts are the only guaranteed way to boost the after tax income of every working New Zealander.

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Herald against tax cuts

May 22nd, 2014 at 10:00 am by David Farrar

The Herald editorial yesterday:

Six weeks ago, the Prime Minister was in no mood to offer encouragement to those who thought tax cuts might be in the offing. The Budget would have no plans for such a move, he told the North Harbour Club, while seeking also to dampen expectations of anything significant in the future. It was exactly the right thing to say. Now, however, John Key is singing a different tune. He is talking about tax cuts as a choice, and they are sufficiently in his mind to to have warranted a mention in last week’s Budget.

It stated: “Operating allowances from Budget 2015 will be $1.5 billion a year, growing at 2 per cent for budgets thereafter. This is a moderate increase that will provide the Government with options around investment in public services and modest tax reductions.” In effect, the growing economy is providing the Government with a bit more freedom. But this does not mean that, for the next term of government at least, they should be at the top of the priority list. Of far greater importance is the need to get debt back to under 20 per cent of gross domestic product.

The Government can do both, and it should do both.

As the editorial notes, any tax cuts would come out of the $1.5 billion operating allowance. So the surplus projections already take into account any tax cuts. It is basically a choice of whether the $1.5 billion goes just on extra spending, or a mixture of extra spending and tax cuts.

People say they want higher after tax incomes. The Government can not directly set incomes. That is between employers and employees. But they can set tax rates. The one sure way to boost after tax incomes for hard working New Zealanders is to give them a tax cut.

There is little to indicate that most people feel they are owed tax cuts. New Zealanders are aware that, while the country has emerged from the global recession in relatively good shape, there are more important priorities.

I disagree. Extra spending benefits the small group of NZers that it goes on. Tax cuts can benefit all working New Zealanders.

The surplus projections take into account the $1.5 billion operating allowances. Now a balanced Government might say let’s spent half on extra spending and half on tax cuts. That would not impact the projected surplus at all.

After three years, that would be $2.25 billion of annual tax cuts and $2.25 billion of annual extra spending. Here’s what you could do with $2.25 billion of tax cuts based on Treasury estimates.

  • Reduce the bottom tax rate (up to $14,000 income) from 10.5% to 4%
  • Reduce the 2nd bottom tax rate ($14k to $48k) from 17.5% to 13%
  • Reduce the third rate ($48k to $70k) from 30% to 26% and the second rates from 17.5% to 14%
  • Increase the upper threshold for the bottom rate of 10.5% from $14,000 to $29,000
  • Increase the upper threshold for the second rate of 17.5% from $48,000 to 67,000
  • Have the bottom 10.5% rate apply to $22,000 (from $14,000), the second rate of 17.5% apply to $56,000 (from $48,000) and the third rate of $30% apply to $78,000 (from $70,000)

The Herald is effectively saying that 100% of the operating allowance should go on extra spending. That should be just as unacceptable as having 100% of the operating allowance going on tax cuts.  What I want is political parties to deliver both extra spending and tax cuts.

The debate should be about what the mixture is, but not about whether there should be a mixture. ACT might say it should be 80% tax cuts and 20% spending. Labour might say 75% spending and 25% tax cuts. National might be 50/50. But I have no time for those who say there should be no tax cuts at all, once they are clearly affordable.

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Very disappointing – no tax cuts

April 3rd, 2014 at 4:00 pm by David Farrar

The Herald reports:

The May Budget will have no plans for tax cuts, Prime Minister John Key confirmed yesterday, and he sought to dampen expectations that there would be anything significant in the future.

I’m very disappointed that there will be no tax cuts. Hard working New Zealanders deserve a boost to their after tax income.

In no way do I expect tax cuts for the 2014/15 year as the surplus is so small. But I was hoping that the Government would signal tax cuts in the future years.

When the Government’s accounts move into surplus, Governments have basically three things they can do with the surplus.

  • Increase spending
  • Reduce tax levels
  • Pay off debt

I believe a good Government does all three. If for example your projected surplus is $4 billion you might increase spending by $1 billion, reduce taxes by $1 billion and retain a surplus of $2 billion to pay off debt.

