Government says open to ACT suggestion for indexation of income tax thresholds to CPI inflation to avoid 'bracket creep' increasing effective tax rates

By Bernard Hickey

Economic Development Minister Steven Joyce has signalled in Parliament the National Government is open to the idea of indexing income tax thresholds to Consumer Price Index inflation to soften the 'bracket creep' that inexorably increases effective tax rates as wages rise.

Joyce's comments came in answer to a Parliamentary Question from ACT MP David Seymour, who produced Parliamentary research showing that had tax rates been indexed to CPI inflation since 2011 when new tax rates were introduced, an average income earning household would have paid NZ$1,036.07 less tax by 2014.

Seymour raised the question after recent comments from Finance Minister Bill English that inflation was the friend of Government because of the effects of bracket creep, while the potential for low to no inflation this year was making life more difficult for the Government as it pushed towards a long-targeted surplus in 2014/15.

"In light of his statement in the House on 11 March that low inflation “makes it more challenging for the Government because higher inflation pushes up the tax base and enables us to collect more tax in a growing economy”, does he agree that this phenomenon of fiscal drag is just another description for an increase in effective tax rates?," Seymour asked in Parliament (see the video above).

Joyce, speaking on behalf of English, acknowledged low inflation was a challenge for Government revenue, but was good for households' cost of living.

Seymour then asked if a period of low inflation was therefore a good time to index tax rates to CPI inflation.

"In regard to income tax and indexation reducing tax rates, we have been very clear that that was something we would consider from 1 April 2017 if economic and fiscal conditions allowed," Joyce said, referring to the Government's Budget 2014 and pre-election suggestion of small tax cuts before the 2017 election.

"Any tax reduction would be modest and focused on low and middle income earners," he said.

"We do have the concern that the member outlines, which is if wages are rising, people can be taxed more. So we are interested in doing that. Would we do it in terms of an indexation? That is something that we would address at the time, once we were confident we had the room to do so."

Seymour later said the Government should be open and transparent if it wanted to increase effective tax rates.

"I propose tying tax brackets to the Consumer Price Index, meaning tax brackets would rise with inflation, stopping stealth tax increases and ensuring government revenue collection is open and transparent," he said.

"The best time to act is now -- current low inflation means a switch to inflation adjusted tax brackets would have relatively little effect on Government forecasts," he said.

Seymour said ACT's preferred position would be indexation to wage growth, which is usually faster than CPI inflation, which would further reduce the effects of bracket creep. But this would be less politically or fiscally palatable for National.