By request

May 21st, 2010 at 12:07 pm by David Farrar

A reader requested this graph. It shows the average tax rate (including low income rebate and independent earner tax credit) at each $10,000 band for April 2008 and October 2010.

A full time worker (without children) earning a bit over the minimum wage at $15/hr has had, over 2.5 years, their average tax rate drop from 19.1% to 12.5%.

A full time worker earning the average wage at almost $25/hr has had their average tax rate drop from 22.7% to 16.0%.

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.

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.

GST on Housing

August 27th, 2009 at 9:23 am by David Farrar

Brian Fallow writes:

Here’s a suggestion for the tax working group set up to figure out how to put the tax system on a more durable and efficient footing to consider: scrap the provision exempting mortgage payments and rents from GST.

A brave suggestion.

But remember, any recommendations the working group comes up with are expected to be revenue-neutral, taken as a whole. And the broader the tax base the lower rates can be.

The question I then have is how much extra GST revenue would ending the housing exemption bring in, which would indicate howmuch tax rates in other areas could decrease.

More than 40 per cent of the income tax – much the biggest single source of Government revenue – comes from the top 10 per cent of taxpayers ranked by income, which is dangerous when labour is as mobile as it is and the income gap with Australia and most other developed countries is as large as it is.

It sure is. The top 9% pay 42% of income tax and the top 14% pay 53%.

What is so special about expenditure on housing that warrants exemption from a consumption tax? Other necessities like food, clothing and electricity attract GST.

A fair point.

According to Statistics New Zealand’s household economic survey the average household expends just over $10,000 a year on rents or mortgage payments (including principal).

With nearly 1.6 million households, at the current GST rate and ignoring any second round effects, that would yield about $2 billion a year. That is also about what an increase in the GST rate to 15 per cent would yield and is reportedly enough to fund, for example, a cut in the top income tax rate to 30c in the dollar – an avowed goal of the Government.

Oh I love it when a journalist actually does research and provides the info you need.

It would cost around $800 million to drop the 38c rate to 30c and around $280 million to drop the 33c rate to 30c so GST on housing would easily allow that it seems.

But that is not all. Applying GST to mortgage payments deals with one of the biggest distortions in the current tax system, the problem of “imputed rentals”. Avoiding the need to pay rent is a large part of the return on investing in the roof over your head. An untaxed capital gain is the rest.

My incentive was to stop paying rent. Any capital gain is a bonus.

Compared with a land tax or the McLeod review’s wealth tax, attacking housing through the GST system has the advantage of not relying on what someone from Quotable Value – however professional and incorruptible – estimates a property is worth. How much you pay a bank or landlord is cut-and-dried, not a matter of opinion.

I wonder why Fallow advocates GST on a mortgage only, and why not GST on the sale of a house? Maybe because most sellers are individuals and not GST registered?

The brutal reality is that if politicians set their face against a shift in the tax mix from direct to indirect taxation because they think the short-term distributional effects are too hard to deal with, then they are bequeathing to their successors a tax system that resembles an iceberg drifting slowly northwards. It will just not deliver the revenue required to provide the services people have come to expect from the state.

This is the killer paragraph and one the Government should remember.

An even better option

June 30th, 2009 at 8:03 am by David Farrar

The NZ Herald says:

Thus there may be a case for compensating a household when one of the earners becomes unemployed in the current recession. Two Auckland economists have called for a relaxation of the rule that refuses the dole to a person whose partner is earning even a modest income. They point out that this is inconsistent with the taxation system which treats couples as separate income earners.

They have not drawn the obvious conclusion, though, that a better solution might lie in changing the tax system. If couples could combine their incomes for a tax assessment, and each be taxed for half of it, the loss of one income would reduce the tax on the other, delivering an appreciable benefit to the household. …

This proposal, known as “income splitting”, deserves consideration for reasons wider than unemployment. If it was adopted as a permanent feature of income tax it would be fairer than the present system for couples in which one partner chose not to be in paid employment.

So the Herald says a better option that allowing people to go on the dole if their partners are working, is income splitting.

I’m not a big fan of income splitting as it will lead to all sorts of “false couples” in order to income split, but I have an even better option that achieves the same end without the perverse incentives.

A flat tax rate. Then there is no need to income split. And you just have a guaranteed minimum family income for low income earners.

Sir Roger’s prescription

February 11th, 2009 at 6:33 am by David Farrar

Sir Roger Douglas gave the now famous Orewa Rotary Club speech last night. His full speech is here.

The Herald reports:

Act MP Sir Roger Douglas is proposing a new low-tax option for taxpayers in which the first $30,000 of income would be tax-free – but only if they pay for their own retirement, health care and welfare insurance or costs.

Income over the $30,000 tax-free threshold would be at a flat tax rate – 15 per cent – to be phased in over 15 years.

The Douglas plan would cut corporate tax rates to the same 15 per cent.

Sounds a good idea to me. Encourage people to look after themselves.

