Two-thirds of voters across the political spectrum support adjusting tax brackets at the rate of inflation, to prevent the average tax rate from drifting higher over time.
Bracket creep, also known as “fiscal drag”, refers to inflation pushing taxpayers into higher tax brackets, despite not having higher incomes in real terms.
This has contributed to an uptick in government tax revenue, which has risen from $97.4 billion in 2021 to a forecast of $117.4 billion in 2023.
A poll conducted by the Taxpayers’ Union and Curia found two thirds of eligible voters were in favour of automatically shifting income tax thresholds to adjust for inflation.
Callum Purves, the Taxpayers’ Union campaign manager, said politicians should have to pass legislation when they want tax rates to increase.
“Why should working New Zealanders be punished with stealthy tax hikes when they are not actually earning more in real terms?”
67% of those surveyed supported adjusting tax brackets at the rate of inflation—referred to as indexation—while just 14% were opposed and 19% were unsure.
This level of support was relatively consistent across political parties, with 66% of National voters supporting the idea, compared with 64% of Labour voters.
60% of Green Party voters were in favour, with 21% opposed and 19% unsure, while 82% of Act voters supported indexation and only 9% were opposed.
This is an inversion of the two parties’ actual policies; indexation is Green Party policy, while Act opposes the idea.
David Seymour, leader of the Act Party, said the poll question had been phrased in a way that implied indexation was the only way to get lower taxes.
“If they were to ask, ‘do you want Labour’s tax policy indexed for inflation, or real tax cuts that reduce the rate of tax?’ most who want tax relief would pick real tax cuts,” he said.
Party policies
The Act party has proposed just two tax rates: 17.5% on income under $70,000 and 28% on everything higher. This flatter tax structure reduces the need for indexation.
However, inflation would gradually increase the average tax rate, particularly for low income earners, and pull in more revenue for the Government over time.
Act’s proposed tax reform would cut revenue by roughly $12 billion, once fully implemented, and would be funded by laying off public sector employees and lifting the retirement age.
On the other side of the political spectrum, the Green Party has proposed adding a tax free threshold of $10,000 and lifting the highest income bracket to 45%, from 39%.
These income tax brackets would be indexed to wage inflation and adjusted every three years.
The Green Party’s proposed reform also includes 2.5% wealth tax, a 1.5% trust tax, and an increase of the corporate tax rate. It would raise $15 billion in revenue to fund an income guarantee.
The National Party has promised to adjust current tax brackets to compensate for the past four years of inflation, which was 11.4% when the policy was announced in March 2022.
Inflation has remained high and in March 2023 the consumer price index has increased 21% since the final quarter of 2017, when Labour first formed a government.
Nicola Willis, National’s finance spokesperson, said the proposed policy was a minimum inflation adjustment and the full tax policy would be announced before September 12.
“National is the party of low tax, and we will deliver tax relief for lower and middle income earners by adjusting current tax brackets to compensate for inflation,” she said.
“Our threshold adjustments will mean someone on an average wage will keep around $900 more a year. If we can responsibly provide further tax relief for Kiwis, we will”.
Both the Green Party and the National Party have released tax calculators, which readers can use to compare the two policies.
Working overtime
Interest.co.nz asked several Labour ministers whether they were considering adjusting tax brackets to compensate for inflation, but all declined to comment.
Finance Minister Grant Robertson said the Labour Party would have a revenue policy and it would be announced “well in advance of the election”.
Lisa Marriot, a professor of taxation at Victoria University, said the bottom personal income tax thresholds haven’t changed since 2010.
“If you work 41 hours at the minimum wage, every additional dollar that you earn will be taxed at 30%. At that point our progressive tax system is looking very unprogressive”.
This means the lowest wage workers are being taxed only 9% less than the highest income earnings when working overtime.
Marriot was speaking at the launch of the Better Taxes for a Better Future campaign launch, which aims to build support for a more redistributive tax system.
A recent statement from the International Monetary Fund encouraged the NZ government to reform the tax system and address bracket creep.
“A well-designed tax reform could allow for lower corporate and personal income tax rates by broadening the tax base to other more progressive sources, such as comprehensive capital gains and land taxes, while also addressing fiscal drag and improving efficiency,” it said.
