O’Sullivan on fiscal drag

Fran O’Sullivan says to enjoy your tax cuts while you have them:

Enjoy your tax cuts – you will probably pay for much of them through fiscal drag.

That’s the reality for many higher income earners as Finance Minister Michael Cullen “all but” admitted to me on Friday.

Over the past eight years, he has pocketed close to an extra $2 billion in fiscal drag, based on figures provided to me by his office.

This year it will probably be about another $250-$260 million, which will go a good way towards funding the shift in the top tax threshold from $60,000 to $70,000.

If the $60,000 “rich prick” threshold had been inflation adjusted it would already be at $74,800 (and it moves to $70,000 only this October). When the threshold moves to $75,000 in March 2010 the fiscal drag would have it at $79,400 and in March 2011 when it hits $80,000 the fiscal drag would have it at $81,600.

So Fran is right. The change to the $60,000 threshold doesn’t even compensate for inflation. Someone earning $60,000 in 1999 and having had their salary go up by the rate of inflation every year would have paid $25,100 of extra tax from 2001 to 2008.

And even from 2009 to 2012 they will pay an extra $12,500 of tax just for having been pushed into the “rich prick” top tax rate, even though they are earning no more in real terms than they were in 1999.

But the Finance Minister suggested those earning more than $80,000 (8 per cent) would basically fund their cut through the fiscal drag effect.

Cullen’s “admission” came after the Wellington Regional Chamber of Commerce’s post-Budget luncheon. He noted the top tax threshold was now cutting in at such a low level, it was even catching nurses and teachers – not his original intention.

Yes only classes of non Labour voters are meant to be targeted by it.

With 55 per cent of the total income tax of $26,373m paid by those earning more than $60,000, and 29 per cent by those earning $100,000 plus, calls are likely to increase for more cuts at higher income levels over time.

Those nasty “rich pricks”who fund the health. education and welfare systems can and are going to Australia.

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