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Tax cut speculation

Written By: - Date published: 2:39 pm, May 9th, 2008 - 55 comments
Categories: tax - Tags: , ,

Now that Michael Cullen has ruled out a tax-free bracket but promised that everyone will benefit from Labour’s tax-cut package, what cuts will he give?

The simplest option would be to cut the bottom tax rate, which would deliver a tax cut for everyone. As a percentage of income the tax cut would be largest for those on the lowest incomes, while the actual monetary value of the cuts would rise until the end of the first tax bracket, and then remain constant. That would satisfy Cullen’s desire to deliver more money to those on middle incomes without giving massive cuts to those on high incomes.

In the graph below the current effective tax rate at different incomes is compared to what would happen if the 19.5% rate was cut to 16.5% or 14.5%.

(data)

The 16.5% option would cost roughly $2.3 billion and give a $23 a week tax cut for people earning $38,000+. The 14.5% option would cost $3.7 billion and deliver $38 a week. On an income of $35,000 your tax would drop by 16% in the first option and 26% in the second. My money is on a cut somewhere between these two, perhaps in several steps: say a cut to 16.5% on October 1 and another two percent off by 2010. Cullen will probably include an increase in the tax bracket thresholds as well: an initial substantial rise and inflation indexing to deliver on the promise of multi-year cuts.

Some hopefully not altogether baseless speculation to ponder.

[Vernon Small raised the idea of an additional top tax rate of 45% at $150,000 like Australia has, to fund more cuts at lower incomes. This is unlikely to happen: any increase at that level would deliver relatively little revenue ($100 to $200 million) and encourage more tax dodging, so it wouldn’t allow much more cuts at a lower level. Hardly worth the effort and the political cost of not making a clean cut.]

55 comments on “Tax cut speculation”

  1. higherstandard 1

    Steve

    I’d be surprised if you weren’t very close to the money on your speculation.

    It’ll be interesting to see the publics reaction – I suspect whatever is announced the public will view it as not enough – who’d be a politician eh

  2. roger nome 2

    Excellent post steve. That looks like a lot of work.

  3. AncientGeek 3

    I’d prefer a more sustainable approach to start the process of moving the levels of tax brackets to reduce fiscal drag effects.

    Whatever way it gets done, starting in the lowest tax bracket is the best place to work in for whole of society. Doesn’t worry me whatever way it goes really – I’m in the extreme right of that graph.

  4. Billy 4

    “I’m in the extreme right of that graph.”

    You big showoff.

    Mind you, with that impressive atom thing you did on the other thread, ssounds like you deserve to be.

  5. AncientGeek 5

    That was just digging tables out of an old textbook. Fortunately I’m at home today.

    “Geochemistry” by Arthur H Brownlow Prentice-Hall 1979. It was state of the art at the time. Reading the modern stuff makes my head hurt.

    I’m more impressed by this graph of Steves. I’m reading through the data link at present – it is more interesting than what I should be working on.

  6. big bruv 6

    Higher

    Of course it will not be enough, after nine years of over taxation the public are not going to believe a word that Cullen says.

    They would also do well to remember that he has lied once over tax cuts and will definitely do it again if he has the chance.

  7. AncientGeek 7

    Steve: What would the reduction in lowest bracket tax do to the effect of low income rebates? And I don’t understand this at the treasury site:-

    Statutory tax scale from 1 April 2000

    * 19.5c per $1 on income up to $38,000
    * 33c per $1 on income between $38,000 and $60,000
    * 39c per $1 on income over $60,000

    With low-income rebate, effective rates are:

    * 15c per $1 on income up to $9,500
    * 21c per $1 on income between $9,500 and $38,000
    * 33c per $1 on income between $38,000 and $60,000
    * 39c per $1 on income over $60,000

    How can the rate of tax increase with a rebate?