The IMF said the country was earning enough overall tax revenue but it could change where it was collecting those taxes to better align with long-term economic goals.
Complex & considered
Robyn Walker, a tax partner at Deloitte, said any implementation of tax indexation would need to be carefully considered.
Indexation can be complex and administratively burdensome, plus it would reduce government revenue even as the cost of providing services increased.
“A reduction in revenue would require spending cuts; if those cuts are too substantial, there is a risk of plunging the country into austerity,” she said.
On the other hand, bracket creep tightened the cost-of-living squeeze and had impacts across the economy.
“Inflation can increase inequality, as those who own assets that benefit significantly from inflation (such as housing) receive an advantage, whilst those reliant on fixed incomes suffer,” she said.
Tax indexation every three years was legislated by the Helen Clark Government in Budget 2005, to first take effect in 2008, but was scrapped in 2007 when John Key was elected.
The Reserve Bank also looked into tax indexation in 1981 when inflation was running at high levels, but the Muldoon government did not pick up the policy.
Walker said it was important not to look at tax policies in a vacuum and indexation should be considered in the context of the entire economic system.
Callum Purves said it shouldn’t be a difficult policy to implement, as NZ already adjusted welfare benefits for inflation and other countries already adjusted taxes for inflation.
The poll was conducted by Curia Market Research in early June and surveyed 1,000 eligible New Zealand voters.
It asked: As welfare benefits automatically increase with inflation, would you support or oppose a law so that income tax thresholds also adjust for inflation, so that someone whose income increases in line with inflation doesn’t end up paying proportionally more income tax than previously?
35 Comments
Of course people think it's a good idea, without thinking where the money to pay for it will come from. From someone on the average income, it can't come from the lower tax brackets. So it seems most people support higher upper tax brackets, or some kind of capital gains tax.
Looks like the Greens have the closest policy to that, followed/equaled by TOP.
What on earth are you talking about. Bracket creep as wages have increased is a blatant rip off. With the stroke of a pen the tax brackets can change back to what the government was pulling in 5 years ago. Nobody would notice because they don't bother to check but the tax percentage amount gets tweaked just about every year as it is. They know exactly what the income will be with the changes, what Labour are refusing to do is stop wasteful government spending and instead give hard earned money back to the people. I for one look forward to what National have on offer come September 12th.
Bracket creep as wages have increased is a blatant rip off.
What we don't know is the amount of taxation required just to retain today's level of state services. I've heard that the US would need to raise taxes 40% across the board today, just to retain the current level of services until 2050.
So what we deem "bracket creep" could very well be even less than what we need to be paying to keep the lights on.
Then the people who get massive ministerial salaries should probably have that conversation, instead of being too cowardly to let the electorate know how much they've bloated the cost of the state, while at the same time delivering fewer and lower quality services as access to them reduces.
But that means the people you need to pay the tax to fund your monstrosity of a state service might actually start to question the value they get for their increasingly bigger tax contributions, so it's easier to just wet yourself anyone someone suggests indexation and decry it as a 'tax cut', even though it's just letting people keep more of their money that you've been helping yourself to with no actual political mandate.
Completely useless and biased survey.
It fails to ask what government services you are willing to cut or what additional user pays fees you are willing to pay to have more money in your own pocket.
NZ already has massive social, environmental and infrastructure deficits.
Public Service Commission numbers confirm public service jobs have increased by over 30% since 2017. These are mostly non-customer facing roles (management, HR, finance, comms, etc.).
The consultant budgets has also gone up to over a billion a year.
This spending is not helping bridge those deficits you speak of, likely worsening them.
the real question is, how come government could provide those services then on lower tax take, but now ask tax payers (by tax payers I meant salaried workers) to pay more and more?
Have we ignored the failure of the government $$ management, and years of spending tax $$ for nothing?
And a counter opinion of New Zealand taxpayers tells us the opposite.
Almost 100 wealthy New Zealanders have signed an open letter to the Government to say they want to pay more tax.
https://www.stuff.co.nz/business/132001093/wealthy-new-zealanders-say-t…
Think I'm going to call bullshit on that one. They all know full well its not going to happen so its just sympathetic virtue signalling. The top wage earners and the rich are the ones running the country, they could make it happen tomorrow if they really wanted it to happen. Its like feel sorry for us we want to pay more tax to help all you peasants out but we can't, yeah right.