We’ve yet to see the size of any future projected surpluses, but if they are projected to be greater than say $2 to $3 billion (which allows contributions to resume into the NZ Super Fund) then tax cuts are affordable and desirable. And I want to see National commit to them.


What will Labour do with the $1.5 billion?

January 23rd, 2014 at 11:00 am by David Farrar

Patrick Smellie at Stuff reports:

Just about anyone who pays income tax earns more than $5000 a year, so every single taxpayer would have benefited from the move, largely offsetting Labour’s intention to raise the top income tax rate from 33 cents in the dollar to 39 cents anyway.

That is a good thing, not a bad thing, that all taxpayers would get a reduction in their tax. Every taxypayer would get $525. However with the top rate going up 6%, those who earn more than $8,750 over the top rate threshold would have ended up paying more.

But I always like to look at tax cuts as a percentage of actual tax paid. The $5,000 tax free threshold would mean tax on $20,000 would reduce by 20.8%, tax on $50,000 by 6.5% and tax on $100,000 by 2.2%.

However, by giving itself a $1.5b kitty to play with, Labour has opened up a significant flank for election year attack by National. In effect, Labour is saying that rather than give you your tax money back by exempting fresh produce and the first $5000 of income, we’ll decide how to spend it for you.

Whatever it proposes had better look attractive to the swinging, middle-of-the-road voters that Labour needs to bring its way this year if it’s to have a hope of governing after the election.

I hope Labour does offer a different form of tax cuts. My worry is they will only offer tax increases, and pledge to take more money off families that are working and give it to families not working.

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Labour dumps tax cuts

January 22nd, 2014 at 12:14 pm by David Farrar

The Herald reports:

Labour has officially dropped its policies of having the first $5000 of earnings tax free and of removing GST from fresh fruit and vegetables Leader David Cunliffe said this morning.

The policies were adopted in the run up to the 2011 election under then-Leader Phil Goff but Mr Cunliffe’s immediate predecessor David Shearer in his first major speech as leader almost two years ago indicated that the policies would be dumped.

Labour estimated the policies would cost the Government about $1.5 billion a year in lost revenue.

The GST off fresh fruit and vegetables policy was a piece of populist nonsense and it is good to see it gone. It would have complicated a tax that is praised globally for its simplicity, and achieved little.

The $5,000 tax free earnings policy had some merit – it would have delivered tax reductions to every taxpayer. There is a case to be made that no one should pay tax until they are earning enough to live on, as otherwise you just give it back to them in welfare and have wasteful churn.

“While these were worthwhile policies , we believe there are better ways to help struggling Kiwi families”, Mr Cunliffe said.

Will this be a different form of tax cuts, or just spending increases? I hope Labour go into 2014 offering tax cuts. They offered $1.5 billion of tax cuts in 2011. They may not have been well targeted particularly, but they were tax cuts. Will they offer anything to taxpayers in 2014? Or just tax increases?

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The net fiscal impact of National’s tax and spending changes

April 10th, 2012 at 2:00 pm by David Farrar

I’ve blogged previously on the outrageously dishonest spin from Labour that tax revenues are down 4% of GDP over four years, and trying to assert it is all due to the one set of changes in 2010. Even some journalists who should know better have repeated such absurdities.

I’m going to blog in two parts on this issue. The first part will be today looking at what the Treasury macro-economic advice was for the impact of the tax and spending changes, and tomorrow (if I have time otherwise later in the week), I’m actually going to analyse the actual changes in tax revenues through the 2008 BEFU, the 2008 PREFU, 2008 DEFU, 2009 BEFU, 2009 HYEFU, 2010 BEFU, 2010 HYEFU, 2011 BEFU, and finally the 2011 PREFU. This looks at the changes in overall tax revenues, individual tax revenues, corporate tax revenues and GST.

It is important to understand you need both the forecasts of what a change will do, and what actually happened. Neither are the total picture, but together they give us a reasonable picture.

