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The tax threshold changes in last month’s budget will see the largest relative tax savings go to those who already shoulder the smallest relative burden: middle-income earners. That's the conclusion of Mac Mckenna's latest report - updating the "Lifetime Tax paper we released in the week prior to Budget 2017.
The income tax thresholds in Budget 2017 will see Kiwis in an average household save $80,000 in tax over a typical lifetime, equivalent to 0.80 years of their earnings.
Income earners in the lowest decile of households save $16,000 (0.70 years) while those at the top will pay $120,000 less (only 0.66 years). Top earners now spend 20 years of work paying tax, two years more than any other group
These findings cast the light on many of the myths surrounding who receives the most from the planned tax changes. We hope it provides for a more informed debate from politicians and those pushing their own agenda.
The changes announced in Budget 2017 only partially compensate for the increases in average incomes (pushing workers into higher tax brackets) since 2010. The top threshold remains unchanged so a growing proportion of earners are moving into top income brackets despite not being relatively better off.
Unfortunately, future inflation will offset tax relief because of the Governments failure to announce periodic inflation adjustments to tax thresholds. Even with the changes coming into effect on 1 April next year, Treasury estimates that by 2021 New Zealanders will have paid an extra $1 billion in tax because of fiscal creep (or $200 million a year).
It's time the Government finally indexes tax brackets to inflation and protects New Zealanders from paying higher tax rates without seeing real increases in income.
Budgets are essentially political documents, and especially in an election year. It’s the government of the day’s bid to win the election.
And in 2017 Steven Joyce is embarking on the biggest election year spend up since Roman politicians in the dying days of the republic gave out free bread to get votes from the plebeians.
In a bid for re-election Joyce has sought to soothe all the political itches he could, and to leave little room for Labour and other parties to outbid National.
With all the changes to personal incomes and transfers taking place from 1 April 2018, there is a clear political message: you have to vote for National (or one of its support parties) to get these benefits.
Total government spending is increasing by $5.0 billion to $100.8 billion and even more spending is promised. But the really sharp increases are taking place in the next financial year, with more modest increases later (although still much larger than previous years).
All budgets have a centrepiece, the presentational maypole around which Ministers dance with all the glee they can muster.
This year there are four pillars of which the families package is the central one.
This delivers an average of $26 a week to 1,340,000 families at a cost of $2 billion over four years. Tax thresholds are adjusted, although tax rates are not changed. The accommodation supplement is simplified and increased. And Working for Families also gets more.
What’s interesting about the changes to the Accommodation Supplement is that the rates will now vary by region, which will deliver more money to families in West and South Auckland and parts of Wellington and Christchurch, precisely the places where low and middle-income families are struggling financially, and also struggling to vote National.
The families package is supported by three others. There’s more money for public services: another $3.9 billion for health; $1.1 billion for education mainly to fund roll growth.
And $4 billion on infrastructure. Included in this is $812m to restore SH One north and south of Kaikoura; $450m for more rolling stock for Kiwi Rail; $436m for Auckland’s City Rail link; another $392 m for new schools, and much more.
Ministers even found $11.4 million to upgrade Radio New Zealand’s technology.
Finally, there’s the business growth agenda, an omnibus term for more money for programmes supporting business like Innovative New Zealand ($373m) which gets a total of$433 million.
Governments go to a lot of trouble to frame the debate over the budget in terms favourable to them.
This budget simply continues that tradition. If government rhetoric is to be believed all the extra spending is responsible, necessary and will achieve its intended purposes. Enabling ordinary New Zealanders to share the benefits of economic growth is the mantra uttered by Ministers.
And the assumptions underpinning the projections are bold: growth averaging 3.1% over the next five years; no sharp fiscal shocks, and surpluses continuing from $2.9 billion this year to $4.1 billion next year and $7.2 billion in 2020/21. And that’s taking into account all the extra spending announced today.
Average wages will continue to rise and unemployment will continue to fall. And the balance of payments will not blow out. Nominal debt will remain broadly the same, although it will fall as a percentage of GDP.
There’s only the vaguest of commitments to actual changes in tax rates: Minister Joyce told the budget lock-up that the government “intends to continue to adjust tax and transfer settings as fiscal conditions allow.”
In fact on today’s numbers the average wage earner is going backwards under Mr Joyce’s deal because the full extent of fiscal drag since National came to power has not been compensated for.
In fact, the analysis prepared by the Taxpayers’ Union released prior to the budget showed that for average earners on $57 000 a year, a reduction of $26.17 a week was needed to compensate for fiscal drag caused by wage inflation. Joyce has delivered a reduction of just $20.38 which means a person on the average wage has actually gone backwards under this government.
A professional earning $120 000 was due $42.04 on the Taxpayers’ Union figures. Joyce delivered just $20.38 because there has been no change to their upper tax threshold.
The good news is that there are no new taxes other than a very small rise in the EQC Levy – to a maximum per household of $69 a year.
