New paper reveals how income tax is being ramped up by inflation
A new briefing paper from the New Zealand Taxpayers' Union reveals just how much more tax Kiwis are paying as a result of inflation-induced tax bracket creep.
Current income tax brackets were introduced in 2010 but because these brackets are not indexed to inflation more Kiwis are being pushed into paying higher marginal tax rates – even when they are not earning any more in real terms. This means that today a worker on the median wage is paying $1,332 more in income tax than someone on the same real income did in 2010.
Bracket creep, or fiscal drag as it is sometimes called, generates billions of dollars for the government. It's no secret to government officials – 92 documents on the Treasury website reference fiscal drag – but successive finance ministers have kept quiet about bracket creep because it ramps up tax revenue without the political fallout of explicit tax hikes.
With inflation driving bracket creep faster than ever, it's time to shine light on this dirty fiscal secret.
Our briefing paper reveals what tax brackets would look like today if they had been continuously adjusted since 2010 when they were originally implemented:
INCOME TAX BRACKETS ADJUSTED FOR INFLATION BETWEEN Q4 2010 AND Q1 2022
| Tax Rate | Quarter 4 2010 | Inflation Adjustment to Quarter 1 2022 |
| 10.5% | $0 - $14,000 | $0 - $17,240 |
| 17.5% | $14,000 - $48,000 | $17,240 - $59,107 |
| 30% | $48,000 - $70,000 | $59,107 - $86,198 |
| 33% | $70,000 - $180,000 | $86,198 - $189,982 |
| Quarter 2 2021 (39% Bracket Implemented) | Inflation Adjustment to Quarter 1 2022 | |
| 39% | $180,000 + | $189,982 + |
In the last 12 months, the effect of bracket creep has been dramatic due to inflation reaching 6.9%. For example, an individual paid $180,000 at the time of implementation is now paid $189,982 (if they have been lucky enough to receive pay rises in line with inflation) and pays an additional $2,700 in tax despite not earning any more in real terms.
The briefing paper outlines three key recommendations:
1. Adjust all tax brackets in line with inflation from Quarter 4 2010.
2. Implement ongoing annual inflation adjustment of tax brackets.
3. Remove the 39% top tax rate.
We have also created a tool where taxpayers can enter their income and see what their tax bill would look like if tax brackets had been inflation-indexed since their implementation in 2010.
Taxpayers' Union spokesman Louis Houlbrooke says, "At the Taxpayers' Union, we say people should only pay more income tax if their real incomes have increased – otherwise they're going backwards. Likewise, if governments want to increase taxes, they should have to announce it as part of a Budget and defend the tax hike in Parliament."
"Higher marginal tax rates punish those who work hard, reduce incentives to upskill and encourage our most productive workers to go overseas."
Our proposed tax changes would benefit taxpayers at all income levels and give a family on the median household income over $2,000 of tax relief.*
The National Party has proposed adjusting tax brackets for inflation since 2017, conveniently forgetting about the seven prior years of bracket creep that occurred when they were in power. We are calling on all political parties to adopt our policy of indexing tax brackets to inflation and make our tax system fairer.
*Based off Stats NZ median household income of $110,451 in June 2021 and assumes a two-income household with a 70% / 30% income split.