You see the reality is that if Treasury says (for example) hiking the top tax rate from 33c to 39c will bring in $900m/year of extra revenue, and a Government does it, and revenue only goes up $700m, then no-one really knows why the revenue gain was less than projected. It might be that it did increase revenue by $900m, but that economic growth was flatter and so taxable income was lower. Or it could be that the increase lead to greater tax avoidance, and the increase did not achieve as much extra revenue as projected.

It is easy to diss Treasury projections – even I have done so. But it is worth noting how massively complicated it is to forecast tax tax over an entire economy. Many individual companies have problems forecasting income just for that company. Now imagine having to forecast income for the aggregate of every company and person in New Zealand, without having the knowledge of what is happening in individual companies.

What we have below is the official net fiscal impact as forecast by Treasury for National’s tax and spending changes. As you will see the total effect of these tax changes is negative during the 2008 – 2010 period, which is when there was a fiscal stimulus policy to help cushion the recession, and in the first two years, providing support to the economy during the recession, and have been net positive from 2010 onwards.

Net fiscal impact of the Government’s tax changes ($million increase (decrease) in the operating balance)








Election tax package1







Budget 2009 cancellation of 2nd and 3rd tranches2






SME tax package3







Budget 2010 tax package4





Budget 2011 tax changes5











 1. fiscal impact = revenue (2/3*removal of R&D tax credit + KiwiSaver changes + cancelling remaining tranches of Labour’s tax cuts) minus costs (personal tax + IETC). Source: Cabinet Paper CAB(08)585.

2. cancellation of the 2010 and 2011 tax cuts as announced in the 2009 Budget. Source: Treasury Report T2009/418.

3. SME tax package as announced in February 2009. Source: BEFU 2009, Table 1.7.

4. fiscal impact = revenue (GST increase + depreciation + LAQC + thin cap + WFF + GST base + tobacco + increased audit) minus costs (personal tax + company + PIE and savings vehicles + GST compensation). Source: Budget 2010 Executive Summary, Table 1.

5. savings from changes to KiwiSaver and WFF tax credits. Source: Budget 2011 Executive Summary, Table 2.

It is worth recalling that during this period Labour opposed every single spending cut made by National.

Over the six years of National’s first two terms, the total projected impact of National’s tax changes (and cancellation of spending commitments) has been a net improvement of $4.9b. In other words compared to the policies put in place by Labour in 2008, National’s changes were projected by Treasury to result in $4.9b more revenue over two terms.

It is worth noting these are only the direct tax (and cancelled spending commitments) changes. This is not taking into account National slashing to the contingency for new spending from over $2b a year to $800m and eventually zero. That has also had am impact in the billions.

Now as I said, we will also look tomorrow at what actually happened to tax revenues, but many factors impact tax revenues as well as policy changes. These figures for now show how preposterous Labour’s deception is about how the 2010 tax package is somehow primarily or totally responsible for a decline in tax revenue of 4% of GDP or $7b/year.

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Repeating Labour’s lines

April 1st, 2012 at 9:29 am by David Farrar

Bernard Hickey writes in the HoS:

The charts reveal the results of the cut in the income tax rate from 39 to 33 cents, which was in theory partly paid for by an increase in the GST rate from 12.5 to 15 per cent. They also reveal a massive reversal in a decade-long trend of improvement in New Zealand’s public debt position.

Our tax-to-GDP ratio has crashed from almost 34 per cent in late 2008 to 29 per cent last year, which means yet more borrowing on the horizon.

This is almost directly taken from David Parker’s talking points, as they make the same mistake.

There were three sets of tax changes. Tax cuts on  1 October 2008 with no spending cuts to compensate, Tax cuts on 1 April 2009 (with some spending cuts to compensate) and a tax package on 1 October 2010 which was meant to be broadly fiscally neutral (income tax down, GST up, no tax benefit from depreciation on investment properties).

Bernard, like David Parker, is using the change in tax from 2008 to cast judgement on the 2010 package. It is absolutely misleading to do. I can understand why David Parker does it, but am disappointed Bernard is repeating his tactics.

