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Home / Business / Personal Finance / Tax

Taxing times: What's on the table for tax cuts?

RNZ
11 Oct, 2022 04:22 AM5 mins to read

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When the Government opened its books last week, it revealed the tax take topped $100 billion for the first time, while the deficit of $10b was half what Treasury predicted in May. Photo / File

When the Government opened its books last week, it revealed the tax take topped $100 billion for the first time, while the deficit of $10b was half what Treasury predicted in May. Photo / File

By Sharon Brettkelly, The Detail

A record tax take and a lower than expected deficit - the political debate over tax cuts is ramping up a year out from the next election.

When the Government opened its books last week, it revealed the tax take topped $100 billion for the first time, while the deficit of $10b was half what Treasury predicted in May.

All the more reason to cut taxes, says National. But Finance Minister Grant Robertson says now is not the time.

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RNZ looks at our current tax rules and how they favour the wealthy, what National will do to change them and why the Labour government isn't cutting taxes for low and middle income earners.

Under National's plan to put money back into earners' pockets, it says it will get rid of the 39 per cent rate that kicks in above $180,000.

But it was a similar plan to cut tax for the wealthy in the UK - removing the 45 per cent rate on those earning above £150,000 ($298,000) - that caused an economic calamity and forced a backdown by new British Prime Minister Liz Truss and chancellor of the exchequer Kwasi Kwarteng.

Tax expert Terry Baucher said there were valid comparisons, and differences, between National's plan and what the UK's Tory government wanted to do.

"The underlying principle in the UK and here is to incentivise people."

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He describes it as an elaborate play on the trickle-down theory, which favours higher income earners and those with substantial wealth or capital.

Baucher believed National's tax adjustments at the lower end would help to tackle the cost of living crisis, as would the British tax cuts.

But the cuts were weighted towards the top end, he said, and the people who were in real trouble with the cost of living were the lower and middle income earners.

"To say they [the tax cuts] would help the cost of living crisis in only partly correct," Baucher said.

National said its priority was to index tax thresholds to inflation, which shadow finance spokesperson Nicola Willis said would "correct for the corrosive impact of inflation".

Right now, each dollar earned up to $14,000 was taxed at 10.5 per cent. The next bracket of earnings up to $48,000 was taxed at 17.5 per cent.

The $48,000 to $70,000 bracket was taxed at 30 per cent, $70,000 to $180,000 at 33 per cent, and each dollar earned above $180,000 at 39 per cent.

National wants to scrap the top rate and lift the other brackets by just over 11.5 percent, to match the rise in the cost of living over the last four years.

But Baucher reckons to do it properly and to make a meaningful difference to the hard hit low to middle income earners 2010 should be the baseline for inflation-adjusted tax thresholds because that was the last time they were changed.

That would lift the tax brackets by about 24 percent and mean the lowest earners would be paying the lowest rate of 10.5 percent right up to $17,400, while the 17.5 percent tax rate would go up to almost $60,000.

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"The concept of fairness is a difficult one," said NZ Herald Wellington business editor Jenée Tibshraeny.

"What's fair for one person might not be fair for someone else."

In its first term, the Labour Government attempted to even the playing field between people who earned income from property versus people who earned income through wages and salaries with a capital gains tax, but it was shut down by coalition partner New Zealand First.

But in 2021, in response to soaring property prices, the Government brought in new rules for property investors, extending the bright-line rule so investors had to pay income tax on any gains made on the value of a residential property that is not their home, if they sold within 10 years.

It also removed the right of property investors to have interest on their mortgage deducted from their tax.

Baucher said the bright-line test was unpopular because it was a complicated tax that penalised property owners who were trying to help their children and grandchildren into the market.

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He said National's plan to reverse the interest deductibility and bring the bright-line rule back to two years would be widely popular with voters.

With a record tax take and lower than expected deficit, Tibshraeny wouldn't rule out a move by Labour to change taxes, but said it wouldn't be rushed.

"Labour would be smart to sit back for as long as it can and assess a) what exactly National is going to take to the election in terms of its tax policy and b) assess the economic environment because it is very dynamic."

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