National’s Tax Policy:Individuals Win, Businesses Lose
The National Party’s eagerly awaited tax policy should not disappoint the average voter given the current economic climate, according to Deloitte’s managing tax partner Thomas Pippos.
If National is successful on 8 November, then tax relief will still be forthcoming from 1 April 2009 to alleviate the financial pressures many are facing in these uncertain economic times. This will come on top of the tax relief that came in on 1 October.
Time will tell whether what has been announced is palatable to voters in the sense of affordability, however in a world where cash is currently king, voters are justifiably just as interested in the slice of the pie they will be getting come 1 April 2009.
National’s package has two key elements – personal tax rate changes and consequential changes to KiwiSaver and R&D legislation in order to fund them.
From the personal perspective, almost all voters will get something from the package with changes made to personal income tax rates and thresholds, and an Independent Earner Rebate being introduced. The rebate of $10 per week from 1 April 2009 and $15 per week from 1 April 2010 will apply to people earning $24,000 a year or above who do not receive a benefit, Working for Families or New Zealand Superannuation. This rebate begins abating at $44,000.
To pay for the tax cuts the following changes have been proposed:
Scrapping the R&D tax credit regime for businesses.
Eliminating the tax credit for employer contributions to KiwiSaver (this reduction in benefit for employers will be at least partially offset by a reduction in the compulsory employer contributions from 4% to 2%).
National’s proposals to move rates and thresholds will result in the average New Zealander earning $46,000 a year, banking an extra $13.84 a week from 1 April 2009, on top of the $16.54 they received from 1 October 2009. If that person is also eligible for the Independent Earner rebate, they will receive a little extra - $18.85 a week from 1 April 2009. This will rise to a total tax saving of $46.54 by 1 April 2011.
From 1 April 2009 a taxpayer earning $80,000 will benefit to the tune of $20.38 per week or $1,060 each year from National’s package. When Labour’s 1 October cuts are added to this, the total savings are $48.46 per week from 1 April 2009, rising to $61.92 to 1 April 2011.
It is particularly pleasing to see a decrease in the top tax rate, from 39% to 38% from 1 April 2009 and then again to 37% from 1 April 2010. While the threshold increases under Labour to $80,000 by 2011, National’s decision to keep the top threshold at $70,000 is understandable given the current economic climate.
A comparison of Labour’s and National’s tax policy in terms of rates and thresholds is set out below. The big winners under National are medium income earners and those on very high salaries. The losers will be those on lower incomes who would have been paying only 12.5% up to $20,000 under Labour – under National the 12.5% threshold will remain at the current $14,000.
1 April 2009
Threshold Rate Threshold Rate
0-14,000 12.5% 0-14,000 12.5%
14,001-40,000 21% 14,001-48,000 21%
40,001-70,000 33% 48,000-70,000 33%
70,001+ 39% 70,001 + 38%
1 April 2010
Threshold Rate Threshold Rate
0-17,500 12.5% 0-14,000 12.5%
17,501 - 40,000 21% 14,001-50,000 21%
40,001-75,000 33% 50,001-70,000 33%
75,000 + 39% 70,001 + 37%
1 April 2011
Threshold Rate Threshold Rate
0-20,000 12.5% 0-14,000 12.5%
20,000-42,500 21% 14,001-50,000 20%
42,501-80,000 33% 50,001-70,000 33%
80,000 + 39% 70,001 + 37%
The table below sets out the tax savings per week going forward under Labour, as compared to National (note the table below includes savings from National’s Independent Earner Rebate). Overall, by 2011 only those earning under $24,000 will be worse off under National, as they do not qualify for the Independent Earner Rebate.