Overall this is an election year budget intended to propel National back to power. Any benefits it might have for the economy or for ordinary taxpayers seem secondary. Real tax reform is still needed but not forthcoming in this budget.
New Zealand Taxpayers' Union
Changes to tax thresholds don’t compensate for changes in average earnings growth for the average earner with an income of $57,000 based on previous reports on fiscal drag by the Taxpayers’ Union.
“The effect is that the average worker is paying a higher average tax rate now than in 2010 — even after the introduction of this ‘families income’ package,” says Taxpayers’ Union Economist, Mac Mckenna.
“Stephen Joyce has sold us short.”
“Because income tax thresholds have not been adjusted to reflect growth in average earnings, New Zealanders have had sneaky tax hikes every year since 2010 that have pushed people into higher tax brackets.”
“The changes announced today, which will come into effect on 1 April 2018, do not even have the effect of returning the average tax rates faced by average income earners back to 2010 levels.”
“Given the huge surpluses, there is no excuse for the average income earner to paying more than in 2010. This is supposed to be a Government which believes in fiscal conservatism, and Budget 2017 doesn’t deliver.”
‘Vote for National and get a tax cut next year’ is the message from Budget 2017, says Jordan Williams, Executive Director of the Taxpayers’ Union. “But middle and high-income earners will be burdened with a higher proportion of the costs of government.”
“The person on the average wage has gone backward tax-wise, since 2010.”
“In politics, the squeaky wheel gets the oil, and Budget 2017 is an enormous spend-up seeking to soothe all the political itches Mr Joyce can find. Even worse, virtually none of the new spending initiatives appear to be funded by reprioritisation of funding. In fact, the word 'reprioritisation' doesn’t even appear in the today’s budget documents.”
“The changes in income tax thresholds are obviously welcome, but they do not fully compensate for fiscal drag for average wage growth for the typical income earner on $57,000 without children. Nor do they come into effect until 1 April 2018.”
“We’ve heard this all before from National in election years. Vote for us, and we’ll give you tax relief. Unfortunately, this Government has canceled more promised tax cuts than it has delivered.”
“This isn’t a taxpayer’s budget. It’s a naked election year spend up.”
With the exception of corporate welfare (which taxes all businesses more, to divert grants to favoured businesses and industries) the business-friendly initiative which features in the Budget announcements is a single proposal to allow deductibility of capital investment 'viability expenditure'. The Government has announced $372.8 million of new operating funding for ‘Innovative New Zealand’, including $74.6 million for Callaghan Innovation’s ‘Growth Grants’.
Jordan Williams, Executive Director at the Taxpayers’ Union, says: “Today’s Budget continues to grow the corporate welfare empire, so the likes of Oracle Racing and Rocket Lab USA are the winners with everyday Kiwi firms paying the price.”
“Despite recent damning reports about the management and decision-making at Callaghan Innovation, the Government is pumping more of our money into the organisation’s grants.”
According to Jim Rose’s report based on the Budget 2016 numbers, if the Government’s corporate welfare regimes were abolished, enough money could be saved to reduce the company tax rate from 28% to 22%
Responding to Minister of Revenue Judith Collins' announcement of a proposal to address blackhole expenditure, Mr Williams says, “This proposal relates to feasibility expenditure which is currently unable to be deducted, but also unable to be depreciated. Businesses in project capital intensive industries will welcome this, but the fact it isn’t even costed yet suggest that it is a long way from being implemented."
“This is a Budget which has largely ignored growing New Zealand’s enterprise and productivity. The ‘once in a generation opportunity’ mooted by the Prime Minister in his budget speech, appears to be a missed one.”
The Government’s failure to index tax brackets to inflation since 2010 now costs the average Kiwi income earner almost $500 each year according to a new report released today by the Taxpayers’ Union. The report, "5 Options for Tax Relief in 2017", models five options to deliver meaningful tax relief packages which could be part of Budget 2017 with fiscal implications of $3 billion or less.
The National Government likes to talk the talk on lower taxes, but this report shows very clearly that they are simply not walking the walk. Because tax thresholds have not been adjusted with inflation, the average Kiwi worker is now paying $483 more per year in tax than in 2010.
By 2020, Government surpluses expected to be $8.5 billion per year. With Bill English having pumped $10.36 billion into new spending, and only $415 million allocated for tax relief in that time, if now isn’t time for meaningful tax relief it never will be.
In addition to modeling various options for tax relief to compensate New Zealand families who are paying more, the report calls for tax thresholds indexed to inflation going forward. That would prevent Wellington increasing the average tax rate paid by New Zealanders every year, raising extra revenue for the Government, in real terms, without the transparency of actually raising taxes.
If we instead indexed thresholds to the growth in average earnings, dating back to 2010, the average earner would save $1,350 each year, or $26 each week.
With the Government set to make a decision on Budget 2017 and its tax relief package in the coming weeks, we hope this report gives taxpayers assistance in understanding what is realistic for Budget 2017.
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