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Key confirms: tax up for middle NZ, down for rich

Written By: - Date published: 9:30 am, February 15th, 2010 - 54 comments
Categories: class war, gst, john key, tax - Tags:

Last week, I looked at Key’s tax reform promises and concluded he was promising over $5.3 billion of income and corporate tax rate cuts paid for with, at best, $3.6 billion of extra revenue from GST and housing investment. Key has explicitly promised that no-one will be left worse off by these changes but he doesn’t have the money, can’t have to money, to do that if he persists in handing over buckets of money to the rich.

I said at the time: “So which tax cuts won’t happen to bridge the gap? Not too hard to guess, eh? While Key pockets $500 a week, Kiwis on low incomes will get nothing, and have to pay higher GST and higher rents.” God, I hate being right sometimes. Here’s Key on Q+A yesterday making it clear there will be no cut to the $0-$14,000 12.5% tax rate:

“it’s the mid rate and the top rate where we want to make people better off, but it’s very difficult at that lower end to make them a lot better off.”

Got that? No cut at the bottom rate. Key says it doesn’t matter because people on low incomes don’t really count:

“about three million taxpayers in New Zealand, about a million of them earn between $0 to $14,000 so you could say well they’re very low income earning New Zealanders, that’s not necessarily correct, they’ll be dominated by children’s accounts, people who have got a small amount in the bank, children for instance, they’ll be dominated by maybe a partner that earns a small amount relative to the overall household might earn quite a lot, and they’ll be students, of which we have thousands and thousands, who do a part time job, they’re not necessarily low income New Zealanders”

I’m sorry? People with low incomes are just kids and stay at home wives, so they don’t count? Firstly, that’s just wrong – there are 3.4 million taxpayers and 3.1 million working age New Zealanders (that includes retired people), so only 300,000 taxpayers can be kids and I highly doubt there are 700,000 housewives out there. In fact, when you look just at income from wages and salaries, there are 745,000 people working for less than $14,000. Secondly, they still have to pay GST on their spending don’t they? I don’t care if they are kids or housewives or students or people ineligible for benefits getting by on a few hours work a week, if their GST goes up they need compensation, like Key promised.

“in fact most beneficiaries, super annuitants and those that work the minimum wage, they earn considerably more than [$14,000]”

Um. No, see the big spike at $13,000-$14,000 on the income distribution graph? That’s your sickness, invalids, and DPB beneficiaires. And remember too, that even if you’re on a full-time minimum wage and bringing in $25,000 a year that most of the tax you pay is in the $0-$14,000 bracket. In fact, 1.9 million Kiwi taxpayers pay more than half of their income in that bottom rate (ie 56% of taxpayers have incomes under $28,000). It looks like Key is going to give these Kiwis on typical incomes a cent or two off the 21% rate but most of their income will still be taxed at the same rate, which means no compensation for GST, despite what Key promised.

It is clear now that Key intends to leave the 1 million taxpayers with incomes below $14,000 completely shafted. They’ll be paying more GST but get no income tax cut. The next million will get get half-pie compensation – a cut in tax on half their income, but they’ll be pay more than that in added GST.

Key has to do that for a very simple reason: he can’t magic more money out of thin air, yet he is determined to give tax cuts of hundreds of dollars a week to his wealthy mates.

54 comments on “Key confirms: tax up for middle NZ, down for rich ”

  1. tc 1

    The fact he’s making these ludicrous promises of no-one being worse off shows just how much he doesn’t give an F……experienced politicians would cover the reply in polly speak to allow weasel room whereas Johnny clown doesn’t even bother because he doesn’t care he’ll be caught out.
    More slash n burn who cares about the impact, I’m right stuff the rest attitude…..are we all seeing now how JK was chosen by National for his merchant banking qualities….haven’t merchant bankers been sooo good for the world.

  2. Lanthanide 2

    GST changes to impact on small businesses:
    http://www.stuff.co.nz/technology/3326431/Enormous-bill-for-GST-software-changes

    I remember a couple of times in comments I said that upgrading software for small “mom and pop” shops would be expensive, or that changing the way GST was charged to tourists so it works like some American states (show your passport in the shop and you are exempt from sales tax) is implausible in NZ and got pooh-poohed by other commenters here. People replied saying “it’s easy, you just change the GST number”.

