NEW REPORT: The Pitfalls of a Tax-Free Threshold for Income Tax
A new report by Taxpayers’ Union Research Fellow, Jim Rose,analysing the impacts of implementing a tax-free threshold concludes that the policy would be an expensive and poorly targeted way of reducing the tax burden and increasing after-tax incomes of New Zealand families.
> The introduction of a tax-free threshold is poorly targeted with many of the intended beneficiaries of the policy already receiving other Government support such as benefits, superannuation and tax credits, which could be increased without spillovers to other higher income groups.
> The more important tax threshold that needs to be adjusted is the $48,000 income tax threshold that when crossed sees individuals paying a 30% marginal tax rate. Given that a full-time minimum wage worker earns $47,216 annually, they only need to work one additional hour a week or get a 40 cent per hour pay rise in order to be pushed into the higher tax rate. This, combined with the 27% abatement of Working for Families tax credits, can create punishing effective tax rates well above 50%, which has significant impacts on incentives to work.
> Most of those in incomes low enough to substantially benefit from a tax-free threshold are either in groups where more targeted support can be provided (such as those listed above), are students working part time, or are second earners, again working part-time.
> The tax-free thresholds proposed by the Greens and Te Pāti Māori, along with the one considered earlier in the year by Labour, would cost more than what is currently spent on Working for Families but spills over to many taxpayers who do not need it, rather than just those the policy intends to help.
Commenting on the report, Taxpayers’ Union Head of Campaigns, Callum Purves, said:
“While it might be seen as appealing at first, the introduction of a tax-free threshold is arguably one of the least effective tax cuts. It is poorly targeted and doesn’t address the real issue, which is high marginal tax rates for primary earners in a household. Marginal tax rates matter because the impact on incentives to work, invest and up-skill along with being key determinants for whether people come to New Zealand or if our best and brightest decide to head overseas for a better return for hard work.
“The Taxpayers’ Union would of course prefer a tax-free threshold be introduced to the current high-tax status quo if it was funded by reductions in wasteful spending. However, there are far more effective options which should be explored instead, such as reducing the tax burden at the point where it hits the hardest by increasing the income threshold at which the 30% tax bracket kicks in.
“Hiking taxes even further to fund a tax-free threshold is simply untenable. The taxes proposed by the Greens and Te Pāti Māori (and previously by Labour) would economically ruin New Zealand by punishing innovation, investment, and success, draining New Zealand of the income needed to sustainably fund such a threshold.”