    [the rebate goes to everyone for their first $9,500 and is abated over the remainder of the 19.5% bracket. So, your first $9,500 is at 15%, then the next $28,500 is at 21%, bringing a total at $38,000 of 19.5%. Between $9,500 and $38,000, the total tax you pay gradually rises from 15% to 19.5% of your income. It’s kind of confusing, try making a graph based on the above figures and you’ll see. The “interesting” thing is there are effectively four tax brackets but we only talk about three, and it would be historically more accurate to talk of four becuase there was a 21% bracket and that got replaced by the 19.5% bracket, which as you see is really 21 cents for the most part. SP]

  8. Matthew Pilott 8

    There is talk of ‘fiscal drag’ and of course the oft-mentioned fact that only a small percentage would be in the top tax bracket when it was introduced; that number is far greater now.

    Two thoughts, one is that the government’s purchases are succeptable to inflationary pressures as well. Two, fiscal drag is caused by wages increasing – but pay increases are necesary in the public sector as well.

    Therefore continuously adjusting tax thresholds for ‘fiscal drag’ would reduce the tax take of the government, its ability to purchase goods and services, and ability to give salary increases in line with inflation to public servants…

    AG – isn’t the net effect there $0 for someone on $38,000, but with a lower rate up to $9,500 (15%) and a higher rate above it (21%) people earning under $38,000 will benefit?

  9. Patrick 9

    Just at a guess AncientGreek (sorry, it’s Friday afternon, I’m not doing any sums!) – it looks as though having a 15c rate for the first $9,500 would decrease the net amount of tax you paid.

    I vaguely recall something like this when I was doing part-time work as a student, but I never really understood it and certainly don’t now…

    Impressive post Steve, thanks for that!

  10. AncientGeek 10

    MP: I’m actually more concerned with the fiscal drag at the bottom end rather than the top end.

    If you look at the slopes in the graph above you can see the change in the velocity of tax increase with income. It steps. Now consider that just wages at the rate of inflation is is steadily going to move people to move up that slope. It makes little difference to me – but it would at 33k because the base costs are similar, but the residual income after costs is less. Note these are probably the wrong terms…

    I’m just unsure of the effect of the low-income rebate. I feel like I’m either missing something, or the numbers are incorrect.

    Anyway – better stop reading this and get some work done.

  11. Billy 11

    47% of the poulation earns less than $20k. That is astounding.

  12. Santi 12

    “47% of the poulation earns less than $20k. That is astounding.”

    Another great achievement of the socialist Labour government!

    Keep the masses impoverished so they can cast a vote for the reds in the hope of more benefits, handouts, welfare, grants and WFF.

    [pathetic Santi. even more people earnt less than that under National. Higher employment, higher labour force participation, higher minimum wage, stronger unions, have all contributed to an average 15% increase in incoems after inflation since Labour took power – add to that the increase in the social wage – Kiwisaver, 20Free, Working for Families, etc. SP]

  13. Billy 13

    59% earn less than $30k and, on current polling, at least 9% of them would vote for National.

  14. higherstandard 14

    Remember that the 47% earning less than 20k includes retirees and children.

    [It doesn’t include children who don’t work but it does include retirees. It’s 47% of registered taxpayers, not all of whom pay tax in a given year. SP]

  15. Daveo 15

    It’s a pity WFF is so hard to model as it’d be good to factor that into the effective tax rates .

  16. big bruv 16

    SP

    Despite your sickening party political statement the fact remains that Santi is right.

    Labour have done nothing in REAL terms for their core supporters, the fact remains that 47% earn less than 20k, that is disgusting.

  17. Billy 17

    SP, maybe you guys are going to have to re-evaluate your oft-repeated line that National represents a narrow interest group of big business and landed gentry. If 59% of the population earns less than $30k and National is polling over 50%, either being in the landed gentry is not what it was, or National appeals to a wider range of voters than you give it credit for.

  18. Daveo 18

    Santi- here’s one example – the minimum wage is up 70% since 1999. How does that square with your claim that “Labour have done nothing in REAL terms for their core supporters”

  19. Patrick 19

    bruv, can you please remind me, what was the minimum wage 9 years ago? What is it now?

  20. mike 20

    Surely the envy tax threshold will have to move.
    It was put in place to only affect 5% of workers and now hits 12%

  21. Daveo 21

    If 59% of the population earns less than $30k and National is polling over 50%, either being in the landed gentry is not what it was, or National appeals to a wider range of voters than you give it credit for.

