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Home / New Zealand

It's the cut we'll hardly notice

Simon Collins
By Simon Collins
Reporter·
15 Feb, 2008 04:00 PM3 mins to read

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KEY POINTS:

Tax cuts are coming - but don't hold your breath for more than a 2 or 3 per cent rise in your after-tax income.

The NZ Institute of Economic Research has costed four tax cut scenarios for the Weekend Herald which would each cost about $1.8 billion -
a bit more than the $1.5 billion which Finance Minister Michael Cullen has publicly earmarked for the cuts.

The biggest boost any of them would deliver to after-tax income is $69.23 a week for a couple on a combined income of $150,000 - an increase of only 3.6 per cent.

The smallest boost, for a domestic purposes beneficiary in three out of the four scenarios, is zero. Only a cut in GST would help the beneficiary, because benefits are fixed by law on an after-tax basis, so cutting income tax rates would have no effect.

High-income families would be best off by raising the income points where tax rates step up.

Low-earning, dual-income couples would do best by introducing a tax-free basic income. But low-earning, single-income earners may do better from across-the-board cuts in the tax rates themselves.

Out of the many possible combinations Dr Cullen might choose, the Weekend Herald picked four simple ones to illustrate a likely range of outcomes.

* Option 1: Increase the income levels at which tax rates increase by $7500 a year, but leave tax rates unchanged. For example, the bottom tax rate of 15 per cent, which now applies to the first $9500 of income, would apply to income up to $17,000.

* Option 2: Cut all tax rates by 2 per cent. The bottom rate would drop to 13 per cent; the next rate on income from $9500 to $38,000 would drop from 21 per cent to 19 per cent; the rate on income from $38,000 to $60,000 would drop from 33 per cent to 31 per cent; and the top rate above $60,000 would drop from 39 per cent to 37 per cent.

* Option 3: Introduce a tax-free basic income of $4500 a year ($86.54 a week).

* Option 4: Cut GST from 12.5 per cent to 10 per cent.

Niu FM announcer Sela Alo and his wife Kathy, a town planner, together earn $150,000 and have just bought a house in Mt Albert. They have a 4-year-old boy and a 6-week-old baby.

Raising the income levels at which tax rates step up would be best for them because they are both in the top tax bracket.

"It would go on the mortgage, the house and the family. Our son is starting school next year," Mr Alo said.

Moses Tokuma and his wife work fulltime as teachers and earn $100,000 between them. They would also do best out of raising the income levels, even though both are only on the second-highest tax rate of 33 per cent. "I'm quite happy with tax, I know it goes to good purposes," Mr Tokuma said.

Night shift manager Rod Ruaporo and his wife, who works part-time, support three children aged 12, 2 and 1 on a joint income of $65,500, roughly the median household income in Auckland.

They pay $430 a week on rent and feel they need a tax cut to save to buy their own home. They would get roughly the same out of any of the first three options.

"Taxes are too high," Mr Ruaporo said. "The more you earn, the more you get taxed."

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