The 2008 and 2009 tax cuts saw tax rates reduce for everyone. It is again dishonest to suggest that fall from 34% to 28% (tax as % of GDP) was just related to dropping the top tax rate from 38% to 33% in 2010.

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Clark compares two different things

March 18th, 2012 at 11:15 am by David Farrar

New Labour MP David Clark blogs:

The Government has continued to spout the line that its tax ’switch’ in 2010 was ‘broadly revenue neutral’.

This is an outrageous claim.  It was nowhere near revenue neutral.

According to the IRD’s 2011 Briefing to the Incoming Minister (BIM), Government tax-take dropped from 35.1% of GDP to 31% of GDP during National’s first term.  In a time of high borrowing, and a projected $12 Billion deficit, a drop in the tax base of more than 10% is plain irresponsible. Falling revenue means we don’t have the funds to support our schools and hospitals.  Either that, or we have to borrow to fund them.  This ain’t good.

The ‘broadly revenue neutral’ claim has been relegated to the status of a bad joke by the honesty of the Government’s own tax officials.  In their 2011 BIM, officials made clear that only about 1.5% could be blamed on the Global Financial Crisis.  About 2.5 percentage points of its 4% revenue drop can be directly explained by Government policy changes (ie the 2010 tax package).

This is not a good start for a former Treasury official. He is comparing two different things. He is comparing the impact of the tax changes in 2008, 2009 and 2010, and using them to come to a conclusion about the 2010 tax changes only.

This would get you failed first years stats at even Waikato University.

What Clark leaves out of the equation was that Labour itself instituted some of the tax changes, which led to tax dropping as a percentage of GDP. It’s nice of him to give National all the credit for them, but it is not quite the case.

What the true comparison should be is whether the totality of National’s tax changes dropped tax revenue by more or less than what would have happened if Labour’s 2008 tax cuts had been fully implemented. And the answer is that over around four to five years, National’s changes look to have slightly less impact on tax revenue. This is because of course National cancelled their planned tax cuts for 1 April 2010 and 1 April 2011.

One can dispute the impact of tax changes, as it is not an exact science. It is impossible to know for sure how much revenue one would have got if a tax change had not occurred. But what one can not do is use the results of tax changes in 2008, 2009 and 2010, to come to a conclusion about the 2010 changes only. It is quite dishonest.

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Tax cuts for the rich

October 31st, 2011 at 12:00 pm by David Farrar

Quiz for readers. Which of the the following parties is promising, if elected, an income tax cut for some-one earning $150,000 a year?

(a) ACT
(b) Labour
(c) National


Tax Cuts

June 22nd, 2011 at 9:00 am by David Farrar

The way Labour go on, you would think the only people who got tax cuts in the last three years were the despised “rich pricks”. Now of course when you cut taxes, those who pay more tax get a larger tax cut. Just like how a bank which pays 5% interest on your investment pays mroe money to someone with $10,000 invested than $2,000 invested.

What I thought would be interesting is to look again at the percentage reduction in personal income tax from September 2008 to October 2010.  These include the IETC for people not on WFF.

Anyway you can see how those earning up to $50,000 had had a massive 30% reduction in the income tax they pay thanks to Labour’s last minute grudging October 2008 tax cut and National’s 2009 and 2010 tax cuts.

And you’ll also see the filthy rich pricks earning over $100,000 have had percentage tax cuts of less than 20%.


Goff caught by his own rhetoric

February 22nd, 2011 at 7:00 am by David Farrar

The TV polls have shown around 60% are against National’s plans to sell part-stakes in some SOEs.

Frankly I thought that was a pretty giood result for a policy which for the last 12 years has been ruled off limits as it is meant to be lethal political poison. The more important indicator was that National’s vote remained high.

Yesterday the polls also showed 60% against Labour’s policy of a tax cut for every NZer by making the 1st $5,000 tax free. Now tax cuts are normally very popular, so it says something about how badly you stuffed up (no way to pay for it) by getting 60% of NZers against having a tax cut.

And Goff’s response to the 60% opposition? He said that those 60% were not knowledgeable about their plan. This 24 hours after he yelled:

Labour says it’s not surprised by the result.

