Cullen rules out tax-free bracket, GST cut

Written By: - Date published: 11:24 am, May 8th, 2008 - 19 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.

19 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.

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