There are fish hooks though. The Centre for Independent Studies had a seminar on this a couple of years ago, and the challenge is how do you cope with people wanting to move from one option to another. Should the decision you make at 18 be unchangeable throughout your life? But if you let people change, they might take the low tax option when healthy, and then when older the high tax option.

The other challenge is what if someone has gone for the low tax option and pledged to look after their only health and retirement costs – yet they lose their savings. As a society do you let them die because they can’t pay for their health care?

As I said, I am very supportive of the principle, and like the notion of people choosing. It would be good to have some further research done on how one might practically have such a system work.

Sir Roger outlined his opt-in proposal to the Orewa Rotary Club.

He would inflation-proof the tax-free income so the $30,000 threshold would rise at the rate of inflation.

But rates would vary for income-earners with dependent children: the threshold for a couple with one child would be set at $50,000.

Families would have a guaranteed minimum income, so that if they earned less than the tax-free threshold they would receive a tax credit up to the threshold.

The concept of people paying no tax until they are earning the minimum income they need is very sound. It avoids the deadweight costs of churn where you pay taxes to then get soem of it back in welfare.

GST to 15% and top income tax to 45%

October 20th, 2008 at 8:57 am by David Farrar

Labour have left the economy with a projected decade of deficits and the latest economic news, coupled with Labour’s massive spending promises, could push the country into a structural deficit.

Top tax expert John Shewan has looked at what might have to be done to break out of Labour’s decade of deficits. He says GST might need to go from 12.5% to 15.0% and the top tax rate from 39% to 45%.

Is this what Labour has planned for its December mini-budget?

The full package

October 8th, 2008 at 1:42 pm by David Farrar

This compares the situation at the beginning of the year, to what it will be like in year three of a National Government.

Again any errors are mine. What it shows is a very significant package – earners in the $30,000 to $50,000 range get their tax bill reduced by 20% to 25%. Those on $100,000 get only a 12% reduction – and proportionally less as income grows (8.1% at $200,000).

Now Labour did deliver the first of the four stages of this tax cut package. They should get some credit for it. Sure it took nine years, lots of screaming, a previous package which they cancelled after the election, only did it because National and the public forced them to, and an admission now they in hindsight they wish they hadn’t done it, but for Labour that is as close as you will get 🙂

The rates used in this calculation are:

  1. 12.5% to $14,000
  2. 20% to $50,000
  3. 33% to $70,000
  4. 37% over $70,000
  5. A $520 rebate for incomes from $24,000 to $44,000 then abating at 13% until $50,000

2009 tax rates

October 8th, 2008 at 1:17 pm by David Farrar

I have done these myself. I think they are accurate but they were done quickly. If people spot an error, let me know.

This shows how much annual tax you pay at income levels as of today (taking into account Labour’s tax cuts) and how much your annual tax will be starting in April when National’s cuts would take effect.

The biggest percentage reduction in tax is those at the lower end of the income scale.

This is based on the following:

  1. 12.5% to $14,000
  2. 21% to $48,000
  3. 33% to $70,000
  4. 38% over $70,000
  5. A $520 rebate for incomes from $24,000 to $44,000 then abating at 13% until $48,000

Tables for 2011 to come.

Harawira on Agenda

September 22nd, 2008 at 7:59 am by David Farrar

Agenda hve the transcript up of their interview with Mairo Party MP Hone Harawira. First the good parts:

HONE Oh sure, I mean they have, to assume that they can simply sit there and pass an Electoral Finance Act when the whole world was saying this sucks and in fact it’s come back to bite them on the bum shows how disconnected they were with reality to try and ram through legislation at this late stage in the game is arrogant, it suggests that they are really only – and then to stack all of these quangos with their cronies suggests that they see themselves going out and they’re really just trying to maintain as much power as possible, that’s arrogant, that’s nothing to do with coalition building, and in fact the Labour Party has yet to come out clearly and say these are the sorts of things we’d like to do with the Maori Party.

Harawira is of course right with his analysis.

GUYON What about National then are you comfortable, could you actually work with National?

HONE Another difficult one there, but no more difficult than working with Labour as far as we’re concerned. People have this big fear of National and Maori in terms of oh they’d get rid of the Maori seats wouldn’t they, but my response constantly is always the greatest land theft of my generation has actually been the Foreshore and Seabed and that wasn’t stolen by National that was stolen by Labour, would you expect us to jump into bed with them happily.

That is a very different tune to a few years ago.

But some idea of the challenges ahead:

GUYON Let’s talk about a couple of the things that you said you want to do if you have influence over a government, you wrote recently in the Northland Age that you want to remove GST from food and abolish tax for people earning $25,000 and under, how much would that cost?

HONE Actually Guyon I couldn’t care less how much that costs, what I do know is this.

Guyon says Treasury worked the cost out for them:

GUYON Well we did something that you should have done, we asked Treasury how much this would cost, they said it would cost two billion to remove GST from food and three billion more to cut taxes for those earning less than $25,000. You want free health care for kaumatua and kuia too, where is the money coming from?

