web analytics

Cullen rules out tax-free bracket, GST cut

Written By: - Date published: 11:24 am, May 8th, 2008 - 20 comments
Categories: tax - Tags: ,

It’s disappointing that Michael Cullen has ruled out both a tax-free bracket and a GST cut in his tax cut package to be announced at the Budget (not least of all because it means he clearly isn’t taking policy advice from The Standard).

His reasoning is odd on both points. The tax-free bracket is rejected because ‘up to 90 per cent of those earning less than $18,000 a year were temporarily on low incomes’ and it would offer little “meaningful relief for those further up the income scale’ That doesn’t make sense. A tax-free bracket would give exactly the same tax cut (in dollar terms) to everyone who has taxable income at or above the bracket level. Say you’ve got a $5,000 tax-free bracket: whether you’re earning $5,000 a year or $500,000 you would get a $750 a year cut. The higher income earner gets a smaller cut in percentage terms but everyone gets the same amount of cash.

Conversely, he argues that a GST cut would favour the well-off more because they spend more. Now, GST is regarded as a regressive tax. That is, the lower your income the more of your income goes on GST, because you save less of your income a higher portion of your income is spent, attracting GST. How can cutting a regressive tax itself be a regressive move? The real argument against cutting GST is that the benefit of a sales tax cut is split between the seller and the buyer, which means you have to cut tax revenue a lot for relatively little more money directly in consumer’s pockets.

Even if both Cullen’s arguments stand, don’t they balance out? Cullen says a tax-free bracket doesn’t give enough to higher incomes, and a GST cut gives more to higher incomes do a bit of both and you’ve got a balance.

A tax-free bracket and lower GST would have been cut everyone’s tax, meeting that important fairness test. Politically, they would have been good cuts too: simple, easy to understand and implement. GST is hated and a tax-free bracket would have an easy resonance.

Now, Cullen is left with making adjustments to the rates and thresholds of the existing income tax brackets. It will be interesting to see what he comes up with. It’s his last chance to get it right.

20 comments on “Cullen rules out tax-free bracket, GST cut ”

  1. Dim (was dime) 1

    i have to admit, i was surprised he actually said – tax cuts for everyone!

    i was picking an increase to working for families and thats it.

    i imagine what he does give will be minimal..

    good to see you calling him out on his blatant lies too!

  2. “Last chance to get it right” ? Freudian slip perhaps ?

  3. Matthew Pilott 3

    There is a third option Steve – lump sum. That has been bandied about in the MSM and must have come from somewhere (admittedly that could be a journo’s imagination)

    mawg – if he gets it wrong, and it’s widely percieved at being wrong, I wouldn’t rate his chance at another shot at it!

  4. Why have GST At all? Too regressive, as you said.
    In the interim he could cut GST on tax like local body rates, and also only charge GST on the base price of petrol, tobacco and alcohol instead of whacking it on top of the excise duties.
    If he was really radical he should move to a basic income scheme (http://en.wikipedia.org/wiki/Guaranteed_minimum_income) including a negative tax rates where you get support if your income falls under a certain level, and which would enable us to do away with unemployment benefits, state pensions, student loans, working for families, sickness benefits and community cards. The bureaucracy saving should be substantial.

  5. mike 5

    “There is a third option Steve – lump sum”

    While it would be nice I think this would look too much like an election bribe. His inflation “test” would also rule this option out wouldn’t it?

  6. Billy 6

    I am very surprised he ruled these out. I would have thought both or either would have hit just the right populist note.

  7. Lump sum is no good. What we don’t wnat to get into is the American-style use of the tax system for short-term poltiical reasons – one-off rebates, tax cuts that have sunset clauses (Bush’s tax cuts will expire once he laves office, giving a whole new President the chance to cut them).

    uroskin – your sales tax ideas sound complicated. the virtue of GST is that is is very simple to administer. Minimum income does have its virtue, as well as its downsides.

  8. Matthew Pilott 8

    I agree mike, it would look that way, although it could be seen as specific to the price rises people are struggling with. Given I doubt many of those prices are going to fall back down, though, it doesn’t make that much sense. A one-off payment should be a response for a one-off event (in saying that, the shock of price rises could fit the bill. I’ll stop talking myself in circles now).

    As said, I heard it suggested in the MSM – would be interested to hear if anyone’s heard of the idea from someone in an official capacity…

  9. Phil 9

    So, if the Nats offer a first $X,000 income tax free, I assume it will get your glowing endorsement Steve?

  10. I would endorse a tax-free bracket policy from the Nats – I already endorse said policy of the Greens and Progressives.