“It shows Kiwis are two-to-one against John Key’s programme,” says party leader Phil Goff.

“Kiwis know that this is bad for them as taxpayers and it’s good for foreign investors. They don’t want it.”

So 60% against a National policy is because Kiwis know it is bad for them, but 60% against a Labour policy is because they are not “knowledgeable”.

Labour’s tax cut for everyone policy was meant to be their big circuit breaker. Instead it has fizzled.

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Don’t believe the lies

January 28th, 2011 at 12:35 pm by David Farrar

Labour are telling massive whoppers, such as the Government is borrowing $120m a week to pay for tax cuts for the wealthy.

The reality is that National’s tax and spending packages will in fact lead to around $2.8b less debt by 2014, than ehwt Labour were proposing. Bill English’s office has released this table showing the components:

Net fiscal impact of the Government’s tax changes ($million increase (decrease) in the operating balance)

  2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 6-year total
Election tax package1 (133) (238)  (37) 188 198 198 176
Budget 2009 cancellation of 2nd and 3rd tranches2   105 553 956 999 999 3,612
SME tax package3 (294) (189) 214 (108) (108) (108) (593)
Budget 2010 tax package4     (460) (90) (40) 175 (415)
Total (427) (322) 270 946 1,049 1,264 2,780


1. Fiscal impact = revenue (removal of R&D tax credit + KiwiSaver changes + cancelling remaining tranches of Labour’s tax cuts) minus costs (personal tax + IETC). Source: Cabinet Paper CAB(08)585.

2. This is not an increase in taxes but the cancellation of future intended tax cuts which were already in the fiscal forecasts. Source: Treasury Report T2009/418.

3. February 2009 SME tax package. Source: BEFU 2009, Table 1.7.

4. Fiscal impact = revenue (GST increase + depreciation + LAQC + thin cap + WFF + GST base + tobacco + increased audit) minus costs (personal tax + company + PIE and savings vehicles + GST compensation). Source: Budget 2010 Executive Summary, Table 1.

The key thing to remember is that the combined tax and spending changes have been not just fiscally neutral, but in fact debt reducing. In the first two years they were slightly expansionary (which is not altogether bad) in a recession, but by the end of next financial year they would have been positive for the Government fiscally..

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Obama’s tax cuts

December 10th, 2010 at 8:37 am by David Farrar

This week Obama stuck a deal with Republicans which sees him try to revive the US economy with tax cuts instead of extra spending. Labour in NZ should take note. Obama has agreed to:

  • Extend the Bush tax cuts for two further years which were due to expire at the end of 2010
  • Reduce for one year the Social Security payroll tax from 6.2% to 4.2%
  • Increase the threshold for the death tax from $1m to $5m ad reduce the rate from 55% to 35%

It will be interesting to observe the President’s poll ratings in the next month.

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The importance of low inflation and tax cuts

October 4th, 2010 at 9:00 am by David Farrar

Just been looking at an old press release from Bill English. It compares the nine years from Sep 90 to Sep 99, the same period from Sep 99 to Sep 08 and the 21 months since then to June 10.

The average weekly earnings went up 27% in the 90s, 37% under Labour and 7% since Sep 00. The average increase per year is 3.0%, 4.1% and 4.0%.

But if you take account of tax paid, to look at what someone on the average earnings/wage gets to take home, then the increases are 33%, 33% and 11% – or annualized it is 3.7%, 3.7% and 6.3%.

Finally thought you want to look at the purchasing power – has someone earning at the average (mean) had their purchasing power increase during each of those periods, and by how much. Now inflation during each period was 16%, 29% and 2% Annualised this is 1.7%, 3.2% and 1.2%. This is worth remembering when Labour talks about cost of living.

So what was the increase in real after tax average earnings. They were 15.5% from Sep 90 to Sep 99, 3.0% from Sep 99 to Sep 08 and since Sep 08 8.7%. On an annualized basis, real wages went up 1.7% a year under National, then only 0.3% a year up until Sep 08, and a massive 5.0% a year since Sep 08.