    Well there’s the proof I knew what I was talking about.

    Also this:
    http://www.stuff.co.nz/business/industries/3327539/Looming-GST-change-repricing-nightmare

    • felix 2.1

      In New Zealand people say “mum and dad”.

      • Lanthanide 2.1.1

        The term is “mom and pop shop” not “mum and dad shop”.

        • felix 2.1.1.1

          Actually it’s usually “mom and pop store” but in NZ we don’t usually say “store”, we say “shop”.

          You’ve partially adapted an Americanism by replacing “store” with “shop”. Good.

          Now follow it through to it’s logical conclusion by replacing the other two horrible words with New Zealand terms and stop wrecking our language.

          • Lanthanide 2.1.1.1.1

            Aside from the fact that this is pointless pedantry: you knew exactly what I meant by the term “mom and pop shop”, you are in fact wrong anyway.

            Google results:
            Results 1 – 10 of about 448,000 for “mom and pop shop”
            Results 1 – 10 of about 416,000 for “mom and pop store”

            Finally if you’re going to complain about english borrowing words and phrases from other cultures, I guess we should get rid of:
            ballet, coup d’etat, fait accompli, faux pas, and all of our other favourite words borrowed from French. Not to mention end this bilingualism with Maori that we have going on here with “kia ora” and “ka pai”.

            In short: get over yourself.

            • felix 2.1.1.1.1.1

              Or you could just say “small business” which is what most people in NZ call them.

              Fair cop on the googling but it’s not pedantry to want language to be meaningful and beautiful. All of those french phrases add something to our discourse which wouldn’t quite be possible to express with English words.

              “Mom and Pop shop” is just something you’ve seen on TV. Quite apart from the absurdity of trying to shoehorn the American words “Mom and Pop” into the language instead of just using the ones we use in real life, it’s a stupid term to use if you’re applying it to any business not owned by a Mum and a Dad.

              Small business. Use your proper words.

    • infused 2.2

      I have to comment on this one. The expense to businesses is going to be small. Any change will be small. Only retarded software programmers (amiright lpent?) would hard code such a thing. Bringing in coders from overseas? Jesus… maybe if your system was made in 1985.

      • lprent 2.2.1

        That would be my position. It’d be really strange to find anyone using a transaction based accounting system with hardcodes. However…

        – I was also around when GST was introduced and some of the things I saw……..

        – It wouldn’t surprise me if there weren’t a pile of hard coded spreadsheets and access dbs used for accounting and written by non-programmers.

        – I’ve been in corporates where I’ve looked at a succession of write-once ‘code’ cobbled together that was running years after the developer and the source had disappeared.

        – I’m not even going to mention banks – the final working repository of languages and systems discarded everywhere else decades before.
        etc…

        However I’d also say that anyone who has a problem is probably the author of their own misery…

        • infused 2.2.1.1

          I can believe the spreadsheet stuff. Everyone and their dog writes those. Actual bought off the shelf and custom made programs I would not expect too much trouble.

      • Lanthanide 2.2.2

        See my anecdote down below about the Warehouse introducing line-by-line GST on their receipts in 2004.

        If the government had introduced variable GST in 2003, they would’ve had to do a mad-scramble to get everything in place and tested.

        You may be a competent programmer, but you shouldn’t assume that everyone else is. I’m sure you’ve written your share of code, that if you came back to it now, would think of much better ways to do it. As well as complete ‘doh’ moments.

        • Lanthanide 2.2.2.1

          Couple more anecdotes, both from things my ex saw in New Zealand.

          A large CRI in NZ was using internet-addressable IP addresses on all of their workstations (no DHCP), with no NAT because it was “easier”.

          A high-volume business operating out of one of the country’s airports whose clientele tended towards companies kept all of their customer data in one giant (20,000+ rows) Excel spreadsheet, including credit card numbers and expiry dates. With no password protection or encryption. Employees had to close the spreadsheet so that other employees could access it. Data was frequently corrupted when someone accidentally altered a customer’s records by mistake, or forgot to save the sheet before closing it.

