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.

 

Tags: , ,

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.

Tags: ,

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.

Tags: , ,

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.

Tags:

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.

Tags: ,

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?

Tags: , ,

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)

 

2008/09

2009/10

2010/11

2011/12

2012/13

2013/14

Election tax package1

(133)

(238)

(37)

188

198

198

Budget 2009 cancellation of 2nd and 3rd tranches2

105

553

956

999

999

SME tax package3

(294)

(189)

214

(108)

(108)

(108)

Budget 2010 tax package4

(460)

(90)

(40)

175

Budget 2011 tax changes5

537

783

823

Total

(427)

(322)

270

1,483

1,832

2,087

 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.

Tags: , ,

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.

Tags: ,

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.

Tags: ,

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

Tags:

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%.

Tags:

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.

Tags: , , ,

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..

Tags: ,

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.

Tags: ,

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.

Tags: , ,

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.

Tags: ,

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.

Tags: , , , ,

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.

Tags: , , , , , ,

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.

Tags: , , ,

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.

Tags: ,

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.

Tags: , , ,

Tax Avoidance

October 26th, 2009 at 2:00 pm by David Farrar

The SST reports:

Finance minister Bill English has signalled the government will next year get tough with tax-dodgers by closing loopholes that allow wage earners to avoid paying their share of tax.

The IRD says the government is missing out on $300 million a year because of wage earners who squirrel away money into trust accounts to avoid paying the top income tax rate. More is lost because of earnings that are “sheltered” by a company created solely to avoid tax.

Not sure how you can legislate to fix that.

The IRD, in its latest submission to the Tax Working Group, says the problem is that New Zealand’s multitude of tax rates is encouraging bad behaviour.

Oh I am sure it is.

It said the trust account and company tax rates were too far out of line with income tax rates. Taxpayers were placing income in a trust account, paying 33 cents for every dollar earned, rather than the top rate of 38c. Another common ploy was for individual taxpayers to “shelter” their money by creating a company so that they paid 30 cents of every dollar earned in tax rather than the top rate.

The preferred solution is to lower the top tax rate – in fact that is the Govt’s official goal – to have a top tax rate of 30% for individuals, companies and trusts.

The IRD says that when the top income tax rate of 39 cents (now 38 cents) was applied to earnings of $60,000+ in 2000, a flood of taxpayers rearranged their finances to avoid the new regime.

I understand the number of people who declared they earned exactly $60,000 increased literally exponentially.

English said large-scale “legitimate avoidance behaviour” by higher-income earners undermined the goodwill of lower-income earners.

“It’s quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income, since the 39 cent top personal tax rate was introduced 10 years ago.

So reduce the incentives for avoidance and cut the top tax rate. When Muldoon’s top tax rate of 66% was dropped to 33%, it killed off much of the avoidance industry. Cullen recreated it.

Also some of the reason for no growth in people paying tax on a million dollars of income, is they have gone overseas.

“As a country, we want families, businesses, accountants and lawyers looking at how to unlock greater income and productivity, not working out how to minimise their tax.

“We don’t want people spending their time and resources trying to avoid tax. We also don’t want IRD devoting all its time to chasing tax and compliance issues.”

Then again drop the top tax rate!

Tags: , , ,

Tell Me Why I Don’t Love Fridays – Tara Te Heke

August 15th, 2009 at 9:52 am by Tara te Heke

Friday’s aren’t very special when you are on the benefit. I mean you don’t work during the week so for me every day is a Saturday. I’ve got no money spare so I can’t go out and even if I could I’d have to find someone to sit the kiddies. The best we get is watching Sky and grabbing some takeaway or looking on the internet.

I sit at my window glancing down the street watching over mortgaged, over financed people arrive home from work after 7pm and I ask myself, why?

If Fridays are a huge relief then what are they a relief from? Working. If working is so horrible then why do people do so much of it? To buy their over priced homes, to drive in their over priced car so they can send their children to over priced schools in the hope they won’t turn out to be like me.

Then we have low income workers always upset about low pay, but what do they do about it? Join a Union to pay for someone else to go and bargain a higher pay rate so they can afford more debt on more things.

