The government has recently signalled its intention to make tax cuts soon. Are tax cuts appropriate? Or is it just a fact of life that the more people earn, the more as a percentage of their income they should pay in tax?
For personal tax payers, the current tax brackets have not changed since October 1, 2010. However, the number of people who pay tax in the next higher brackets has increased. In other words, these people have had a default tax increase.
The current tax brackets on personal income are; 10.5 per cent for income up to $14,000; 17.5 per cent for income up to $48,000; 30 per cent for income up to $70,000; and then 33 per cent for any income more than $70,000.
The bulk of the default tax collected is from people who have moved from the 17.5 per cent bracket to the 30 per cent bracket, that is a 71 per cent increase in tax.
The people who have moved from the 10.5 per cent bracket to the 17.5 per cent have suffered a 66 per cent increase in tax, however, if they now earn more than $24,000, they qualify for the independent earner rebate.
The total tax take from individuals for 2016/17 is estimated by Treasury to be $32-$33 billion which is 41 per cent of total core Crown revenue.
The reason I believe tax cuts are appropriate is because costs are rising for most households and businesses.
You only need to look at your rates and insurance bills to see that.
Interest rates are also rising adding a significant extra cost for both households and business.
For instance, a 1 per cent rise in interest rates on a mortgage of $200,000 is $38.46 a week extra that home owners must find. Should the New Zealand dollar depreciate, imported goods and services will rise as well, particularly fuel.
So, a tax cut is a good reward for those low and middle-income families where a few extra dollars would make a real difference with the prospect of these rising costs.
Treasury had originally estimated a 2016/17 budget surplus of $1.1b, which has now been revised down to $473 million to take account of the Kaikoura earthquake. Treasury are forecasting future surpluses to rise from $3.3b in 2017/18 to $8.5b in 2020/21.
It is certainly prudent for the Government to put money aside for the recent earthquakes, repay debt to around 20 per cent of gross domestic product (GDP) by 2020 and invest in future projects. Based on these forecasts there is room for tax cuts, while leaving surpluses available.
The counter-argument regarding default tax increases is that the increases are modest, and those paying the tax are doing so because they are receiving extra income, are valid.
It is not as though taxpayers are receiving less net income. It is also valid to argue that at some point as people earn more they should move into the next tax bracket, and by not changing the thresholds, that changes just happens in a subtle way.
However, this argument can be seen as unfair and a disincentive to work harder.
A possible approach is to raise the tax thresholds so that some of the people who have crept up a tax bracket, can move back into their previous tax bracket.
This approach also supports reducing the tax paid on salaries and wages which assists in broadening the tax base due to less tax being collected from individuals.
Using the Treasury's forecast tools, if the 10.5 per cent threshold of $14,000 was increased to $16,000, and the 17.5 per cent threshold of $48,000 was increased to $50,000, an estimated $560m would be pumped back into the pockets of lower and middle income families.
Where both parents work, the effect would be even more meaningful.
For instance, someone on an income of $30,000 would pay $140 less in tax per annum. Someone on an income of $50,000 would pay $390 less in tax per annum.
Some of the tax cuts would immediately go back into government coffers through increased GST and other taxes collected where people spent their tax cuts on goods and services. Remember there will also be a compounding effect of the re-spending of the tax cuts flowing through the economy.
A further, bolder approach which the government could consider is raising the rate of GST to allow for more significant tax cuts. Treasury estimates GST to be collected in the 2016/17 year to be $19b which is 24 per cent of estimated core Crown revenue, and a rate change could bring in significant extra tax revenue. A half percentage point change could raise about $600m.
It will be very interesting as the Bill English administration settles in and as we enter an election year to see what tax changes are on the table.