In the United States, there is an inflation adjustment on tax brackets every year.
The Greens are not being up front. 4-5% of households would be affected by their wealth tax, not .7% as they are saying.. And there is an old saying "the rich don't pay." As Ronald Reagan said, once you increase taxes beyond a certain level, people will find ways to avoid paying. When he was Governor of California, and taxes were cut, there was actually far better compliance and revenue increased. The Greens will ensure that many wealthy people--the top 20% who pay 68% of income tax--will either flee to Australia or else will find other means to avoid paying the wealth tax.
I doubt that's a realistic concern, given their entrenched interests and other systematic issues that have nothing to do with not wanting to be up front with the electorate about how you're increasing your share of the tax take year-on-year and hoping no one will notice.
Tax indexation every three years was legislated by the Helen Clark Government in Budget 2005, to first take effect in 2008, but was scrapped in 2007 when John Key was elected.
The sentence is incomplete.
Requires this addition, "in order to be able to (somewhat) mitigate the effect of the tax breaks given to those at the top end of town".
watch Chris Bishop on Newshub Nation , he genuinely has no idea what inequality is . National are betting on the old adage that poor people will vote for tax,cuts because they aspire to be rich . There will be nothing for the average wage earner in their tax cuts , they can't afford it, onto of cuts for the top. but it seems they are talking about a different average.
The 'top end of town' that was taxing people 39 cents in the dollar for earning over the frankly plutocratic income of over $60K? And wondering why people were plunging into property investment that they could extract tax-free gains from without anyone noticing? Yea, good thing having that stupidly low rate for so many years had no effects whatsoever.
This is such a complicated issue when it really needn't be. Simplifying taxes should be a priority for every govt. The less tax we pay the wealthier we all become. Remember govt here is the problem, not the solution. Govt has always has been the problem, but when you dismantle families, communities & society in general, & replace them with big govt/state solutions, problems followed by more problems will always be the result.
Get the govt out of our lives & those with any smarts will get on & create the wealth for the rest of us to share in. Will it be perfect? Hell no. But it's way better than having the govt always telling us what to do, how to do it & when we can or more likely, when we can't do it, all the time.
Look at Europe - the most developed region on planet Earth, currently regulated up to the eyeballs & beyond & going nowhere. It too is taxed to the max. All it has to trade on these days is its history. We go there to see, smell & taste their rich cultures we've read so much about. We don't go there to see the future. This time next century there will be 100 million less Europeans living in western Europe. In its place there will be a new ''African European'' element [happening right now] & I bet you it will not make European culture a better thing. I hope I am wrong, but in almost every other region where I see this currently happening suggests I might be right. Now all you who think you know better can hammer me.
Yep your name is right - you are wrong. Govt is there to do all the things the private sector can’t or won’t do. It’s a backstop, and the bigger it is the more it suggests the private sector is becoming more incapable, more monopolistic, more short term, more corrupt and more hurtful to those further away from the money supply.
ACT must explain how reducing taxes & laying off public servants will not send this country back to the era of robber barons. But they can’t…and I suspect most of their ilk don’t care.
This would hold some weight if our government wasn't a handbrake on the progres of the country and didn't act in the exact same way for the sake of self-preservation, which it treats as more important than delivering the services that taxes get extracted from the general populance to supposedly pay for. Not a lot of moral high-ground to be had if we're going to judge people to the same standards, really. NZ's public sector produces worse and worse outcomes with each passing year, yet tribalists still offer this ridiculous "it could be worse!" arguments for why our healthcare, education and livng standards are rocketing backwards.
Getting rid of tax bracket creep would be good if they took NZ super payments out of general tax and charged them as a separate tax. But otherwise we would have NZ super payouts constantly going up with the tax take staying stagnant, so either higher government debt or less services.
The Green party tax calculator is incorrect Dan, it makes no adjustment for the trust tax. Weird how no journalists seem to have picked this up. I would expect headlines along the lines of "National party blasted for inaccurate tax calculator" if the shoe was on the other foot...
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