Politics

Clint Smith: Will tax cuts really decide our next election?

OPINION

National Leader Christopher Luxon has come out early with his election trump card. His tax cut package would cost around $3.5b a year, the largest single tax change in New Zealand history.

In his announcement, Luxon tapped into the undeniable pain in the wallet families are feeling from inflation – driven by the price of oil and the cost of new housing – and promising to partially make up for it by reducing tax – although the fact his offering nowhere near meets inflation costs shows that higher wages, not tax cuts are the remedy for living costs.

Luxon has pledged to scrap the tax rate of 39 per cent on income over $180,000 a year, lift other tax brackets by 11.5 per cent (so-called “tax indexation”, where the thresholds for tax brackets rise in line with inflation), restore tax deductions and loss-ringfencing for landlords, and cancel Auckland Council’s fuel tax.

It’s bold, and unusual, to announce a tax package 18 months out from the election. While it helps Luxon to frame the political debate, it also gives his opponents plenty of time to develop a counter.

Labour will find it hard to counter the idea that some kind of tax relief is due.

Labour doesn’t want to go into the election arguing why people can’t have a $15 a week tax cut. Instead, it would be wise to neutralise Luxon’s tax plan with a plan of its own that is more targeted at middle and low incomes.

Because National’s plan is heavily tilted to the well-off:
• 1.1m taxpayers on incomes under $14,000 would get nothing from National
• 1.7m on incomes between $14,000 and $48,000 would get up to $2 a week
• 700,000 on $48,000 to $70,000 would get up to $15 a week
• 700,000 on $70,000 to $180,000 would get up to $20 a week
• 90,000 on more than $180,000 would get an average of $180 a week
• 125,000 landlord households would get an average of $110 a week
• Auckland households would save $3 a week on the fuel tax.

Roughly half the tax cuts would go to the top 10 per cent of earners, while the bottom quarter get nothing and those in the middle get less than a quarter of the money.

Finance Minister Grant Robertson has ruled out tax cuts this Budget, but notably left the door open for something in the election year Budget.

A good election year tax package would deliver as much or more to lower and middle incomes as National and leave Luxon defending the bits that favour the better off.

Labour will also want to go into the 2023 election with the books in surplus. So, it can’t break the bank in any response. Easier said than done.

I’ve stared at enough spreadsheets when I was a political adviser in opposition to know the iron rule is a tax cut that gives a decent amount of money to a big chunk of people costs a massive amount.

Tax cuts can never deliver life-changing amounts to middle New Zealand. The best Labour can do is neutralise the politics of the issue.

So, first, Labour can rule out cutting taxes for landlords and people earning over $180,000. That saves $1.5b out of National’s $3.5b a year package.

The case for tax indexation is strong in principle. Its purpose is to stop “bracket creep”, where more of people’s incomes fall into higher tax brackets as incomes rise, which is easily portrayed as a “stealth tax grab”. Labour could keep National’s indexation plan and bolt on a billion dollars a year to pay for a $2500 tax-free zone, which is $5 per taxpayer per week on top of National’s offering.

Labour would thus offer middle New Zealand a $20 or $25 a week cut to National’s $15 or $20 a week cut, and $5 a week to those on the lowest incomes, rather than National’s zero.

Finally, Labour should ditch the Auckland Regional Fuel Tax. It’s $3 a week to the average Auckland household but creates a whole lot of political pain.

All up, that plan would cost $3b; which is less than National’s while delivering more to middle New Zealand.

Labour will know that if it cedes the tax cut ground to National, it’ll let Luxon spend the election portraying himself as the guy who’s going to give middle New Zealand a break.

If Labour turns the tables on him with a more targeted tax policy, Luxon will risk looking out of touch, having to explain why he is planning to cut taxes for the well-heeled and landlords.

• Clint Smith is a former adviser to the Labour and Green parties who worked on three Alternative Budgets. He is now the director of Victor Strategy and Communications..

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