Income 1 April 2009 per week tax relief 1 April
2010 per week tax relief 1 April 2011 per week tax
Labour National Labour National Labour National Labour National
$20,000 $0 $0 $5.72 $0 $4.09 $0 $9.81 $0
$30,000 $0 $10.00 $5.72 $5.00 $4.09 $3.08 $9.81 $18.01
$40,000 $0 $10.00 $5.72 $5.00 $4.09 $5.00 $9.81 $20.00
$50,000 $0 $18.46 $5.72 $4.62 $9.86 $6.92 $15.58 $30.00
$60,000 $0 $18.46 $5.72 $4.62 $9.86 $6.92 $15.58 $30.00
$70,000 $0 $18.46 $5.72 $4.62 $9.86 $6.92 $15.58 $30.00
$80,000 $0 $20.38 $11.49 $6.54 $15.62 $6.92 $27.11 $33.84
$100,000 $0 $24.23 $11.49 $10.38 $15.62 $6.92 $27.11 $41.53
Again, it is those earning between $40,000 and $70,000 or high income earners that will benefit most under National.
Interestingly, a large tax cuts package did not pay off for National at the last election. Whether this was because of other factors, or because large tax cuts did not appeal to voters at the time, is an interesting question. Regardless of the answer, National has slashed their tax cuts package back as compared to 2005, with the current state of the Government books being blamed for this.
If National had won the election in 2005 then the tax rate for income between $12,500 and $50,000 would have been 19%. Income between $50,000 and $100,000 would have been taxed at 33%.
Nevertheless, the crux of National’s policies in both elections has been quite simply to provide a lower tax burden and restore incentives for taxpayers to get ahead from their own effort. This package is intended as a signal to hard-working New Zealanders that a National Government will trust them to keep more of their own income.
One of the disappointing aspects of National’s policy is that teachers, the police and hospital workers will still, as a rule, be subject to the top tax rate – albeit this rate is decreasing to 37% by 2010.
From a personal tax perspective there are few who will be worse off under the tax policies released today. Not even the public service should have concern over the safety of their jobs given the scaling back of National’s tax cuts and their promise to cap the growth of the public service rather than slash the numbers of bureaucrats.
It is encouraging to see National has outlined a plan extending to 2011 and beyond. A medium term goal has been given “to deliver a three-tier tax system with the highest rate no more than 33 per cent on income over $50,000 a year.” This is positive stuff.
The question everyone will be asking is - can we afford it? True to the traditions of politics, the left will assert “no” and the right will assert “yes”. One thing is clear, cries from the left of fiscal responsibility and inflationary spirals are likely to fall on deaf ears given the pain people are starting to feel in their pockets. The fact remains that the Labour government has overtaxed and spent massively in the recent economic good times, and are now their term appears to be up, they are telling New Zealanders that National cannot be trusted to use sound economic management.
One of the difficulties with tax policies is the inherent difficulty in explaining tax to the masses. It is now up to each of the parties to ensure voters understand what is in it for them under each party’s policies.
National has signaled it will pay for the cuts by making changes to KiwiSaver and abolishing the research and development tax credit. These changes will in fact result in National’s package being $283 million cheaper than Labour’s. However, it is likely these changes will be met with some negativity.
From a business standpoint, the announcement around the scrapping of the R&D tax credit regime comes as a major disappointment, especially given the regime is only in its infancy. Given these regimes are common internationally and have been proven to assist in stimulating private sector R&D, the proposed scrapping of the regime is a blow, particularly to businesses who have invested heavily preparing for the regime.
Given the extensive policy debate prior to the introduction of the R&D tax credit regime under the Generic Tax Policy Process it is disappointing that a National Government would seek to jettison the regime with such ease. But, these things happen in an election year and given the testing economic conditions, sometimes difficult decisions need to be made. Time will tell whether the R&D tax credit regime can survive, and if National are unable to govern alone it may receive a reprieve from the chopping block.
Business will also be disappointed with National’s decision to cancel the KiwiSaver employer tax credit. Similarly some individuals will complain about National’s decision to reduce compulsory minimum employer KiwiSaver contributions to 2% of gross salary.
Realistically however, National had to find the money for their tax cuts somewhere given their promise not to borrow. The decision to reduce the minimum employee contribution from 4% to 2% will be positive for many people in tight economic circumstances who cannot afford to save 4% of their gross salary.
Further, while the employer tax credit will go by the wayside under National, employers will benefit from the fact that their minimum contribution rate will also drop to 2%. This is a lower contribution rate than the 4% rate they face under Labour’s proposals. Come 8 November, voters will have the chance the judge whether this course of action is the appropriate one.