Tax Freedom Comes Early – But It’s A Sign Of Rough Weather Ahead

A lower corporate tax take, wage inflation and plummeting spending indicate a difficult 2024

• Tax Freedom Day moves forward by six days – largely because businesses are forecasting lower profits
• Despite the local government tax take increasing 15%, its share of tax has fallen 1% thanks to wage inflation
• The tobacco tax take is down 23%, indicating a big switch to vaping, but fuel tax is up 28%

NEW ZEALAND, 14 May 2024 – New Zealanders’ tax freedom has come nearly a week earlier this year – although it may be a sign of concern rather than cause for celebration. According to Baker Tilly Staples Rodway’s annual Tax Freedom Day calculations, the corporate tax take has fallen 10 per cent in real terms, signalling businesses are expecting a significant drop in profits. Meanwhile, GST is down by 2 per cent after accounting for inflation, showing that things cost more and our spending has plummeted further to make up for it.

Tax Freedom Day marks the hypothetical day each year when New Zealanders have paid off their collective tax bill, and every dollar they earn goes in their pocket from that day on. For the past two years, this date has fallen on 20 May. In 2024, it’s come forward to 14 May.

More than anything, this demonstrates the impacts of inflation and a difficult trading environment. Businesses have paid significantly less provisional tax, which is calculated based on expected earnings, meaning they forecast a tough year ahead. In addition, the Government’s cost of finance has added two full days’ worth of tax to New Zealanders’ tax year, even as everything else has gone backwards.

It’s also clear why “bracket creep” has been such a hot topic for the Government. Councils’ rates figures show just what an impact wage inflation is having on the overall tax take, especially with corporate tax down. Last year saw what was then the biggest annual rise in local government taxes (more than 13 per cent) since Tax Freedom Day calculations began. This year saw an even bigger increase of more than 15 per cent. It’s a sign of how much personal tax has increased that local government tax has actually fallen 1 per cent as a percentage of the total, to just under 9 per cent.

“For some time, we’ve been calling for adjustments to the personal tax brackets to bring these in line with wage inflation,” said Mike Rudd, Tax Director at Baker Tilly Staples Rodway. “The effects of bracket creep and wage inflation have pushed the individual tax take up 3.5 per cent this year, even after inflation is accounted for. There’ll be strong interest in how big an impact the Government’s tax adjustments will have after this coming Budget, and how they will be balanced against other tax measures to avoid further inflation.”

He pointed out some anomalies in the New Zealand results, with those impacts yet to be realised. One is the effect of the recent shift in the trust tax rate on the overall tax take. On 1 April, the trust tax rate increased to 39 per cent. Hundreds of millions in Dividend Withholding Tax would have been payable in April 2024, effectively a one-off tax bonanza for the government, but these fall just outside the period covered by the Tax Freedom Day calculations, which run from April to March.

The sharp rise in unemployment, from 4 to 4.3 per cent over the March quarter, also hasn’t yet translated to a significant increase in welfare payments. However, should things continue on their current trajectory (with unemployment reaching 5 per cent or higher as projected), we can expect to see social welfare’s proportion of the total tax take to increase in 2025, through Jobseeker allowances or accommodation supplements.

In a sign of things to come, the amount of tax paid for flexi-wages more than halved this year, from $52 million to just $25 million. This represents a sizeable drop-off in top-up payments given to employers as they train new workers – likely because businesses are no longer hiring as many new staff.

Big swings can also be seen in the excise tax figures. While alcohol excise duty decreased 1 per cent over the past year, tobacco taxes are down 23 per cent in real terms. Some of this may be attributed to cost-of-living cutbacks and consumer preference, but the likelihood is that smokers are switching to vaping products. Balancing this, fuel excise duty is up 28 per cent, with taxes reinstated after being temporarily suspended to help New Zealanders battle soaring prices.

Other countries are facing different struggles. In the UK, Tax Freedom Day was celebrated on 25 May in 2021, but this fell back to 18 June in 2023. This is a day earlier than Canada, on 19 June. France reached tax freedom around its usual time on 17 July.

“Based on economic forecasts (and the promised individual tax rate changes), we can expect the gap between New Zealand and these countries to widen even further next year,” Rudd said.

“Unfortunately this is more from lower profits and belt-tightening than a reduction in the overall tax burden. While we welcome any moves to address bracket creep, we also acknowledge a need for the right balance in our tax settings. Like all New Zealanders, we’ll be watching this year’s Budget with particular interest.”

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