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National’s proposed temporary tax cuts would make some households feel better, but they are likely to be the ones that would use their extra income to pay off their mortgages rather than spend money to stimulate the economy, says a tax expert.
Publishing its alternate budget on Friday, National outlined plans for changes to the tax thresholds that would apply from December 2020 through March 31, 2022.
The party estimated that this would earn more than a million New Zealanders $ 2,500.
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Instead of paying a 10.5 percent tax on their first $ 14,000 of income, people would earn up to $ 20,000 at that tax rate.
Income between $ 20,000 and $ 64,000 would be taxed at a rate of 17.5%, compared to $ 48,000 today.
Income between $ 64,000 and $ 90,000 would be taxed at 30 percent; At this time, income over $ 70,000 is taxed at the maximum rate of 33 percent. Under National’s plan, this maximum rate would not take effect until $ 90,001.
It would mean that people earning the median salary would pay a top tax rate of 17.5 percent instead of 30 percent.
Average earners would benefit $ 46.50 per week, or $ 3,226 over the 16-month period. National said this would give New Zealanders the confidence to consume, which would benefit the economy.
But the average hides a significant difference.
Someone making $ 90,000 a year would be $ 58.08 better a week, compared to just $ 1.35 for someone making $ 15,000.
A person making $ 80,000 would have an additional $ 52.31 in their pocket and someone with $ 70,000 would have another $ 46.54.
Deloitte’s tax partner, Robyn Walker, said the tax thresholds hadn’t changed for a long time.
“People felt that the thresholds had to move… so many people are on the higher rate. It makes sense that some thresholds are raised. It would be great if it was a permanent change, but if they are doing it temporarily, it’s a good start. “
She said that by the time the changes were supposed to end, it would be clearer what kind of shape the economy was in. “Increasing the thresholds will make a significant difference.”
Tax expert Terry Baucher said this kind of short-term stimulus was common around the world.
He said households with higher incomes would benefit the most. But they were also more likely to choose to save the money or use it to pay off debt. “With a progressive tax system, the more advanced the chain, the greater the benefit.”
He said the proposal, combined with National’s plan to reduce the bright line test to two years and allow homeowners to once again claim their losses against other income, could create problems.
Ross Giblin / Stuff
National leader Judith Collins proposes short-term tax relief.
The bright line test requires owners to pay taxes on the gains made on an investment property bought and then sold within a specified time period.
“It will increase the problems we have with capital taxation.”
People with reliable incomes would use the extra money to reduce debt in times of economic uncertainty, he said.
“If they know it’s not permanent … when they get the extra money, they’ll keep it.”
Baucher said he would have preferred to see a plan that would target low-income families tax cuts and help those receiving benefits. “Low-income households spend the money that comes in, it circulates back.”
National also promised to adjust tax thresholds every three years to keep up with inflation, which Baucher said was welcome.
He said governments had for too long been allowed to let the interval push more people to higher tax levels over time, and then claim a “tax cut” when it tightened.
Walker said there would be compliance costs associated with frequent changes in tax brackets. There would also be flow effects on other tax rates, such as the fringe benefit tax and the employer retirement contribution tax rate.
