John Key has indicated that the Government will lift the GST rate to 15% and remove depreciation from investment houses. According to the Tax Working Group, that’ll raise $3.6 billion.
That revenue will then be spent on compensation and tax cuts.
First, he has promised compensation for the GST increase to beneficiaries, people on working for families, and superannuitants (but not for their rent rises). That will cost $500 million – 2.2% of the $21 billion social services bill.
Second, on Campbell Live Key promised that everyone will get an increase in after-tax income to off-set the GST increase – remember, most people on low incomes are not on benefits or super, the off-setting will have to come from a tax cut. To deliver that, he’s going to have to cut the bottom 12.5% rate to 10%. According to Treasury, that would cost $800 million.
Third, Key would need to drop the 21% rate to make up for GST. He confirmed that this rate would come down on Morning Report. The Tax Working Group said the cut here should be from 21% to 15%. The price tag for that is $2.3 billion.
On Campbell Live, Key indicated he is looking at dropping the top tax rates to 30%, at a cost of $1.1 billion, most of which doesn’t go to people on $70,000-$100,000 but to the ultra-wealthy.
Then there’s corporate tax. Key, oddly, made no mention of this in his speech but each cent off it costs the government $180 million. On NewstalkZB, Key confirmed the corporate rate would fall, all expectations are to 27%, so that’s nearly $600 million.
Whoops. Key is promising something on the order of $5.3 billion worth of tax cuts and compensation. The tax increases just don’t raise that much money. Key has done is old trick of over-promising. He will have to under-deliver.
As Brent Edwards noted this morning, Key is promising that everyone will be better off even after taking into account the GST increase, which just isn’t possible if these tax changes are revenue neutral (and it would be the height of folly to cut tax income while borrowing $240 million a week). This can’t be a free lunch for everyone, someone has to miss out.
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.