I have a figure of $2.4 billion for removing GST from food. The no tax on those earning less than $25,000 could be even more than $3 billion. That is the cost of zero tax for everyone who earns $25K or less. But if you read it as being zero tax on the first $25,000 of income (which you would need to do otherwise someone at $25k pays $0 and someone on $26K pays pays says $5k) then the fiscal cost is arouynd $11.4 billion (according to NZIER calculator).

HONE Well let’s say the tax off cigarettes for the last we’ll say five years, that’s five billion dollars. This isn’t very hard eh, this isn’t rocket science, the government is taking a billion dollars a year off tobacco tax, they could certainly spend it in this area.

Hone is correct that tobacco excise tax is around $1 billion a year. But that tax is already budgeted for.

Even if Hone was suggesting we double the excise tax on tobacco, that would bring in an additional billion a year at most. Probably quite a bit less as the amount of tobacco purchased would decline. But even if it was $1 billion that is not even close to the $5 billion to $13 billion cost of what he wants to do.

Will Dr Cullen increase taxes on some?

May 8th, 2008 at 4:21 pm by David Farrar

Vernon Small from the Dom Post blogs his speculation that Dr Cullen may do what he did in 1999, and bring in a new top tax rate, to help pay for tax cuts elsewhere.

How does he stop the highest paid getting the most? Well a threshold movement is better than a rate cut in that regard. Given that all those above any new threshold will get the maximum benefit, it is still limited. For example, if you lift the top threshold from $60,000 to $70,000 then everyone earning more than $70,000 gets 6c X $10,000 a year = $600. Between $60K and $70k they get lesser amounts. Compare that with a cut to the top rate of 39c where the more you earn the more you benefit.

If you want to cut the rates, then the only ways to limit that effect is to cut a rate further down the progressive scale – either the 33c rate that starts at $38,000 or the 21c (effective) rate below that threshold.

Or – and here’s a bit of speculation to send a chill through the blood of the very well paid. Remember that comment about redistribution and the imposition of the 39c rate in 1999?

What if he introduced a new top rate, to apply after the election of course, say 40c or 42c on income above a new threshold? A threshold of $150,000 might do it, and would annoy precious few voters. That would cap the benefit and even start to claw some tax revenue back. National could fulminate, but might look like protecting “its rich mates” – a trap Cullen is constantly baiting for John Key and Bill English.

There are those who would argue the top personal and company rates should be aligned, but with business tax at 30c and two personal rates higher than that now, the roof hasn’t fallen in. So “why not be hung for a sheep as a lamb?” as my mother would say.

This certainly can not be ruled out. Cullen hates rich pricks, and the thought of taxing them even more is not impossible. He did the same in 1999.

Cullen knows he will probably never get their votes, so you do some wedge politics and take more off the “rich pricks” so you can reduce tax for people who might still vote for you.

No tax free income for New Zealand

May 8th, 2008 at 9:18 am by David Farrar

Michael Cullen has ruled out making the first few thousand of income tax free. This is a pity because I think there is a strong case that there should be no tax on your income until you are earning more than the minimum amount you need to live on. The welfare system then tops people up to that minimum standard, but it is significantly wasteful to tax people just to then give them that money back as welfare.

In Australia the first $11,000 of income is tax free, and by 2012/13 the first $20,000 will be tax free.

So what does this mean for someone earning say $40,000. Well in NZ you $8,070 of tax which is an average 20.2% and this has not changed since 1999. Now in Australia it used to be $9,802 in 1999 which is an average of 24.5%.

But Peter Costello, and now Kevin Rudd, have shown what you can do if you reduce tax just a bit every year. In 2012/13 someone earning $40,000 in Australia will pay only $3,400 of tax – an average tax rate of 8.5%.

So because Michael Cullen has refused to reduce taxes until forced to at near gunpoint, the NZer on $40,000 who used to pay $1,800 less tax than an Aussie, now will be paying around $4,500 more by 2012/13 – less whatever he announces in the budget.  But it is hardly going to close the gap he has allowed to grow.

NZIER tax cut tool

April 9th, 2008 at 10:32 am by David Farrar

Hidden away on the NZIER site is a excel spreadsheet which allows you to design your own tax cuts.

You can do the following sorts of adjustments:

  • Change Thresholds
  • Change Rates
  • Change Thresholds and Rates
  • Introduce a tax-free threshold
  • Income Splitting

For each scenario, it will tell you have much less tax you will pay, and the approximate fiscal cost.

House Prices

March 13th, 2008 at 3:17 pm by David Farrar

DPMC have published a very good report on house prices. I quote one section:

Like other businesses, a rental property investor can combine their net rental income with income from other sources. An investor’s total deductions for interest, rates, repairs and insurance may exceed the gross income from rent, creating a loss that can be applied to reduce the taxpayer’s liability on other sources of income. The value of this aspect of the tax system is directly related to marginal tax rates. Therefore, the increase in 2000 to a top marginal tax rate of 39% may have encouraged some additional investment in rental housing.

So Labour increasing the top marginal tax rate increased demand for investment properties, pushing house prices up. And one presumes that a reduction in marginal tax rates would make investment properties less desirable and lead to a drop (or less of an increase) in house prices.