Estimates find tax relief for most

Number-crunching by the New Zealand Institute of Economic Research suggests a package of income tax cuts and a GST increase could be constructed to leave most households at least slightly better off, without resulting in a significant shift in the distribution of the tax burden.

"Our estimates by broad income groups suggest the tax burden [income tax and GST] will remain broadly unchanged," the institute said.

Those on high incomes would benefit most, because they pay more tax as a percentage of their income.

They earn more and spend more.

The top 20 per cent of households, ranked by income, will continue to pay around 46 per cent of all income tax and GST.

The upper half of households by income will continue to pay around 80 per cent of all income tax and GST.

And the bottom 30 per cent of households will continue to pay around 8 per cent of all income tax and GST.

However, there are some important caveats and qualifications to this exercise. It is intended to be illustrative only.

The Government may prefer to do some of the tax cuts by raising thresholds rather than cutting rates.

NZIER has assumed that the top rate (above $70,000) is cut from 38 to 33 per cent, the upper middle rate (above $48,000) from 33 to 30 per cent, the lower middle rate (above $14,000) from 21 to 19 per cent, and the bottom rate (up to $14,000) is from 12.5 to 10 per cent.

Offsetting that is the clearly foreshadowed increase in the GST rate from 12.5 per cent to 15 per cent. NZIER assumes that 80 per cent of household spending is on things which incur GST.

The main exceptions are mortgage and rental payments.

Its calculations do not include any changes to welfare benefit payments, or to Working for Families tax credits.

But they do include a 2 per cent compensatory increase in New Zealand superannuation payments.

The calculations do not include any changes to the tax treatment of rental property investments.

But a tougher tax regime for landlords is likely if the whole package is to be revenue-neutral.

NZIER estimates the income tax cuts it envisages would cost about $2.4 billion.

That is based on rule-of-thumb indications from the Treasury at the time of last year's Budget of what various changes to income tax rates would cost if implemented over the past year.

But more recent modelling done by officials for the tax working group suggests the fiscal cost of the NZIER's tax package might be higher than that.

On the GST side NZIER estimates the additional revenue would be around $2 billion.

The tax working group's figure was $1.9 billion - after automatic inflation adjustments to benefit levels and superannuation payments.

As for how much changes to the tax treatment of investment properties might yield, Finance Minister Bill English ruefully acknowledged on Thursday that the harder officials look at the numbers the smaller they tend to get.