    The left doesn’t argue that National doesn’t appeal to wage and salary earners, we point out National’s policies won’t benefit them (which is where dogwhistling and PR come in). There’s a crucial difference there.

  22. Daveo 22

    Surely the envy tax threshold will have to move.

    There’s no envy involved, just a recognition that those on higher incomes can afford to pay a greater share.

  23. BB. This graph includes everyone who pays tax. Now, That includes retired people, kids who work a few hours a week, beneficaires, and the 30-odd% of adults of working age who are registered for tax but aren’t in the labour force. So, those people all have low earnings but are in this graph. If you wnat info on wage growth under National and Labour, go to the archives..

  24. Joker 24

    Without wishing to single out Ancient Greek I think he has unintentionally confirmed my (very) amateur profiling of the “champagne socialist”.

    By volunteering information about how much he earns for no particular reason as some kind of boast it would appear to me that no one (i.e. his parents) taught him that this is a ghastly nouveau riche thing to do.

    From this I deduce that his parents were working class old school labour supporters.

    Having no doubt worked very hard to make himself reasonably succesful for Ancient Greek at some time there must have been some allure in the economics of the right.

    However a sense of guilt from loyalty to his working class roots or the continual exposure to socialist dogma in his formative years will always cloud his judgement.

  25. mike 25

    “Therefore continuously adjusting tax thresholds for ‘fiscal drag’ would reduce the tax take of the government, its ability to purchase goods and services, and ability to give salary increases in line with inflation to public servants ”

    So in other words the private sectors real take home pay should slowly fall to keep welfare payments and public sector’s pay high.
    And you wonder why the tide is turning…

  26. The low income rebate thing is a bit hard to understand. i tried explaining it one way above, now I’ll try the other way.

    All income to $38,000 is taxed at 19.5% but you get 4.5% back on the first $9,500. After that they gradually take back that rebate from you by adding 1.5% to the 19.5%. At $38,000, the rebate is all gone but if you earn less than $38,000 (like most people) you still get some part of the rebate).

    The graph I’ve done is a little unsatisfactory because it’s based on incomes groups, and so the line jerks about a bit when in reality it’s a series of curves – at the start of every bracket the curve is relatively steep and then eases off as it starts to approach the level of that threshold – the effective rate of tax paid can never reach the bracket rate (execpt in the first bracket) because not all your income has been taxed at that bracket, hence the shape of the curve, apporaching the rate at the declerating rate, never able to touch it (think of dividing 1 by 2, then the result by 2, then the result by 2, you get closer and closer to 0 at a slower and slower rate but can’t touch it, same shape curve)

  27. Here’s that the current effective tax rates actually look like

    Tax as a percent of income graph

    like I say, couldn’t do that in combination with the population distribution. Might see if Tane, our images guru, can work something out for when the real tax cuts come.

    [lprent: corrected link so it was readable]

  28. Matthew Pilott 28

    Mike,

    1 – still sticking with the envy tax line are we? So how are your politics of greed going? Seems even National has abandoned them, rough bro. Can’t say I’m sorry…

    2 – “So in other words the private sectors real take home pay should slowly fall to keep welfare payments and public sector’s pay high.
    And you wonder why the tide is turning

    No. Drag only occurs with increase in pay. You get a pay rise and an increased proportion gets taken out in tax but your real take-home pay increases. Learn some basic maths, and try to think beyond making irrelevant inflammatory statements, they don’t add much.

  29. Matthew Pilott 29

    Joker, as an amateur profiler, what are you singling out a champagne socialist from? A 1950’s Soviet Railway worker perhaps?

    That term has no meaning, unless you think all socialists are poor, or anyone who is wealthy will automatically become conservative.

    Or are you saying that all socialists must live on collective farms and read Little Red Books?

  30. AncientGeek 30

    Joker: you name yourself well. Your simplified assumptions say more about your intellect than almost anything else you could have done.

    The reason why I gave an idea of my income is because there has been too much concentration on the upper incomes in the tax debate. The real issues for the whole of society are at the bottom income levels. A standard wingnut tactic is to denigrate on relative advantage in tax cuts.

