A rethink of New Zealand income tax brackets is necessary

When former Prime Minister Helen Clark was on the campaign trail in 1999, those on an income of more than N.Z.$60,000 were thought to be “rich”.

Under the Helen Clark Government the top tax rate was 39c in the dollar and kick in at $60,000. I always thought that this was unrealistic. The then Treasurer Dr Michael Cullen promised that it would only affect the top 5% of income earners at any given time. But when he was reminded of that towards the end of the Fifth Labour Government, he was not interested.

The other tax brackets then were quite steep as well. The next one was 33c kicking in at $38,000; 21c for income greater than $14,000 and 19.5c for income below that.

Not surprisingly in the least National and A.C.T. both spent much time and effort attacking the “tax and spend” mentality of Ms Clark’s Government. The attacks included adverts aimed at voters in the 2005 election.

Prime Minister John Key took office in 2008. Due to the Global Financial Crisis being in progress he could not immediately introduce tax cuts and promised that these would happen later. Due to the substantial earthquake events of 2010-11 and 2016 Mr Key realized that he could not very well lower taxes, given that significant expenditure as a result of both quakes was required to get the affected locations back on their feet.

It is however time to move on. In the last decade there has been enough movement across all brackets to justify a review.

And so now I find myself in one of those rare moments when I agree with economists like Shamubeel Eaqub. Mr Eaqub and other economists believe correctly that $70,000 is not high income in New Zealand any more and that the brackets need to be adjusted to reflect that. Interestingly, but also concerning given that the purpose higher tax brackets is to target higher incomes, apparently if left unchanged, by 2026 the average worker would find themselves in the highest bracket.

And therein, if for no other reason than that, is the case for a reform of the income tax brackets. I believe that the current ones are out of date. The current range of brackets is much too restrictive both in terms of the rates being charged and the range that the individual brackets cover.

So that we do not find ourselves in such a situation in the future, I recommend that the top rate be a floating one that adjusts per annum as the top 5% of income changes from one year to the next.

I am not sure what the tax working group will say about this, but those who commented on the initial report would have very probably raised concerns or commentary about the state of the tax brackets. I have an expectation that this will be one of the key areas addressed when the working group releases its final report sometime next month. Any failure to do will be seized on by National and A.C.T. at the next election – the latter long being known to support a flat tax where a single tax bracket covers all incomes, which is policy that A.C.T. has not changed since the 1990’s.

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