Average FT Earnings Increase/Year
Gross Net Real Net
Sep 90 – 99 3.0% 3.7% 1.7%
Sep 99 – 08 4.1% 3.7% 0.3%
Sep 08 – Jun 10 4.0% 6.3% 5.0%

This table above shows the difference. I’ll update it after we get the Dec 10 figures which will include the latest tax cuts, but also the GST impact.

The moral of the story is wage growth by itself is not enough. You also need low inflation and tax cuts to offset fiscal drag.

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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 tax cuts 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 GST increase.

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The importance of tax cuts

August 27th, 2010 at 9:00 am by David Farrar

Bill English’s office has put out a comparison of real (CPI adjusted) net (after tax) wage growth for a full-time worker on the average (mean) wage.

The Australian data only goes back to 1994, so the first time period compared is Sep 1994 to Sep 1999 – the final quarter before Labour took office.

During those five years the real net income for a FT worker on the average wage rose 13.2% in New Zealand and 6.2% in Australia.

Then over the next nine years from September 1999 to September 2008, the increase in New Zealand was 3.0% and in Australia it was 19.3%. Yep six times greater in Australia. They had high wages, low inflation and tax cuts. We had no tax cuts, higher inflation and lower wage increases.

From Since September 2008, to June 2010, the increase in New Zealand has been 8.7% vs 4.8% in Australia.

If one translates this to average annual increases, then the comparison would be:

  • Sep 94 – Sep 99 – 2.6% NZ vs 1.2% Aust
  • Sep 99 – Sep 08 – 0.3% NZ vs 2.1% Aust
  • Sep 08 – Jun 10 – 5.0% NZ vs 2.7% Aust

Now the time periods used are slightly cheery picked, in that the latest period includes both the April 2009 tax cuts and the October 2008 tax cuts – so they do not correspond exactly to Government terms. But on the other hand Labour did the Oct 2008 tax cuts most grudgingly, because of the election, and probably would ave cancelled them if they had retained office.

The stat that stands out to me is that during those nine years from Sep 99 to Sep 08, the average after tax income only grew 0.3% a year. Fiscal drag mean someone on the average wage paid more and more tax as their salary increased.

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Editorials 6 April 2010

April 6th, 2010 at 12:00 pm by David Farrar

The Herald calls for aligning of top tax rates:

It will lower the top rate of income tax from 38 per cent to perhaps 33 per cent, which would leave it still significantly higher than the company rate of 30 per cent.

Aligning those rates should be a primary aim of tax reform. The top income and company rates should be the same for reasons of social equity and economic efficiency.

It is neither fair nor useful to the economy that taxpayers on the same incomes should pay different rates because one puts some costs through a company and the other does not.

Arguably it is more important to align the trust rate and the personal rate.

I think we should aim to align all three, but a 3% difference between company and personal is not huge, considering company tax is inputted.

The rates were aligned for a long time after the 1980s reforms when incentives for tax avoidance were taken out of the system.

The incentives were restored by Helen Clark’s Government as a byproduct of its determination to “tax the rich”.

It introduced a new top income rate of 39 per cent in its first year of office, 2000, and tax-avoidance opportunities returned.

Chief among them are the use of trust funds and personal investment entities that carry a lower tax rate, 33 per cent.

Yeah, that unnecessary tax increase has been a boon for the avoidance industry. Remember 50 of the 100 richest NZers do not even pay it.

The Government expects to be borrowing $240 million a week for the next four years. Tax cuts must be balanced by spending cuts if the red ink is not to get worse.

The economy would gain as much strength from a balanced Budget as it would from competitive company tax rates.

Whatever decision the Government makes on the alignment of income and company rates it should be guided by the implications for its revenue. But if it can afford to align those rates it should do so.

Alignment is tidy, simple and fairer for everybody.

Can’t disagree with that.

The Dom Post welcomes open justice:

Justice Warwick Gendall, presiding in the High Court at Whangarei, was upholding the concept of “open justice” in another way. He said talented Blues rugby player Rene Ranger had no more right to anonymity than anyone else charged with assault. The charge of injuring with intent to injure dates from October, when Ranger appeared in Warkworth District Court after an incident outside a Mangawhai pub. He was given name suppression at the time, after his counsel argued that naming him might end his contract with the New Zealand Rugby Union. Poor lamb.

