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.