I ask Kiwiblog readers, why? Why do you bother working say more than 9-5pm five days a week. Does it get you anywhere? Does it make you more money than standard hours. Does your employer value your extra contribution? Is your small business making you money and therefore worth the effort, or is it all just a giant waste of time and effort?

If it is and you are disciples to the Friday evening, then why do you do it?

And don’t just answer to pay for people like me. That’s a cop out.

If I wasn’t here you’d be contributing to some other taxpayer funded scheme or whim. Because you are all the same. You all like paying tax else you would vote for parties like ACT that would make me get off my backside, hand me a mentor such as Muriel Bloody Newman and monitor my life like Gestapo.

You feel guilt. You feel as though taxation paid gives you cleansing of that guilt.

It shouldn’t. I watch you arrive home at 7pm on a Friday straight from the office and I keep wondering.

Why?

Tags: , , ,

Q&A on Tax Cuts at NBR

May 29th, 2009 at 11:50 am by David Farrar

My column at NBR is a Q&A on tax cuts. An extract:

Bill English says the 2010 and 2011 tax cuts has been deferred. What does that mean?

It means they have been cancelled.

Are you sure?

Yes

So we won’t get them at some future point?

You may get tax cuts in the future, but when you do it will be a new package, not the package that was planned for 2010 and 2011.

Comments and feedback can be made at NBR.

Tags: , ,

Tax Cuts Past and Future

May 11th, 2009 at 10:00 am by David Farrar

Almost everyone is expecting that the tax cuts planned for 2010 and 2011 will be delayed, if not cancelled, in the Budget later this month.

I thought it would be useful to have a look at the tax cuts we have already had, and those likely to be canned, and to weigh up their relative significance. I’m going to look at each element of the tax changes:

Labour’s October 2008 package

This package has an annual “cost” (ie reduced revenue to the Crown) of around $1.826 billion. Note that Labour did not reduce any spending to compensate – in fact they increased it in their last budget by $4,5 billion. Labour did three things:

Bottom tax rate drops from 15% to 12.5% and threshold increases from $9,500 to $14,000.

Annual cost – $1.448 billion

Tax reduction on $30k – $620

Tax reduction on $50k – $620

Tax reduction on $100k – $620

Threshold for 21% rate increases from $38,000 to $40,000.

Annual cost – $0.211 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $240

Tax reduction on $100k – $240

Threshold for 33% rate increases from $60,000 to $70,000.

Annual cost – $0.167 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $600

Total October 2008 changes

Annual cost – $1.826 billion

Tax reduction on $30k – $620

Tax reduction on $50k – $860

Tax reduction on $100k – $1,460

Worth remembering when Labour goes on about borrowing to fund tax cuts for the wealthy eh!

National’s April 2009 package

This package has an annual “cost” (ie reduced revenue to the Crown) of around $1.292 billion. Also note National reduced other costs such as KiwiSaver by $1.429 billion – so the tax cuts were fiscally neutral.

National did three things:

Independent Earner Rebate for non WFF recipients earning between $24k and $48k

Annual cost – $0.500 billion

Tax reduction on $30k – $520 (if not WFF)

Tax reduction on $50k – $0

Tax reduction on $100k – $0

Threshold for 21% rate increases from $40,000 to $48,000.

Annual cost – $0.686 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $960

Tax reduction on $100k – $960

Top tax rate drops from 39% to 38%.

Annual cost – $0.106 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total April 2009 changes

Annual cost – $1.826 billion

Tax reduction on $30k – $520 (of not WFF)

Tax reduction on $50k – $960

Tax reduction on $100k – $1,260

So someone on $100k got $200 more of a tax reduction from Labour than National! Those on $50K got $100 more from National than Labour and those on $30K (if not on WFF) got $100 more from Labour than National.

So remember this again when Labour campaigns about tax cuts for the rich.

Now what are we missing out on:

Labour’s April 2010 tax cuts

These were replaced by National, but useful to look at what they would have been.

Threshold for 12.5% rate increases from $14,000 to $17,500.

Annual cost – $0.560 billion

Tax reduction on $30k – $300

Tax reduction on $50k – $300

Tax reduction on $100k – $300

Threshold for 33% tax rate increases from $70,000 to $75,000.

