Pre-budget, the PM indicated personal tax cuts will be part of its election year arsenal.
In pre-budget comments, the Prime Minister indicated that considering personal tax cuts of $3 billion will be part of its election year arsenal.
New Zealand’s tax policy process is largely predictable and occurs outside the Government Budget process. 2016 is no different. We focus on possible changes in 2018.
Given that personal tax rates and income thresholds were last adjusted in the 2010 Budget, the Prime Minister has framed the need for tax cuts as compensation for “bracket creep” since then.
Bracket creep is where higher tax rates apply to individuals as inflation increases their incomes, and they pay more personal tax as a result. The problem is that their “real” earnings (as measured by purchasing power) have not increased.
Bracket creep is an automatic source of revenue increase for Government. Although less of a problem in a low inflation environment, it can “squeeze” household incomes, as those on median and average incomes move up the tax rate scale.
The last major tax change was in the 2010 Budget, which reduced tax rates and increased income thresholds (with effect from 1 October 2010), while increasing the GST. This “switch” reflected a shift from taxing labour and investment income, to taxing consumption. Benefits were also increased to compensate.
Our pre-budget estimate was that the Government has collected about $800m extra in income tax due to bracket creep since 2010. (In other words, if the thresholds were indexed in line with inflation, the Government would have collected about $800 million less in revenue.)
If the Government wants to correct for bracket creep, then according to KPMG’s analysis, it should adjust the current income thresholds for inflation by around 9%.
For someone on the average wage, this change to income thresholds would deliver a tax cut of $628.
You can read our full analysis of bracket creep in this separate article – Bracket creep in New Zealand: a closer look.
The budget papers indicate that bracket creep will contribute about $1.1 billion to the Government’s revenue. This means that the remaining $1.9 billion indicated by the Prime Minister would be available to deliver a “real” tax cut.
This time around, a GST increase is unlikely to accompany any personal tax cuts. Personal tax cuts will therefore signal either a lower spending track, or confidence that a growing economy will make the cost of the cuts self-funding.
This Government has tended to re-prioritise spending rather than lowering it. Over the forecast period, there is continued growth but at a lower rate than the increase in revenue.
The prospects for future tax cuts rely on continued growth.
Inland Revenue’s Business Transformation is an important project for taxpayers. The budget allocates $857m for Inland Revenue’s new tax administration system. This is expected to produce operating cost savings of $284m for Inland Revenue and raise additional tax of $284m.
The signal remains: the change will happen. Businesses, particularly, will have to implement changes to comply. That will come at a cost. The opportunity to influence the shape of the new system, so that those costs are minimised, and benefits to business maximised, should be taken.
The Minister of Finance confirmed that New Zealand will work with the OECD on its BEPS project. This work is expected to have a positive impact on Government revenue. (Interest deductions and hybrids are mentioned). This impact has not been quantified.
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