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.