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Brian Fallow: Christopher Luxon’s tax plan misses the mark

OPINION:

Let’s give National the benefit of the doubt about the revenue cost of its proposal to lift income tax rate thresholds back to where they were four years ago in inflation-adjusted terms.

At $1.7 billion it would represent less than 1 per cent of household consumption expenditure.

When consumer price inflation is running at nearly 6 per cent a year and has yet to peak, to present the tax cuts as a policy to address a cost of living crisis invites the response “Better than nothing, I guess”. More to the point, they are badly targeted — if the aim really is to help those struggling with rising inflation, rather than reversing the “stealth tax increases” of four years of bracket creep.

Inflation is always hardest on those on low and fixed incomes, and savers. But raising all three thresholds, currently $14,000, $48,000 and $70,000, by the same percentage (11.5 per cent) — in other words by $1600, $5500 and $8100 respectively — inevitably top-loads the benefits to those on higher incomes.

It would make the income tax scale less progressive than it is now. It would mean tax rates rise less steeply relative to incomes.

Whether the status quo is more progressive than it ought to be is a matter of opinion.

Its defenders would say National’s plan just restores the progressivity in real terms to where it was in 2017 and that was plenty steep enough.

What is fair in this respect will look different to someone in a yacht club bar, say, than to someone calling in at a food bank on her way home from work.

National’s own illustrative numbers bear this out. Someone on an income of $45,000 would save $112 a year. Someone on $55,000 would save $800 and someone on $85,000 would be just over $1000 a year better off.

“As always the tax reduction for each taxpayer will depend on how much tax they already pay and how close they are to the existing thresholds,” National says.

Three days before Christopher Luxon announced the policy, Statistics NZ released the results of its latest survey of household assets and debt, which includes data on wealth inequality.

Household net worth continued to be concentrated in the richest 20 per cent of households, which held about 69 per cent of total household net worth, it found.

The top 10 per cent of households continued to hold approximately 50 per cent of New Zealand’s total household net worth — as they did in 2015, which was Statistics NZ’s first survey of this type.

And while the median net worth of the wealthiest 20 per cent of households increased by $313,000 in the last three years, to just over $2 million for the year ended June 2021, the median net worth of the bottom 20 per cent increased by just $3000 during the same period to $11,000.

And it is no surprise that demographically the best strategy for maximising net worth is to be old and Pākehā; the worst is to be young and Pasifika.

Against that background of stubborn wealth inequality, changing the tax scales in a way that most benefitsthose on higher incomes — a group which is likely to overlap a lot with those who have benefited most from the asset price inflation of the past three years — looks politically tribal.

And spinning it as a measure to mitigate inflation looks opportunistic.

By way of contrast, when the tax review chaired by Sir Michael Cullen three years ago was considering how the Government might recycle the early fruits of the capital gains tax they recommended — a sum roughly equivalent to the cost of National’s income tax plan — they suggested raising the threshold at which the marginal rate rises from 10.5 per cent to 17.5 per cent from its current $14,000 to $22,500, while leaving the higher thresholds where they are.

Under that option people earning between $14,000 and $22,500 would gain something between zero and $595 a year, and everyone on a taxable income higher than that would gain $595. The fiscally cheaper option of raising the lowest threshold to $20,000 would be worth $420 a year to anyone earning more than that.

Adjusting the income tax thresholds is not the only tax change National is proposing.

Other “tax grabs” by the Labour Government Luxon pledged to reverse include:

• The new 39 per cent top income tax rate, which kicks in at $180,000. “A boon for tax lawyers and accountants.”
• The regional fuel tax, which Luxon said was extracting hundreds of millions of dollars more from Aucklanders than is being spent to fix the city’stransport challenges.
• The removal of interest tax deductibility on rental properties. “A tax on Kiwis who have worked hard and put their life savings into a rental.”
• The extension to 10 years of the bright line test for when the profit on sale of an investment property is taxed. “A capital gains tax by stealth.”It was the previous National Government which introduced the bright line test, albeit set at two years. Whether the plan is to return it there is not clear. But let’s assume it is.

Consider this thought experiment. You go to your bank and say “I reckon Air New Zealand shares are undervalued. I want to invest $500,000 in them and I want the bank to lend me $300,000 towards that. That leverage will nicely amplify the tax-free capital gain I am confident of pocketing when I sell them in two years’ time. How about it?” Good luck with that (unless you have got an existing property you are willing to re-mortgage).

But substitute “a rental property” for “Air NZ shares” and you have the tax treatment of investment in the former that National wants to reinstate.

Would that reignite house price inflation?

None of these policies is costed yet. Luxon assures us they will be before the next election.

What they have in common is that they narrow the tax base.

And that would only worsen a major structural weakness of New Zealand’s tax system — and the reason perhaps that Ministers of Finance are slow to adjust tax thresholds — its over-reliance on personal income tax.

In the current fiscal year the Government expects to get half of its tax revenue from taxing the income of individuals. Most of the rest, 43 per cent of the total tax take, is GST and company tax.

The Cullen tax review made the point that New Zealand is exceptionally highly reliant on those three sources of tax revenue. Among the OECD’s 35 members, only Denmark was more reliant on them; on average across the OECD, governments derived a third of their tax revenue from other sources like capital gains taxes and payroll taxes to fund social security.

The Government’s plan to introduce a payroll tax (it prefers the term “levy”) to fund income insurance has been rejected out of hand by National.

“[It] would force everyone to pay for a scheme that will incentivise those who lose their job not to re-enter the workforce for more than half a year,” is how Luxon described it.

To describe the plight of those who lose their jobs through redundancy or illness with such facile condescension is telling.

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