    Whether I would endorse a National tax cut policy as a whole would depend on what else it contained.

  11. Pascal's bookie 11

    <i. (Bush’s tax cuts will expire once he laves office, giving a whole new President the chance to cut them).

    That’s not why you use sunset clauses Steve. The aim is to make the govt small enough to drown in a bathtub.

    The Treasury has to make it’s forcasts based on the law as it is written. So if a massive tax cut has an expiry date, the costs of it being permanent are not forcast. This is the short term political benefit you have when trying to sell the cut in the first place. It looks cheap.

    In the second place, the longer term political benefit comes when your political opponents have to do something about the expiration.

    Either they allow the cut to expire, in which case, “ohmigod, they are raising taxes!!1!”.

    Or they make them permanent, blowing out the forcasted deficit, in which case “Ohmigod, we has to slash spending 11!!”

    If anyone doubts me, just watch.

  12. Santi 12

    Ah, Cullen, such a generous man (I avoid calling the much better deserved, bastard) he is!

    In a few months once the socialist are defeated he’ll be all but forgotten.

  13. Matthew Pilott 13

    Yep, the Cullen fund and Kiwisaver will see to that Santi.

    Stop projecting your inane thoughts upon a public you don’t represent in the slightest.

  14. Perhaps Labour is leaving the tax-free bracket as an area for the minor parties to claim as their own.

    However, being politically cynical, Labour already counts the votes at the low level as relatively safe, i.e. 75% chance they’ll vote Labour, or not all. This announcement will move speculation back to bracket shifting, and perhaps a minor cut – perhaps 19.5 to 18% on the small income bracket.

    I fully anticipate that the other rates will remain unchanged however, brackets I expect will be shifted to $50k and $75k in the short-term.

  15. For someone on the tax cuts I just described, it would give an income earner on $80,000 (chosen because it is both top brackets) a tax cut of $49.90 per week.

    For someone on $50,000, the formula above would give a tax cut of $45.58 per week.

    For someone on $20,000, the formula above would give a tax cut of $5.77 per week.

  16. Draco TB 16

    Yeah PP, tax cuts, no matter how you do them, always benefit the rich far more than the poor.

  17. Billy 17

    …because it is kind of hard to give a tax cut to someone paying no tax.

  18. Ari 18

    The one advantage to having GST, by the way, is that it taxes people from other countries buying goods or services here, apart from a few narrow exemptions.

    Personally, I’d rather see spending on infrastructure than tax cuts, because that’s really the only thing that’s going to make day-to-day costs significantly cheaper.

  19. roger nome 19

    His reasoning is odd on both points. The tax-free bracket is rejected because “up to 90 per cent of those earning less than $18,000 a year were temporarily on low incomes’ and it would offer little “meaningful relief for those further up the income scale’ That doesn’t make sense.

    I’d like to see the figures to back that up. That’s an insane amount of social mobility he’s talking there. Seems unrealistic to me.

Links to post

Recent Comments

Recent Posts

  • Twenty highlights of 2020
    As we welcome in the new year, our focus is on continuing to keep New Zealanders safe and moving forward with our economic recovery. There’s a lot to get on with, but before we say a final goodbye to 2020, here’s a quick look back at some of the milestones ...
    3 weeks ago

