Controversy over National's Tax Cuts
by Keith Rankin, 10 December 2008
Listening to the tax debate in Parliament today (10 December 2008), most of the controversy has been about the lower
threshold ($24,000) for the proposed Independent Earner Tax Credit (IETC). The IETC will be $520 per year ($10 per week)
from April 2009 for those who qualify, rising to $780 ($15 per week) in April 2011.
The application of this $24,000 threshold means that, in 2011, persons earning between $14,000 and $24,000 will receive annual tax cuts of less than $100. They will receive nothing before 2011. This contrasts with Labour's already legislated for
tax cuts, from 2010, which target this group of workers.
Table 1 below shows the size of the tax cuts promised by Labour and National for workers on various annual incomes from
$10,000 to $100,000. The figures clearly show that, for low income workers on about $20,000 (most will be in part‑time,
short‑time, or variable‑time work situations), National will give them a tax cut of just over $1 per week.
Click to enlarge
Further, workers who don't qualify for the IECT will be worse off than they would have been under Labour for incomes up
to about $45,000.
National has been unable to enunciate any sound reasons for the exclusion of persons earning less than $24,000 from
access to the IETC.
The problem can be clearly seen by looking at the 2011 tax rates previously legislated for by Labour (Table 2), and the
2011 tax scale with which National will replace Labour's tax rates (Table 3). The critical differences lie in the income
bands $14,000 to $20,000, and $42,500 to $50,000. To compensate for Labour's big cut on incomes from $14,000 to $20,000,
National is introducing the $780 IETC. The biggest problem is that independent workers earning from $14,000 to $24,000
do not qualify.
Table 2: Marginal Tax
Labour's Tax Rates: 2011-12
$0 - $20,000
12.5%
$14,000 - $20,000
12.5%
$20,001 - $42,500
21%
$42,501 - $50,000
33%
$50,001 - $80,000
33%
$80,001 and over
39%
Table 3: Marginal Tax Rates
National's Tax Rates: 2011-12
$0 - $14,000
12.5%
$14,001 - $24,000
20%
$24,001 - $44,000
20%
$44,001 - $50,000
20%
$50,001 - $70,000
33%
$70,001 and over
37%
The problem can easily be fixed. First, it doesn’t arise until 2010, because only National offered tax cuts for 2009.
It turns out that, for all independent workers earning more than $24,000, the IETC combined with the Table 3 scale is
identical to the tax scale in Table 4 below. Further, the scales in Table 3 and Table 4 are virtually identical for
persons earning less than $14,000 per year. Differences only arise for workers in the $14,000 to $24,000 income band.
Table 4: Alternative Marginal Tax Rates, incorporating Independent Earner Tax Credit
New Zealand Income Tax Rates
2011-12
for Independent Taxpayers
$0 – $14,000
12.375%
$14,001 - $24,000
12.375%
$24,001 - $44,000
20%
$44,001 - $50,000
33%
$50,001 - $70,000
33%
$70,001 and over
37%
By replacing the unwieldy IETC with the tax scale in Table 4, National could deliver all its promised benefits to
persons earning more than $24,000, while still giving something worthwhile to persons with incomes in the $14,000 to
$24,000 range. The fiscal cost of doing this will be small (about $100 million [corrected 12/12/08]), because only persons earning less than $24,000 would be affected. The annual benefits to those people will be, on
average, less than $500.
It is particularly important that the Government realises that, as unemployment rises next year, many people currently
earning more than $24,000 per year will find themselves with annual incomes below $24,000 in the years to come. It will
be cruel to give them an IETC, like giving a person an umbrella, only to take it away when the rain comes, when they
most need it.
National can save itself a lot of political embarrassment by replacing its proposed 2011 tax scale (Table 3 less the
IETC) with the tax scale represented above in Table 4.
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krankin [at] unitec.ac.nz