Putting it on the line | KPMG | NZ

Budget 2017 - Putting it on the line

Putting it on the line

With the Government’s books “back in the black”, Budget 2017 puts it on the line with a $2 billion a year “families’ income” tax cut and assistance package.

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The art of the tax cut

As widely foreshadowed, the key measures are aimed at increasing money in the pockets of working families. This relief is in the form of income tax threshold changes and increases in Working for Families and accommodation benefits, targeted at lower and middle income earners.  

The Government estimates that its Budget 2017 centrepiece will benefit around 1.3 million families by an average of around $26 a week.  

The Budget tax and family assistance changes at a glance

  • Higher income tax thresholds for the 10.5% and 17.5% tax rates:
Tax rate Current tax thresholds From 1 April 2018: Increase in threshold
10.5%  Nil to $14,000  Nill to $22,000  +$8,000
17.5% $14,001 to $48,000 $22,001 to $52,000  + $4,000
30%  $48,001 to $70,000  $52,001 to $70,000  No change
33%  $70,001  $70,001 +  No change
  • The independent earner tax credit of up to $10 a week will be removed (replaced as part of the tax threshold changes). 
  • For family assistance recipients, family tax credit rates will increase, while the accommodation supplement will also increase (the size of increase will depend on family size and where they live).  
  • Superannuitants will see a rise in their NZ Super payments, as these are pegged to after-tax income which will increase on the back of the tax threshold changes. 

When do the measures take effect?

1 April 2018. The Minister of Finance has indicated this is to alleviate pressure on Inland Revenue’s systems from a 1 October 2017 start. This is certainly a factor given Inland Revenue’s ongoing Business Transformation. 

The more cynical may also look ahead to September. 

The back story – why tax relief now?

New Zealand’s fiscal position coming out of the global financial crisis left the Government little room for manoeuvre. Add to this the fiscal strain from subsequent events like the Christchurch earthquakes.  

The last tax changes, in 2010, (reductions in personal and company tax) were largely self-funding (from removing tax depreciation on buildings and increasing the GST rate). This left the fiscal position largely unchanged. 

The Government’s stated approach to date has been one of prudence – getting its books in order – while continuing to fund key priorities and unexpected events. 2017 is the first Budget where the Government has felt there is enough fiscal headroom to offer tax relief. Plus, there is an election around the corner. 

What’s behind the Government’s thinking?

In the lead-up, the Government strongly hinted that it would be targeting relief to lower and middle income earners and their families. The Budget appears to have largely done that, with a particular focus on those on lower incomes. 

Cutting taxes is an art, rather than a science. It involves a number of dimensions and can require difficult trade-offs. Some of the things to think about include:  

  • Equity (or fairness). This includes “horizontal” equity, which is concerned with how people earning the same level of income from different sources are taxed and “vertical” equity which is about the tax burden that those earning different amounts pay. NZ’s progressive income tax system means that those earning more generally pay more proportionately. 
  • Cost. For Government, this is the tax revenue forgone (the “opportunity cost” – what those funds could have been used for instead) and from IRD having to change their systems to implement the new bands. For employers, there is the cost from having to update their payroll systems.  
  • Efficiency. Taxes have different impacts, for different groups, particularly when combined with other Government assistance they may receive (such as Working for Families, and other credits, that abate as incomes rise). These interactions may impact incentives to take on additional work. Personal tax cuts can, therefore, have employment and wider economic effects (although the extent is often disputed).
  • Political. Ultimately, the design of the Government’s tax changes has a political objective. What provides the most bang for buck, particularly with an election around the corner?

Given the range of economic, social and political factors at play, an independent view on the Government’s tax and families’ package requires re-doing the Budget as a whole. We have focused instead on “fiscal drag”.

What is “fiscal drag” (aka bracket creep)?

Fiscal drag, or bracket creep as it’s more colloquially known, is where, without adjustment, people can move to a higher tax band simply because their salary or wages rise by the rate of inflation. This is without any “real” increase in their income (as measured by the goods or services they can actually purchase). This is inequitable as their economic position is unchanged and is a windfall gain to the Government’s coffers.   

We support lifting the income tax thresholds to combat fiscal drag. 

The last personal tax cuts took effect from 1 October 2010. Those on the median salary or wage of around $48,000 pay 30%, the second highest tax rate, on their next dollar of income. In 2010, those on around $40,000 (the 2010 median salary or wage) paid 17.5%. There is tacit acknowledgement of the effect of fiscal drag in the Budget announcements.  

Do the proposed tax threshold changes alleviate fiscal drag?

There are different ways to index the income tax thresholds. We have calculated below what the tax thresholds would be if they were adjusted for the Consumer Price Index (CPI) inflation from 1 October 2010. The cumulative CPI movement has been around 10.40%. 

Table 1. Income tax threshold options

Tax rate Current Budget 2017 Indexed
10.5% $14,000  $22,000  $15,500
17.5% $48,000  $52,000  $53,000
30%  $70,000  $70,000  $77,300
33%   $70,001 +  $70,000+  $77,301+

The tax cut, for different income levels, under the different options is outlined below. 

Table 2. Annual tax cut for different income levels

Income ($) $20,000 $40,000 $48,000 (median) $70,000 $100,000 $150,000
Budget 2017 $420  $560*  $560 $1,060 $,1060 $1,060
Indexed (CPI) $105 $105
$105
$730 $949 $949


*This excludes the effect of the independent earner tax credit removal. The net tax cut will be $40 if someone currently receives that credit.  

The personal tax changes in Budget 2017 do more than address fiscal drag since 2010 for those on lower incomes. The additional cash in hand changes will significantly exceed those from a simple CPI adjustment. 

However, this benefit also flows to those on higher incomes as the same benefit passes to them. That is of course a natural effect of a progressive tax system, like New Zealand’s.

New Zealand Budget 2017

New Zealand Budget 2017

 
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