Justice Gendall was having none of such nonsense and reversed the order.

It is cheering when judges remember that they work in public courts, on behalf of people who have not only entrusted them with dispensing justice fairly and impartially, but who also must fund much of what goes on within their courtrooms. Open justice needs to prevail as often as possible; the circumstances in which secrecy supplants it should be rare indeed. …

The shape of Mr Power’s bill, therefore, will be interesting. It will, this newspaper hopes, make it much harder for the wealthy, the well-known, and those who can engage a judge’s sympathy to hide from public scrutiny. It is a basic tenet of our justice system that everyone be equal before the law.

Again, I agree.

The Press focuses on rampaging crime:

New Zealanders will be disturbed that crime is continuing to grow at an alarming rate. They have become used to statistics that show increases, but not to the sort of large jump recorded in Wednesday’s figures.

That surprise will be the greater because of the tougher measures implemented by John Key’s Government and touted as a means of reducing wrongdoing.

The Government’s defence – that its measures have not been in effect long enough to impact on crime – is reasonable to a degree. But the trumpeting of its tough measures must have sunk into the awareness of most citizens, criminal and law-abiding, and should already be showing a beneficial result if it is the right approach.

The problem for the Government is that it will be able to use the excuse – that its measures need to be given time to work – only once. If the crime statistics continue to grow in the next 12 months, the Government will have to find a more convincing reason to account for the apparent failure of its policies.

Another increase of this magnitude for violent crime would be a problem.

The ODT discusses the case of the Norweians who hunted protected Kereu:

Most New Zealanders would have been horrified to learn of the incident involving Norwegian tourists who posted on the internet images of shooting at a fully protected native wood pigeon (kereru), the bird falling from a tree, and film of one of the tourists holding two dead birds.

Though heavily dependent on tourism, the country does not need or want visitors such as these, but there appears to be no existing mechanism within the prosecution regime whereby they can be banned from returning.

Yet if the perpetrators were to be charged and convicted under Norwegian law, the punishment would be far more in keeping with the crime – up to six years’ jail for having wilfully or through gross negligence reduced a natural population of protected wildlife in Norway or overseas.

It is ironic that they face greater punishment in Norway for what they did in NZ, than what they could face if they were still here.

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A possible tax cuts package

March 15th, 2010 at 1:34 pm by David Farrar

Grahame Armstrong in the SST writes:

THE GOVERNMENT is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets – even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

So that would give up three tax brackets – 10% for low income earners, 19% for middle income earners and 33% for higher income earners.

What would be the reduction in income tax for people at various income levels:

  • $26,000 – 13.8% or $590
  • $30,000 – 13.1% or $670
  • $40,000 – 12.1% or $870
  • $48,000 – 11.6% or $1,030
  • $70,000 – 6.4% or $1,030
  • $100,000 – 9.2% or 2,530
  • $150,000 – 10.8% or $5,030

That is pretty well targeted. Those on the minimum wage get the largest percentage increase, and everyone earning under $50,000 a year gets a double figure percentage drop in the tax they pay. And in fact, with WFF, many of these people are net tax recipients anyway, not net tax payers.

What would be the fiscal cost?

  • Dropping the 38% rich prick rate  to 33% – $500 million a year
  • Dropping the 21% to 19% – $780 million a year
  • Dropping the bottom tax rate from 12.5% to 10% – $820 million a year

So total foregone revenue is $2.1 billion.

Now how much extra GST might people pay. Let us assume that on average people spend 90% of their after tax income, and that the GST increase of 2.5% will lead to an average price increase of 2.0% (as estimated by Stats NZ). What is the impact at each income level:

  • $26k – $391 more GST and $590 less income tax = $199 better
  • $30k -$448 more GST and$670 less income tax = $222 better
  • $40k -$590 more GST and $870 less income tax = $280 better
  • $48k -$704 more GST and $1,030 less income tax = $326 better
  • $70k – $969 more GST and $1,030 less income tax = $61 better
  • $100k – $1,304 more GST and 2,530 less income tax = $1,226 better
  • $150k – $1,862 more GST and $5,030 less income tax = $3,168 better

So it does indeed look like no one would be worse off (even if you assume 100% of after tax income is spent).