Annual cost – $0.061 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total Labour April 2010 changes

Annual cost – $0.621 billion

Tax reduction on $30k – $300

Tax reduction on $50k – $300

Tax reduction on $100k – $600

Amazed the media keep repeating Labour’s spin about their tax cuts.

Labour’s April 2011 tax cuts

These were also replaced by National, but again useful to look at what they would have been.

Threshold for 12.5% rate increases from $17,500 to $20,000.

Annual cost – $0.359 billion

Tax reduction on $30k – $210

Tax reduction on $50k – $210

Tax reduction on $100k – $210

Threshold for 21% rate increases from $40,000 to $42,500.

Annual cost – $0.240 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $300

Tax reduction on $100k – $300

Threshold for 33% tax rate increases from $75,000 to $80,000.

Annual cost – $0.051 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total Labour April 2011 changes

Annual cost – $0.650 billion

Tax reduction on $30k – $210

Tax reduction on $50k – $510

Tax reduction on $100k – $810

National’s April 2010 tax cuts

These are the ones likely to canned in the Budget.

Independent Earner Rebate for non WFF recipients earning between $24k and $48k increase from $10 week to $15 a week

Annual cost – $0.241 billion

Tax reduction on $30k – $260 (if not WFF)

Tax reduction on $50k – $0

Tax reduction on $100k – $0

Threshold for 21% rate increases from $48,000 to $50,000.

Annual cost – $0.137 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $240

Tax reduction on $100k – $240

Top tax rate reduces from 38% to 37%.

Annual cost – $0.105 billion

Tax reduction on $30k – $0

Tax reduction on $50k – $0

Tax reduction on $100k – $300

Total National April 2010 changes

Annual cost – $0.483 billion

Tax reduction on $30k – $260

Tax reduction on $50k – $240

Tax reduction on $100k – $540

National’s April 2011 tax cuts

These are also likely to canned in the Budget.

21% tax rate decreases from 21% to 20%.

Annual cost – $0.525 billion

Tax reduction on $30k – $160

Tax reduction on $50k – $360

Tax reduction on $100k – $360

So what do all these numbers mean? First let us look at total fiscal costs on an annualised basis

Total Fiscal Cost

  • National’s total package – $4.126 billion a year
  • Labour’s total package – $3,097 billion a year
  • Tax cuts delivered to date – $3.118 billion

So under National tax cuts greater than Labour were promising over three years have already been delivered. And furthermore, by reducing KiwiSaver etc by $1.429b, National has reduced the impact on the books to around half what Labour’s tax cuts would have been.

What are we missing out on with the cancelled tax cuts? Another $1b a year – a fair bit – but only one quarter of the total package.

Total tax cuts for different income earners

Someone on $30,000 (not getting WFF)

  • National’s total package – $1,560 a year
  • Labour’s total package – $1,130 a year
  • Tax cuts delivered to date – $1,140 a year

So someone on $30,000 (not getting WFF) has already got in tax cuts more than they would have got from Labour’s total package – but miss out on a further $420 a year.

Someone on $50,000

  • National’s total package – $2,420 a year
  • Labour’s total package – $1,670 a year
  • Tax cuts delivered to date – $1,820 a year

So someone on $50,000 has already got in tax cuts more than they would have got from Labour’s total package – but miss out on a further $600 a year.

Someone on $100,000

  • National’s total package – $3,620 a year
  • Labour’s total package – $2,870 a year
  • Tax cuts delivered to date – 2,720 a year

Interestingly it is only the so called rich pricks on $100k who have recieved less to date in tax cuts than they would have from Labour’s total package.

So remember these facts, when you hear myths:

  1. National has not borrowed for tax cuts. National’s additional April 2009 tax cuts of $1.292 billion a year was offset by $1.429 billion of expenditure reductions.
  2. Future tax cuts were promised by both Labour and National, and were both around $1b – $1.271 Lab and $1.010 Nat.
  3. Labour’s future tax cuts were worth $1,410 for someone on $100k and National’s future tax cuts $900 for someone on $100k.
  4. By having an additional round of tax cuts in April 2010 (when the economy most needs it as a stimulus), National has delivered in six months greater tax cuts than Labour were going to deliver over three years.
Tags: , ,