    FYI: If you scale it in terms of income tax. Most of my extended family are usually in the mid to top brackets and have been since the depression. But we have and have had family members in just about every income bracket. It depends on what you find important. The family doesn’t do much inherited wealth transfer – we live too long. So everyone starts low. This gives an appreciation of choices to make.

    In the family, there is general agreement that what is good for all of society is good for us in the long-term.

    So we don’t get carried away by quick-fix solutions offered by the conservatives. That is something for people without a sense of history

  31. higherstandard 31

    MP

    “Or are you saying that all socialists must live on collective farms and read Little Red Books?”

    There’s no denying it would be a vote winner !

  32. AncientGeek 32

    Steve: thanks – those explanations (especially the graph) made it much clearer.

  33. Billy 33

    “Or are you saying that all socialists must live on collective farms and read Little Red Books?”

    I think that is only reasonable.

  34. rex brown 34

    “As a percentage of income the tax cut would be largest for those on the lowest incomes”

    Is that the goal? If so, why?

  35. Matthew Pilott 35

    Social Democrat Billy, remember there’s a difference!

  36. Billy 36

    So you say…

  37. Phil 37

    “[Vernon Small raised the idea of an additional top tax rate of 45% at $150,000 like Australia has, to fund more cuts at lower incomes. This is unlikely to happen: any increase at that level would deliver relatively little revenue ($100 to $200 million) and encourage more tax dodging, so it wouldn’t allow much more cuts at a lower level. Hardly worth the effort and the political cost of not making a clean cut.]”

    I think you need to be a little clearer about “tax dodging” which, when taken out of context, can be a very serious allegation to be levelled at an individual person or company.

    There is a distinct difference between “Tax Evasion” (illegal) and “Tax Avoidance” (which is transparent and legal). The type of ‘tax dodge’ that you talk about is the latter.

  38. Hillary 38

    Phil,’tax dodge’ as in rich people paying expensive accountants and lawyers to ‘minimise their tax liability’. While wage earners have almost no scope to ‘minimise their tax liability’. Fair, aye?

  39. mike 39

    “No. Drag only occurs with increase in pay. You get a pay rise and an increased proportion gets taken out in tax but your real take-home pay increases.”

    Why should pay increases be sucked up by fiscal drag?
    Will you socialists ever learn that rewarding production is the answer not penalising it.

  40. ak 40

    ah gee, so sad. A whole thread on money. Saw it coming.

    When the tories put up the most blatant election bribe I’ve ever seen in 2005 they dragged everyone down to their level. With the Press now so obviously shallow and blatantly pro-tory it could be a $30/wk versus a $45/wk election.

    Jesus. What an ignominious situation for such a proud, idealistic and world-leading country.

    Labour must continue to lead. Onya Hells and Culls – Slippery’s munificent flip-flops have delivered you an unprecedented and fully mandated platform to project us (and the world) yet further along the path of social evolution.

    Be bold. Race relations is both huge opportunity and electoral – hang on the league tests on – seeya

  41. Why should pay increases be sucked up by fiscal drag?
    Will you socialists ever learn that rewarding production is the answer not penalising it.

    ————–

    You mean profit, and generally its considered its own reward.

  42. ak 42

    (bastard! – no urgency, overhyped, overpaid pack of …. anyway, yes where were we, that’s right

    – GO! Cully and Hels, Slippery’s craven flipflops have given your progress to date an indelible seal of approval and the mandate to press on with further advances in social justice.

    Kiwis won’t be fooled again by the private-owned media. Go for it. Ignore the “New Zealand Sucks” fearmongers and Hollow Men arse-lickers: seize the advantage and pledge to raise maori life expectancy by four years within ten.

    It’s achieveable. It’s world-leading. It’s disgraceful that it hasn’t yet been seriously attempted.
    Go on Hels. Is Slippery going to say it’s an undesirable outcome? Ask him: and the Maori Party.

  43. mike 43

    “pledge to raise maori life expectancy by four years within ten.”

