Tax threshold changes reduce lifetime tax by $80k /10 months

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.

Key findings:

• The average household saves $80,000 in tax over their lifetime from Budget 2017 threshold changes.
• Total lifetime tax for the average household is equivalent to 14.2 years of income. The savings equate to a reduction of 0.8 years.
• Households in the bottom decile will save $16,000 in tax over their lifetime from Budget 2017 threshold changes – a saving of 0.7 years. They now spend 17.7 years paying tax.
• Households in the top decile will save $120,000 in tax over their lifetime from Budget 2017 threshold changes – a saving of 0.66 years. They now spend 19.7 years paying tax, the longest of any group by two years.
• Due to insufficient data available from Government, these results do not account for Working For Families, Independent Earner Tax Credit, or Accommodation Supplements changes. Including these additional policy changes would only further emphasise our point: top income earners receive disproportionately less from Budget 2017 than other income groups.

How Budget 2017 impacts different household's Lifetime Tax (household earning deciles)

As Steven Joyce prepares to deliver his first budget on Thursday, the Taxpayers’ Union can reveal that the average household pays $1.48 million in tax over a lifetime - equivalent to 15 years of earnings.

In a paper published today, the Taxpayers’ Union reveals:

• Over a lifetime, an average household (gross income of $98,818) will pay $1.48 million in taxes (at 2016 prices).
• This is equivalent to the total income of a household over 15 years.
• Of the $1.48 million, approximately $826,000 is paid in income tax (56% of the total tax bill), $375,000 in GST, $121,000 in council rates, and $40,000 in petrol taxes.
• Households earning more or less than the average take even longer to pay their lifetime tax bills.
• The average household in the bottom ten percent of income earners will pay $381,187 in direct and indirect taxes, taking 18½ years to pay.
• An average household in the top ten percent of income earners will pay $2,772,842 in direct and indirect taxes, taking 20½ years to pay.
• Figures are based on a standard working life of 44 years (age 21-64) and retired life of 15 years (a life expectancy of 80). 

This new analysis shows just how heavy the burden of taxation falls on each and every family across New Zealand, pushing up the cost of living.

Cutting down wasteful spending is key to reducing the average household’s lifetime tax bill.  Corporate welfare, whereby the Government ‘pick winners’ with grants, costs taxpayers $1.3 billion per year and is a good example where money could be saved.
 
Kiwi’s tax bills are too high – and growing because the Government has not adjusted income tax thresholds to match wage inflation.  Lower taxes don’t mean cuts to services, they mean a focus on cutting out wasteful spending.  We hope Thursday’s Budget indicates renewed fiscal discipline, rather than loosening of the purse strings now that there are surpluses.