          Seriously, people using hard-coded GST values in production-ready software (especially bespoke systems that have not had rigorous testing) would not surprise me at all.

  3. Pardon my ignorance but, whats the rationale behind giving a substantial tax cut to the well paid and well to do ?

    I don’t get how that’s going to create more jobs ?

    • Gosman 3.1

      Jobs are created directly in an economy in two main ways.

      One involves the private sector employing more people due to increase demand and/or investment so that they can take advantage of economic opportunities to make increased profits. The other has the Government sector making up jobs for a variety of reasons which may or may not be economically viable and may or may not be socially desirable.

      If you reduce the income tax burden on the wealthy sections of society you increase the incentive to invest their surplus income in income generating projects. Many of these are likely to lead to increased employment opportunities for people. This incentive to invest such a surplus is increased if you also discourage the surplus being spent on consumption via a consumption tax like GST.

      Happy now pollywog?

      • IrishBill 3.1.1

        Ah yes “trickle down”. The economic theory that has resulted in the opening of a massive income disparity between rich and poor in the last thirty years.

        If you still believe in trickle down, Gosman, I’ve got some magic beans you might be interested in.

        • Gosman 3.1.1.1

          As you still believe that Socialism works IrishBill I don’t think I will take you up on that offer of the magic beans. For a start it will take you many times longer to produce them than you promised, there won’t be as many as agreed as all the workers were on strike and you couldn’t source the raw materials, and on top of that they wouldn’t even produce a standard bean stalk, let alone a magic one. You would also probably come along afteryou gave them to me and repocess them as private property is inheriently ‘evil’ and ‘unfair’

          • infused 3.1.1.1.1

            Very nice

          • Ari 3.1.1.1.2

            Adam Smith would roll in his grave listening to your strawperson arguments.

            Socialism isn’t the opposite of capitalism, corporatism is. Mr. Smith was an ardent unionist and minimum wage advocate, and believed that part of the purpose of the market was to drive wages up.

            In short, he believed growth was built up from the foundation, not trickled down from the top. But to do that, you have to nip in the bud the corporate and elitist government kleptocrats that are so much more objectionable than this “socialism” you seem so afraid of.

        • Clarke 3.1.1.2

          I seem to recall that the vernacular definition of trickle-down was “they’re pissing on you …”

          If trickle-down economics actually worked, then there would be no poverty at all in the United States.

      • pollywog 3.1.2

        yeah thanx Gosman

        But just going by my own example if i were wealthy and got a tax windfall. i dont think i’d be inclined to invest the surplus on an income generating project likely to employ someone cos the demand isnt really there as witnessed by job cuts and a high unemployment rate and economic opportunities are few and far between. i mean, now’s not really the time to be risking investment…is it ?

        More likely i’d pay off some debt and buy a new toy, like a jet ski, maybe fix up the boat or take the missus on a holiday overseas and write off the consumption tax to the business. if i were to invest and create a job it’d more likely be outsourced to some asian sweatshop or the like or maybe hire a part time cleaner or a gardener for minimum wage cos i hate housework.

        • Gosman 3.1.2.1

          Paying off debt is basically similar to investing. Instead of making the decision yourself where to put your money you pass this on to whoever had the debt you paid off.

          You are more than welcome to spend your own money however you see fit but the reason why the Government raised GST was to discourage people from spending their increased free capital just on consumption of goods and services.

        • Richard 3.1.2.2

          More likely i’d pay off some debt and buy a new toy, like a jet ski, maybe fix up the boat or take the missus on a holiday overseas…

          The “trickle down” theory is not that you will actually literally invest in a business (although maybe a small minority will).

          The theory is that you will do something like you suggest, which does actually generate economic activity. Someone else will earn commission on what you buy, or make the bits for your boat, or whatever. Which is in and of itself not too stupid an idea. Unfortunately, the problem seems to be that so many tickets get clipped on the way down, that very little wealth makes it to the bottom. Also, the wealth is as likely to trickle overseas as it is to remain in NZ.