  • Pre-departure testing extended to all passengers to New Zealand
    To further protect New Zealand from COVID-19, the Government is extending pre-departure testing to all passengers to New Zealand except from Australia, Antarctica and most Pacific Islands, COVID-19 Response Minister Chris Hipkins said today. “The change will come into force for all flights arriving in New Zealand after 11:59pm (NZT) on Monday ...
    BeehiveBy beehive.govt.nz
    46 mins ago
  • Bay Cadets learn skills to protect environment
    Bay Conservation Cadets launched with first intake Supported with $3.5 million grant Part of $1.245b Jobs for Nature programme to accelerate recover from Covid Cadets will learn skills to protect and enhance environment Environment Minister David Parker today welcomed the first intake of cadets at the launch of the Bay ...
    BeehiveBy beehive.govt.nz
    23 hours ago
  • Cook Islanders to resume travel to New Zealand
    The Prime Minister of New Zealand Jacinda Ardern and the Prime Minister of the Cook Islands Mark Brown have announced passengers from the Cook Islands can resume quarantine-free travel into New Zealand from 21 January, enabling access to essential services such as health. “Following confirmation of the Cook Islands’ COVID ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Supporting communities and landowners to grow employment opportunities
    Jobs for Nature funding is being made available to conservation groups and landowners to employ staff and contractors in a move aimed at boosting local biodiversity-focused projects, Conservation Minister Kiritapu Allan has announced. It is estimated some 400-plus jobs will be created with employment opportunities in ecology, restoration, trapping, ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Border exception for some returning international tertiary students
    The Government has approved an exception class for 1000 international tertiary students, degree level and above, who began their study in New Zealand but were caught offshore when border restrictions began. The exception will allow students to return to New Zealand in stages from April 2021. “Our top priority continues ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Tiwai deal gives time for managed transition
    Today’s deal between Meridian and Rio Tinto for the Tiwai smelter to remain open another four years provides time for a managed transition for Southland. “The deal provides welcome certainty to the Southland community by protecting jobs and incomes as the region plans for the future. The Government is committed ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • New member for APEC Business Advisory Council
    Prime Minister Jacinda Ardern has appointed Anna Curzon to the APEC Business Advisory Council (ABAC). The leader of each APEC economy appoints three private sector representatives to ABAC. ABAC provides advice to leaders annually on business priorities. “ABAC helps ensure that APEC’s work programme is informed by business community perspectives ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Govt’s careful economic management recognised
    The Government’s prudent fiscal management and strong policy programme in the face of the COVID-19 global pandemic have been acknowledged by the credit rating agency Fitch. Fitch has today affirmed New Zealand’s local currency rating at AA+ with a stable outlook and foreign currency rating at AA with a positive ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Additional actions to keep COVID-19 out of NZ
    The Government is putting in place a suite of additional actions to protect New Zealand from COVID-19, including new emerging variants, COVID-19 Response Minister Chris Hipkins said today. “Given the high rates of infection in many countries and evidence of the global spread of more transmissible variants, it’s clear that ...
    BeehiveBy beehive.govt.nz
    7 days ago
  • 19 projects will clean up and protect waterways
    $36 million of Government funding alongside councils and others for 19 projects Investment will clean up and protect waterways and create local jobs Boots on the ground expected in Q2 of 2021 Funding part of the Jobs for Nature policy package A package of 19 projects will help clean up ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • New Zealand Government acknowledges 175th anniversary of Battle of Ruapekapeka
    The commemoration of the 175th anniversary of the Battle of Ruapekapeka represents an opportunity for all New Zealanders to reflect on the role these conflicts have had in creating our modern nation, says Associate Minister for Arts, Culture and Heritage Kiri Allan. “The Battle at Te Ruapekapeka Pā, which took ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Better care for babies with tongue-tie
    Babies born with tongue-tie will be assessed and treated consistently under new guidelines released by the Ministry of Health, Associate Minister of Health Dr Ayesha Verrall announced today. Around 5% to 10% of babies are born with a tongue-tie, or ankyloglossia, in New Zealand each year. At least half can ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Prisoner disorder event at Waikeria Prison over
    The prisoner disorder event at Waikeria Prison is over, with all remaining prisoners now safely and securely detained, Corrections Minister Kelvin Davis says. The majority of those involved in the event are members of the Mongols and Comancheros. Five of the men are deportees from Australia, with three subject to ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Pre-departure COVID-19 test for travellers from the UK and the US from 15 January
    Travellers from the United Kingdom or the United States bound for New Zealand will be required to get a negative test result for COVID-19 before departing, and work is underway to extend the requirement to other long haul flights to New Zealand, COVID-19 Response Minister Chris Hipkins confirmed today. “The new PCR test requirement, foreshadowed last ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • PM congratulates New Year Honour recipients
    Prime Minister Jacinda Ardern has added her warm congratulations to the New Zealanders recognised for their contributions to their communities and the country in the New Year 2021 Honours List. “The past year has been one that few of us could have imagined. In spite of all the things that ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • David Parker congratulates New Year 2021 Honours recipients
    Attorney-General and Minister for the Environment David Parker has congratulated two retired judges who have had their contributions to the country and their communities recognised in the New Year 2021 Honours list. The Hon Tony Randerson QC has been appointed a Companion of the New Zealand Order of Merit for ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • New Year’s Honours highlights outstanding Pacific leadership through challenging year
    Minister for Pacific Peoples Aupito William Sio says the New Year’s Honours List 2021 highlights again the outstanding contribution made by Pacific people across Aotearoa. “We are acknowledging the work of 13 Pacific leaders in the New Year’s Honours, representing a number of sectors including health, education, community, sports, the ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Supporting seniors to embrace technology
    The Government’s investment in digital literacy training for seniors has led to more than 250 people participating so far, helping them stay connected. “COVID-19 has meant older New Zealanders are showing more interest in learning how to use technology like Zoom and Skype so they can to keep in touch ...
    BeehiveBy beehive.govt.nz
    3 weeks ago