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Thomas Pippos on National's Tax announcements

Media Release 22 August

Deloitte Managing Tax partner Thomas Pippos sums up National's Tax announcements

A day is a long time in politics.

This morning the Prime Minister is reported as painting the election as a choice between radical change or inclusive leadership. She warned against National's "new Right agenda" and said the election represented "high noon" for New Zealand.

Then came the personal attack - "My opponent represents the last throw of the dice for the people who brought us Rogernomics and Ruthanasia. "Like rust the forces of neoliberalism have never slept since power was taken from them in 1999."

At 1230 however a moderate wide ranging and one expects widely appealing tax policy was announced by the evil forces referred to above - whoops.

Will it be popular, well it depends upon what criteria you evaluate it. The flat tax society will bemoan the lost opportunity but the flat tax society was not who National were looking to appease. If anything, National has now left Act clearly on the right occupying alone its sacred tax ground – possibly with some new found support.

Paraphrased the crux of the policy is quite simply to provide a lower tax burden and restore incentives for taxpayers to get ahead from their own effort. It was intended as a signal to hard-working New Zealanders that they can share in the benefits of a growing economy – a signal that seems pretty loud and clear.

This is probably no better brought out than through the fact that currently a single person earning around the average wage faces a marginal tax rate of 33% - under the proposed new rates that’s now 19% - that’s material – a whopping 42% tax reduction.

Teachers, the police and hospital workers will not as a rule be exposed to the 39% rate when the threshold moves from $60,000 to $100,000 – that’s material.

In fact, it’s hard to identify who is worse off under the tax policies released today?

In terms of business, the corporate rate drops to 30%, carbon tax is out and it appears so is the unrealised capital gains tax on international share investments. That’s simple; the first two will positively impact New Zealand’s perceived and actual international competitiveness and will be well received.

Is this the destination or the first leg of the journey, I suspect the latter. The differential tax rates across individuals and other business structures (i.e. the company tax rate) continue and in some cases are exacerbated. Time will tell but a Government that is prepared to provide tax cuts now is probably prepared to further refine tax rates when and if economic conditions allow to get to the utopia situation of low and consistent tax rates between corporates and high income New Zealanders. Such differentials are to be avoided given the complexity that is created through maintaining those boundaries.

What about complexity, well you try and work out the Working for Families tax calculations – put it this way, for those that file income tax returns look at question 34 that asks whether they would like the IRD to calculate the actual amount of tax payable – go no further and take up the offer and move to question 35. Will what National propose be much better – the devil is in the detail but it couldn’t be any worse. The mind boggles how the average kiwi will be able to work out their effective tax rate under Working for Families over the upcoming years with threshold changes and as dependant children come in and out of their lives.

Can we afford it, well wait for it, the left will assert no and the right will assert yes. One thing is clear, cries of fiscal responsibility and inflationary spirals are likely to fall on deaf ears given the spend up articulated in recent times by the incumbents. Hard to see that this war chant can be credibly made when both parties are spending up large. The question is whose spend do you like?

Possibly the great irony of the 1230 announcement is that it could have been made by either party and had it been made by Labour as part of their May budget the election would all of been over and a third term guaranteed – something to reflect on.

Upcoming polls will be interesting but the only one that counts is that on 17 September – today’s announcement has probably sent the worm off to get oxygen as its cruising at altitude.

To the left we have the incumbents showing largess to families, students and an extension of the welfare state, to the right the challenger courting all and sundry with widespread tax relief across the political spectrum, premised upon incentives to get ahead. Under the left a family earning $100,000 with 3 children would still be on welfare – seems a strange thing to encourage, on the right that same family would just hit the highest tax rate - 39%.

What was released today could win the election for one and loose it for the other - the forces of evil do not seem to have had a hand in setting today’s tax agenda – what a surprise as to occupy the treasury benches one needs to capture the minds and spirit of middle New Zealand – a void stated to be left by Labour and now sought to be filled by National.

In terms of raw cash, ignoring the impact targeted measures around families what’s the rates on offer as taxpayers seek to move up the tax spectrum:

Annual income from working Labour National Savings

20,000 3,630 3,300 330

30,000 5,730 5,200 530

40,000 8,070 7,100 970

50,000 11,370 9,000 2,370

60,000 14,670 12,300 2,370

70,000 18,570 15,600 2,970

80,000 22,470 18,900 3,570

90,000 26,370 22,200 4,170

100,000 30,270 25,500 4,770

But is the above fair? In dollar terms those on the highest incomes get the biggest tax relief. Possibly the way to look at it succinctly is cutting off ones nose to spite ones face – more eloquently doing the rounds on the net regard to be had to the following:

Suppose that every night, ten men go out for dinner. The bill for all ten comes to $100. They decide to pay their bill the way we pay our taxes, and it goes like this:

- The first four men (the poorest) paid nothing

- The fifth paid $1

- The sixth $3

- The seventh $7

- The eighth $12

- The ninth $18

- The tenth man (the richest) paid $59

All 10 are quite happy with the arrangement, until one day, the restaurant owner says: "Since you are all such good customers, I'm going to reduce the cost of your daily meal by $20."

So now their dinner for ten only costs $80. The group still decides to pay their bill the way we pay our taxes. The first four men are unaffected. They will still eat for free.

But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get his "fair share"?

They realise that $20 divided by six is $3.33. But if they subtract that from everybody's share, then the fifth and sixth men would each end up being paid to eat. The restaurateur suggests reducing each man's bill by roughly the same percentage, thus:

- The fifth man pays nothing (like the first four)instead of $1 (100%saving)

- The sixth pays $2 instead of $3 (33% saving)

- The seventh pays $5 instead of $7 (28% saving)

- The eighth pays $9 instead of $12 (25% saving)

- The ninth pays $14 instead of $18 (22% saving)

- The tenth pays $49 instead of $59 (16% saving)

Each of the six are better off, and the first four continue to eat for free, as now does the fifth - but outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man "but he got $10!"

"That's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more than me!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison.

"We didn't get anything at all. The system exploits the poor!"

The nine men then surrounded the tenth and beat him up.

The next night the tenth man didn't show up for dinner. The nine sat down and ate without him, but when they came to pay the bill, they discovered that they didn't have enough money between all of them to meet even half of the bill!

That is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants elsewhere.


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