          • Zaphod Beeblebrox 3.1.2.2.1

            Top end real estate will be the most likely beneficiary. Or perhaps the three B’s- Bach, BMw or boat. Remember this is NZ.

        • aj 3.1.2.3

          You could take your hols in Maui….

      • jason rika 3.1.3

        What a lot of rubbish G-man. I worked for Telecom for years and all there was is cuts to staff. They made higher and higher dividends but we never saw staff increases ever.

        They to this day continue to cut staff and expect the remaining staff to cover the work load. You don’t know what the hell you’re writing about. Reality and idealism are two different things.

        They did however try to break into the Aussy market, abject failure. Loss of billions of dollars. Got there arse well and truely kicked. Thats unionism for ya.

        • Gosman 3.1.3.1

          What is the size of the Telecommunication sector in NZ, (not just Telecom) now versus in the 1980’s?

          • jason 3.1.3.1.1

            When I joined the post office in 85 there were 39000 employed in the telecommunications industry. However numbers are not the issue. The industry is rife with collusion. The companies overcharge you and I and you and I know it.
            I know what I’m talking about because I’ve been tossed from company to company every time expected to do more for ever lowering wages.

            Heres the list,
            Post office
            Telecoms
            Telecom
            Telecom NZ Ltd
            Connectel
            DB & M
            Alstom
            Areva
            Transfield
            Chorus
            There may be a couple of others but I can’t remember them off the top of my head.
            Also the training has basically stopped. New gear turns up all the time and we just get a user guide and are expected to do the installations.

  4. Gosman 4

    So when GST was first implemented, or when it was subsequently raised from 10% to 12.5%, did all these ‘Mom and Pop’ shops go bust with the added overhead?

    What I fail to understand is why people who normally bemoan our consumption driven society now rallying against a tax on consumption.

    GST is potentially regressive if your consumption rate amongst income groups is similar. However if you increase wealth transfers via increased targetted benefits, m(as suggested by the Government), then it can become tax neutral.

    So what is the problem from the left of the spectrum exactly?

    • Lanthanide 4.1

      In 1989 when the GST was increased, the economy was much smaller, and computerised systems were much less available. Accounting for small businesses would have been done on paper, and obviously humans are much more adapatable than computers are. It also doesn’t cost you money to tell your accountant “apply 12.5% GST instead of 10% GST from now own”, but to tell your computer system to do the same is not as straightforward, and for less sophisticated software takes re-coding, re-testing and re-deployment.

      The story also points out that even if the main accounting package is easy to upgrade, there may be many other spreadsheets (or other tools) created and in-use by the company that will need to be updated manually, and if these are overlooked it could result in errors. Your accounting system is only accurate if you give it correct data to work with, after all.

      Just as an anecdote, I worked at The Warehouse from 2002 to 2006. They changed the computer systems in 2004 to apply GST on a line-by-line basis on the receipt, instead of a flat 12.5% to all items, so that they could handle a potential government change to GST applying at different rates to different products. This is our largest retailer, who didn’t have systems capable of doing this until 2004, yet many people would think that this was an “obvious” eventuality to account for.

      • Gosman 4.1.1

        Do you work with Computer systems at all? If so I’m at a loss to understand how you think manually changing every price to take into account a rise in GST is easier than changing it in a computer system.

        • Lanthanide 4.1.1.1

          If you read the second article I linked to, that is talking about physically changing prices. That has to be done in 1989 and 2010.

          The first article about updating computer systems only has to be done in 2010. That is what my post above was addressing. Evidently that wasn’t clear.

          • Lanthanide 4.1.1.1.1

            I’m not allowed to edit my post as someone else has posted, but the two problems actually affect opposite ends of the scale:

            Small firms have more issues with updating accounting software than they do with physically re-pricing.
            Large firms have more issues with physically re-pricing than they do with updating accounting software.

            In 1989, the small firms had fewer problems than the large firms as they did not have to worry about updating the accounting software.

            In 2010, all firms with have problems from either the software, the physical repricing, or both.

            You asked if all ‘mom and pop shops’ went bust in 1989 when tax was raised (clearly they did not), and why it is such a big deal this time around. I think I’ve clearly laid out why it will be more of a challenge this time than last.