    More racist policy from the left. What a laugh
    Didn’t dear leader retreat on “closing the gaps” faster than “carbon neutrality”

  44. Higherstandard 44

    From a medical perspective it would be a miracle to raise the life expectancy of Maori by this amount in such a short period.

  45. big bruv 45

    ak

    Seems like “Culls and Hells” are going to suffer the same fate as your league team.

  46. Higherstandard 46

    BB

    Unlike the league team they will however fight tooth and nail.

    Don’t know what it is about our rugby and league players at the moment seems to be an acute “lack of ticker”

  47. Phil 47

    Hillary

    ” ‘tax dodge’ as in rich people paying expensive accountants and lawyers to ‘minimise their tax liability’. While wage earners have almost no scope to ‘minimise their tax liability’. Fair, aye ”

    Sure, because it’s so very expensive to set up a company in New Zealand, and it’s so very hard to complete all the documentation required to run it that you simply must spend thousands of dollars on expensive lawyers and accountants to do it.

    If someone is earning enough that it’s cheaper to set themselves up as a company and pay the company tax rate on their personal income, then good on them. That’s the beauty of progessive tax systems. If you want to offer an alternative (flat-tax anyone?) then be my guest.

  48. ak 48

    bruv: “”Culls and Hells’ are going to suffer the same fate as your league team”

    too right bruv – start off behind and convincingly win the second half in November

    HS: “miracle”: that’s what I’d always thought too – “too hard basket” – until I recently saw (by accident) a paper on improvements in cardiac intervention rates for Maori males that had come about purely from the introduction of a “check list” for specialists. You should know better than anyone that late presentation is a huge factor – something as simple as more community-based kaiawhina with a focus on primary checks could work wonders.

  49. higherstandard 49

    ak

    While I applaud your optimism you will not be able to lift Maori life expectancy by 4 years in a decade while surgery is my specialty current public health intiatives will be lucky to maintain current life expectancy in light of the increasing incidence of diabetes and cardiovascular disease.

    The major problem is poor diet and inactivity amongst this group coupled with thrifty genetics these behaviours aren’t changed in 10 years.

  50. randal 50

    I hear JOhn KEYS IS PROMISING A 10% GENERAL WAGE ORDER IF NATIONAL WINS?

  51. “There is a distinct difference between “Tax Evasion” (illegal) and “Tax Avoidance” (which is transparent and legal). The type of ‘tax dodge’ that you talk about is the latter.”

    Yeah, Phil, I’m aware of the difference between evasion and avoidance. There’s no arguing that the latter is still not a concerted effort to avoid tax, ie dodge it.

    Like Hillary says, that’s a rich man’s game.

    I disagree with your comments on the cost of opening a company in NZ – we’re rated the second easiest country in the world to do so, and it only costs, what, $400?

    Does a progressive tax system open room for tax avoidance? Sure. Does it also allow us to get the level of public services the public desires without taxing the poor into the ground? Yes. There’s no reason to throw the baby out with the bathwater by going for flat tax because of what are only minor tax avoidance issues and false economies.

    Perhaps more suitable for some future post, but most the tax avoidance uses trusts, which are taxed at 30%, to take income that would normally be taxed at 39%. I question the value of trusts fullstop but, without going that extreme, I believe there must be a way to clamp down on this gaming of the system by the wealthy for their beneift and everyone else’s lost (I wonder how many of those people on zero income in the graph are actually raking it in and using companies and trusts to avoid tax.. it’s not illegal but it should be).

  52. Billy 52

    Steve, I think you will find that trustee income is taxed at 33%.

    [right you are. I thought it was moved with the corporate rate. SP]

  53. Matthew Pilott 53

    Billy – not if it’s a PIE

  54. Santi 54

    Long live the PIEs, one good idea of this socialist government helping me to reduce my tax take and maximise the use of cash resources.

    It’s just a pity that it generates more work for accountants and tax advisers, due to its complexity.

    Lower taxes and make live simpler, I’d say.

  55. uroskin 55

    Leona Helmsley said tax is something only the little people pay.
    If you can’t afford a creative accountant, you shouldn’t be in business.

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