National has been unable to enunciate any sound reasons for the exclusion of persons earning less than $24,000 from access to the IETC.

The problem can be clearly seen by looking at the 2011 tax rates previously legislated for by Labour (Table 2), and the 2011 tax scale with which National will replace Labour's tax rates (Table 3). The critical differences lie in the income bands $14,000 to $20,000, and $42,500 to $50,000. To compensate for Labour's big cut on incomes from $14,000 to $20,000, National is introducing the $780 IETC. The biggest problem is that independent workers earning from $14,000 to $24,000 do not qualify.

Table 2: Marginal Tax

Table 3: Marginal Tax Rates

The problem can easily be fixed. First, it doesn’t arise until 2010, because only National offered tax cuts for 2009.

It turns out that, for all independent workers earning more than $24,000, the IETC combined with the Table 3 scale is identical to the tax scale in Table 4 below. Further, the scales in Table 3 and Table 4 are virtually identical for persons earning less than $14,000 per year. Differences only arise for workers in the $14,000 to $24,000 income band.

Table 4: Alternative Marginal Tax Rates, incorporating Independent Earner Tax Credit

By replacing the unwieldy IETC with the tax scale in Table 4, National could deliver all its promised benefits to persons earning more than $24,000, while still giving something worthwhile to persons with incomes in the $14,000 to $24,000 range. The fiscal cost of doing this will be small (about $100 million [corrected 12/12/08. See Controversy over National's tax cuts: a clarification]), because only persons earning less than $24,000 would be affected. The annual benefits to those people will be, on average, less than $500.

It is particularly important that the Government realises that, as unemployment rises next year, many people currently earning more than $24,000 per year will find themselves with annual incomes below $24,000 in the years to come. It will be cruel to give them an IETC, like giving a person an umbrella, only to take it away when the rain comes, when they most need it.

National can save itself a lot of political embarrassment by replacing its proposed 2011 tax scale (Table 3 less the IETC) with the tax scale represented above in Table 4.

krankin [at] unitec.ac.nz

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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