            Note that I am not advocating that because it is difficult it shouldn’t be done, I’m just pointing out that these are real issues that should not be swept under the carpet. It seems that Jonkey is more interested in getting this implemented on October 1, 5 month after the budget, so that it doesn’t leak into the election year, than he is about doing it properly.

          • Gosman 4.1.1.1.2

            What isn’t clear is why you think changing a computer system so that it calculates GST at 15% instead of 12.5% is such a big issue. Normally stuff like Tax rates in any half decent Computer system are stored centrally and then applied to individual Tax calculations when required.

            • Lanthanide 4.1.1.1.2.1

              Clearly you didn’t actually bother reading the articles I linked to:
              http://www.stuff.co.nz/technology/3326431/Enormous-bill-for-GST-software-changes

              • Gosman

                If someone is stupid enough to purchase or commission software where flexible factors such as tax rates are hard coded then more fool them.

                However that article you linked to bears little resemblence to Software development as I know it and I suspect it is a beat up by some Journalist who has little idea of the subject.

                There have been far bigger changes to financial systems in the recent past that have been implemented without much fuss. Just look at those that were required for Kiwisaver.

                • lprent

                  I’d agree with that. The software isn’t going to be a problem.

                  The problem is going to be for the poor buggers who will have a 2.5% hole ripped in their budget without being able to increase their income. However they’ll be happy in the knowledge that they’re paying for the more affluent to have a tax-cut.

                  • infused

                    Well, if it’s a business, it’s claimable isn’t it?

                    • Herodotus

                      Not if you are selling something that will not go up automatically i.e. commodity e.g. Buildings, land. If GST goes up 1 Apr. You cannot sell a section/house on the 31st on 12.5% and the next day increase the price by 2.2% so your margin decreases, the same if you have tendered/quoted GST incl to build a house. The end user does not get an increase in the price of a house. There maybe a surge of activity on the last day that GST is at 12.5% and I bet the IRD would not stoop to review when the service/goods was deemed to transfer and the GST liability arose, as then it may have terminal tax implications.

              • Lanthanide

                Funny, because that article bears a lot of resemblance to Software development as I know it. And as I am a software developer, perhaps I have a little more insight into this than you do?

                Furthmore the journalist has reported sources that said that upgrading systems would be expensive. It doesn’t look like the journalist simply made this up.

                As for your kiwisaver example, kiwisaver was announced 2 years prior to it being implemented. Not the same as the 5 months Key is going to give people. Also kiwisaver is different in kind: it is implementation of an entirely new feature (from the software perspective), which is very different from altering an existing feature, where all different parts of the system may have been developed with certain assumptions in mind. Some straight off the top of my head:
                – Assume that GST is 12.5%
                – Assume that the current GST rate applies to all historical and future invoices
                – Does not handle that invoices generated prior to 1st October have a different rate from those generated after 1st October
                – Does not handle payment for invoices generated on different dates correctly

                Software development for a GST change may seem like “just changing a number somewhere from 12.5 to 15”, and if you read that story that is exactly what the large retail chains say should be the case for them. But you only get that flexibility for well-designed systems. Well-designed systems cost $$$ and time, and can still have bugs in them anyway.

                Your first sentence is basically “if someone is stupid enough to set up a small company and buy the most cost-effective software solution that meets their needs at the time, then more fool them”.

                Who cares about small business owners, it’s not like they employ 80% of the workforce in NZ or anything. Oh wait, they do.

                captcha: assumed. When you assume, you make an ass of out of me and u.

              • infused

                Lanthanide, You have no idea. Software is not coded like this. I built my own crm in .net for IT services. GST is a single var stored in the db. 5 second change. Most systems should be like this.

                When calculating invoices, the invoices should have had the old gst applied and saved to an invoices table, so nothing should be affected.

                It really is programming 101.

              • Lanthanide

                Yes, that is how things *should* be done, I am not disputing that at all. That does not mean that is the way things are done. Or that bugs aren’t introduced by simple mistakes or mis-thinks on the part of the developer.