Obviously those at the top tax brackets do best in an absolute sense, but they are also the ones most likely to be property investors, and may in fact end up worse off overall. Also worth remembering two that half of the 100 wealthiest people in NZ do not actually pay the 38% tax rate, so will not in fact benefit from its reductions – they will just not need to operate through their family trust.

I have no idea if this is the package the Government will go with, but it looks pretty workable, and affordable. Most of all, it is not meant to be about just the redistribution of any changes, but the large benefits to the economy of increasing the incentives to work, save and invest and reducing the incentive to borrow and spend – plus the shifting of incentive for investment income from property to other areas.

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The average worker should not be paying even 33%

January 21st, 2010 at 12:50 pm by David Farrar

A lot of the debate at the moment is on the 38% tax rate. Now this rate was introduced in 2000 by Michael Cullen and has led to huge tax avoidance. Few on the right dispute that the 38% rate should go, or at the very least thre threshold for it increase massively.

But I want to focus also on the 33% rate. You see only should people not be paying a 38% rate, most FT workers shouldn’t even be paying the 33% rate. I’ve done a graph to make my point.

The blue line is the threshold at which people reach the 33% rate, and the purple line is the average FT income. When the top rate was made 33% in 1986, the threshold for it was around double the average FT wage.

Now since then, the average wage has increased greatly, but the threshold has only been lifted four times. The end result is that where once you had to earn twice the average wage to pay the 33% rate, under Labour it go to the point where someone earning 80% of the average wage would be paying the 33% marginal rate.

The threshold stayed constant for ten years until 1996.  It then went up to around $34,000 and two years later to $38,000. Then it stayed constant for another ten years until a miniscule $2,000 increase in October 2008. National then increased it by $8,000 in April 2009.

So National has managed to get it back to around the level of the average wage. But it used to be at twice the level. So remember that if National does drop the top tax rate to 33c, so someone earning $100,000 has a top marginal rate of 33% – that back in 1986 someone earning the equivalent of $100,000 (being double the average wage) wouldn’t even be paying the 33% rate of tax.

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ODT on Key and Tax

November 22nd, 2009 at 3:00 pm by David Farrar

The ODT reports:

Personal tax cuts are back on the agenda of Prime Minister John Key and his enthusiasm for the cuts appear to indicate they could be part of National’s 2011 election manifesto.

Speaking to the Otago Daily Times yesterday, Mr Key talked about how a reformed tax system – rewarding people for hard work and risk-taking – could help productivity, along with other measures the Government was considering.

“A lot of work is being undertaken by the tax working group which is due to report by the end of 2010.”

The tax group would make recommendations, some of which would not be palatable to the Government but others would have merit, he said.

What was true was that the group was concerned about holes in the tax system, particularly around the $200 billion of rental properties from which the Crown lost $150 million in revenue.

Mr Key did not support a capital gains tax but he did favour putting some boundaries around investment property.

“On the tax front, the Crown aims to be tax neutral. If we end up plugging some holes then we can recycle the money through tax cuts.”

Sounds promising.

Asked if he could see a time when he could confidently talk about the reintroduction of the tax cuts postponed once the recession hit, Mr Key said he could but the ability to deliver them depended on the size of the fiscal deficits in the future.

However, tax cuts could be part of the overall tax mix.

All of the academic research he had seen out of Treasury pointed to lower personal tax rates as being the strongest impetus to economic growth.

Research from the United States also confirmed that.

And that is key. How we structure the tax system, can have a major effect on economic growth. And only by growing the cake, can we afford superannuation, health care, education etc.

We should ideally have a tax structure that maximises economic growth, and then use the welfare system to deal with inequalities that need addressing. The problem is people see the tax system as the way to address inequality, and that often proves counter-productive.

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