Brash Speech: Getting ahead with National
Don Brash MP National Party Leader
22 August 2005
Getting ahead with National
Address at the launch of National's fair tax & family assistance policy, Sky City Convention Centre, Auckland.
Early last year, I announced that my priorities in the area of tax policy were to take the pressure off low to middle income families, to provide better incentives for people to get ahead from their own efforts, and to reduce the tax rate on business so that we could get the sort of investment in this country that will lift the incomes of everybody.
Our package of phased tax cuts over the first term of the next National Government, and our family tax package, will do just that.
Today I will announce a tax package that gives hard-working New Zealanders a bigger share of a growing economy.
This tax package substantially reduces the tax rate faced by ordinary New Zealanders who work a little harder, or do some extra overtime.
It is a package designed to allow people to get ahead from their own efforts.
It also utilises the family-related income support of the Working for Families (WFF) package for middle-income households, but does so as an interim measure prior to the introduction of a family tax structure. Middle income families should not have to pay excessive tax, and then have to apply to various government agencies to get some of it back.
National trusts New Zealanders to make good decisions for themselves, their families and their businesses.
The Labour Government's last Budget has crystallised one important choice for working people.
Under Labour, there will be no significant reduction in personal taxation; what Labour has grudgingly offered is a derisory inflation adjustment of tax brackets in 2008 - a cruel joke on working people.
The massive extension of income support to families announced last week is an insult to all working people without dependent children. What about young people trying to save to establish themselves financially before establishing a family? What about single people without children? What about those whose children have grown up and who are now saving for retirement?
All working New Zealanders deserve tax relief after six years of the government taking most of the benefits of a stronger economy.
Superannuitants should also share - as they will from this package I am announcing today - in the benefits of lower taxes.
Our objectives with the package of tax relief I am announcing today are these:
* First, to give working New Zealanders the chance and the incentive to get ahead in life from their own efforts, by reducing the tax rate that most people face when they decide to work some more overtime, take on more responsibility, or take on a second job to get ahead.
* Second, to give middle income New Zealand families relief from the tax burden they face, instead of being forever the source of income support for others.
* Third, to keep New Zealand competitive with Australia by reducing the company tax rate to ensure that businesses invest and grow in New Zealand.
The key ingredients of our tax package are a substantial expansion of the tax rate thresholds, out to $50,000 and $100,000 of income, and a drop in the lower effective rate from 21% to 19%.
Under a National Government, by April 2007 we will have a very simple tax structure.
* For income up to $12,500, the tax rate will be 15%.
* For income between $12,500 and $50,000, the tax rate will be 19%.
* The default withholding tax rate for secondary employment will also be 19%.
* Income between $50,000 and $100,000 will be taxed at 33%.
* Income above $100,000 will continue to be taxed at 39%.
* The lower statutory rate of withholding tax applied to interest and other investment income will be reduced from 19.5% to 18%.
* The threshold for abatement of Working for Families (WFF) payments will be $30,000 from April 2006 and, to keep the effective tax rate on extra income low, the abatement rate will be 20%.
These personal tax reductions will be phased in over eighteen months, in April 2006 and April 2007.
They will give very large reductions in the tax rate on extra work and income faced by around half a million working New Zealanders, and a significant income boost for most working people.
In addition, we will not introduce Labour's planned carbon tax. That will save the average household at least $200 per year from 2007. Indeed, independent analysis by PricewaterhouseCoopers indicates a more likely cost of Labour's carbon tax of $900 per household each year.
The company tax rate will be reduced to 30% no later than April 2008, and earlier if fiscal circumstances permit.
These moves will bring average personal tax rates in New Zealand down well below those in Australia, and give a company tax rate that matches the Australian rate.
Under this tax structure, a person on the average wage can work harder, do some overtime, or take secondary employment, and they will from next year keep more than $4 in every $5 they earn.
The tax rate on extra work at the average wage will drop substantially - from 33% to 19%.
That is what I mean by letting working people get ahead from their own efforts.
Many people who work at second jobs to get ahead financially end up getting taxed at a higher rate than they should. The default rate of withholding tax to be used by employers on secondary income, unless otherwise advised by the employee, will be 19%.
Pushing the threshold for the 19% rate out to $50,000 will dramatically change the tax rate on extra work for around 300,000 working New Zealanders.
The 39% top personal income tax rate will over 18 months be shifted out to $100,000. That will lower the marginal rate from 39% to 33% for almost another 200,000 taxpayers.
That top 39% rate is still too high, and still cuts in at too low a threshold. But further changes will have to wait. Our priority in the first term of government is to reduce tax rates on low and middle income New Zealanders to give people better incentives and ability to get ahead in life.
I want now to briefly touch on National's approach to the WFF package.
There is, within the complex structure of WFF, a rough and ready allowance for a parent staying at home to look after young children, and for the number of mouths the household income has to support. For middle income New Zealanders, however, this is something which should be addressed through a system of family taxation, not through a system of application to various government agencies.