                I also refer you to http://www.thedailywtf.com where you will discover that the little examples I gave up there really pale far in comparison to the complete wreckage of software projects that have been delivered, even projects costing in the 7-8 figure range.

                The thing is, although most companies won’t be terribly affected by this (especially if they’re using off-the-shelf products like MYOB, as many small businesses do), there are some that will be affected by it quite a lot. And a lot of companies that haven’t even thought about the issue at all, or are assuming that everything will just work, but forget about special process xyz they sometimes do for customer Acme Ltd that needs to be updated. Also when dealing with a small price increase like this, it’s not inconceivable that everything could appear to be working correctly for days or weeks, only for the company to discover everything is horribly wrong and it’ll require someone 2 days to clean everything up.

              • infused

                Ok,

                But using that as your argument, any sort of taxation change is going to effect them a lot. So it doesn’t matter if it was GST or anything else…

              • Lanthanide

                Yes, I agree infused.

                I have never said this is a problem exclusively as a result of the GST change, simply that it is a problem that National has probably not considered, or thought it no big deal. Certainly if they were giving people 12 months notice it wouldn’t be such a problem, but 5 months is less than half that time.

                It goes along with the second article I linked to about physically changing price stickers on shelves, it’s going to cost a lot of businesses a lot of time (and hence money) to sort it out. They also raised the issue of strategic-pricing, where items that were $99 are more likely to go up to $105 than they are to $101.18 as a flat 2.2% would have them. Of course the alternative is just to eat the 2.2% price rise, but clearly very few businesses would be willing to do that wholesale. So we may see some items go up by greater than 2.2% and others less or unchanged.

              • infused

                Yep I get you. RFID’s… they were meant to be the solution for this problem.

    • Olwyn 4.2

      I am not an expert on economics, and am very much open to correction if wrong, but the question as I see it Grosman, is does this actually happen? There seems to be in NZ a cargo-cult like faith that if you give enough money to those who are already rich they will do something really creative and save us all. But creative enterprises are actually pretty risky all over the western world, and especially in a place like NZ, with a small population a long way from anywhere. So what seems to actually happen is that these favoured people grant themselves life-styles comparable to those of the “grown-ups” in richer countries, and seek to buy up local assets such as land, energy and water, which people have to have by necessity. Such things offer a sure return so long as NZ still has a population. Beyond dairy farming, there are a few counterexamples such as Weta Workshop and various science projects, but these are not enough to justify the above mentioned belief, especially since farming, special-effects and science all involve specialised knowledge and a deep engagement within a real area of human endeavour, as opposed to a fist full of dollars followed by a question mark.

      • Gosman 4.2.1

        Pretty much all Economists, regardless of political persuassion, agree on basics such as consumption versus investment. It is kind of like supply and demand. If you increase demand for something you increase the price in the short term. Therefore it is not controversial to claim that increasing the surplus amount of money for a certain segment in an economy will lead to increased investment. Where Economists differ is the actual size and nature of that increased investment and the flow on impacts on the economy.

  5. Zaphod Beeblebrox 5

    Its so much easier working out GSt if it is a fraction of a full integer. with 12.5% (1/8th) you simply divide by 9. Working out the divison gfactor when doing your GST will be a real pain. Bet the IRd are not looking forward to having to check everyones figure either.
    Why don’t they make it a fraction of an integer?? 16.6667% or 14.3% for eg???

  6. Sam 6

    Wait, so students aren’t low income New Zealanders despite not being able to work very many hours, despite their fitting into one of the hardest-hit brackets of unemployment, and despite a total lack of investment in support by the government? Talk about George Orwellian re-definition.

    • Lanthanide 6.1

      I wonder if the student loans (particularly ‘course related costs’) are going to be adjusted so that students are not “worse off” when the price of their ‘course related costs’ go up by at least 2.2%?

  7. MartyG is right, the sums do not add up. Someone ought to be testing Key’s numeracy abilities.

  8. feijoa 8

    Nobody seems to have mentioned

    USER PAYS

    I’m sure it’s coming……………….

  9. b 9

    What did people expect? National are totally without conscience. Their rationalizations are so ingrained that they are completely cut off from reality.

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