It is not my objective in life to have middle income New Zealand having to apply to government agencies to get the relief from taxation they should never have had inflicted on them. The next National Government will fix that.
Many working families do not get the tax relief they are entitled to because they deeply resent being placed in the role of beneficiary and supplicant to a government agency. And they are right to feel that way.
We have worked hard on this issue over the past year, and have come to the conclusion that the whole structure of WFF is fundamentally flawed, and that it should be replaced by a family tax structure.
Our retention of the WFF package to ease the pressures on middle income families is therefore an interim measure.
Work will start immediately we assume office on replacing WFF with a system of family taxation. Nobody will be worse off from this change - we are comfortable with the level of support. But the method of delivery must change.
Those receiving more in family support than they pay in tax will of course continue to require direct transfers, but that is no excuse for making middle New Zealand go through the charade of paying tax then applying for it back as a WFF benefit.
During the interim period while the family tax is being developed, a 20% abatement rate will be applied on top of our 19% tax rate out to $50,000. This will mean that even with income support abating, lower income earners will face an effective marginal tax rate no higher than the top rate of personal income tax of 39% (19% plus 20%).
By contrast, under Labour's ad-hoc adjustments layered on top of an unchanged tax structure, those around the average wage and up to $60,000 of income will face a 53% effective marginal tax rate as their income support abates. Those earning over $60,000 will face a 59% tax rate.
Once again, Labour has undermined the incentive for working people to get ahead in life from their own efforts.
We believe that the combination of the extended threshold and the lower abatement rate on WFF payments, together with the underlying tax reductions, is a sufficient level of income support for families. National will therefore not introduce the scheduled extra $10 per child payment in 2007. Instead of waiting until 2007, working families will receive a tax cut in April 2006, and most will be better off than under Labour's package.
Let me give you a few examples of what our new tax structure achieves.
A single person earning $38,000 is scheduled under Labour to receive a 67-cent a week tax cut in 2008. That is all that is being offered to a person earning a little below the average wage, an amount which would be overwhelmed by the extra costs associated with the introduction of Labour's carbon tax alone.
In contrast, our tax package will provide a $630 a year increase from April next year, rising to $690 a year from April 2007.
Somebody earning $50,000 a year will get an annual increase of $1470 from April next year, rising to $2370 from April 2007.
In both cases, the benefit of not incurring the extra costs which would be imposed by Labour's proposed carbon tax means the advantage of National's tax package would be even greater than these numbers suggest.
Now consider a very common two-income family.
Two income families are often hit particularly hard by the WFF package, as the benefits abate on household income. With two incomes, even if they are individually around the average wage, household income is quite commonly in the range where support has been heavily reduced as the abatement rates cut in. Our lower abatement rate will reduce the effect to some extent, but lower taxes are more important for such two income families.
Consider a two-income family, with two young children, with a household income of $80,000 arising from two $40,000 incomes.
With National's tax cuts, this family will be $1512 better off in the year starting April 2006 than they would be with Labour's package, and $592 better off in the year starting April 2007.
And if this family has pre-school children, then National's policy of tax deductibility of pre-school childcare costs will add significantly to their financial position.
For example, if the family faced childcare expenses of $10,000 for two pre-school children, they could claim a refund of $3300. Thus a hard-working couple on modest incomes would, with the maximum childcare deductibility, be $4812 a year better off under National from April 2006, and $3892 a year better off from April 2007. And again that is without taking any account of the benefit from National's intention to scrap Labour's carbon tax.
National's tax package, together with the deductibility of childcare costs for pre-school children, will greatly relieve the pressure on working parents.
Just as importantly, it reduces the penalty on those who choose to work harder or longer to get ahead: in many cases, the effective tax on extra work would be 39% after taking abatement into account at 20%, not the 53% under Labour's package.
Superannuitants will also benefit from this package, as the net superannuation payment is related to the after-tax average wage.
The reduction in tax on the average wage will therefore flow through into superannuation payments.
Under the normal process of adjusting Superannuation payments, the tax cut effect would be delayed a year, but I am determined that both working and retired New Zealanders get an immediate benefit from this package.
Accordingly, we will provide for a one-off adjustment to the notional tax rate on the December 2005 average wage, so that the impact of lower taxes will apply to superannuitants from April next year, along with all other taxpayers. Thereafter the normal adjustment criteria will apply.
We anticipate that the annual net payment for a married couple receiving New Zealand Superannuation will increase by about $320 in April next year, rising by inflation to around $410 in April 2007, and then a further lagged increase from the tax cuts to around $560 from April 2008.
Superannuitants will of course also benefit from National's intention to scrap the carbon tax, and by our decision to retain Labour's proposed rates remission policy.
Finally, for people with student loans, the tax cuts, together with deductibility of interest on those loans, will have a large impact on their ability to repay loans quickly.
Most students do not amass the huge loans often quoted in the media - most have loans between $15,000 and $20,000 on completion of a degree. Most will be earning higher than average incomes over their working lives and will benefit significantly from lower taxes. Most will be significantly better off with a mix of interest deductibility and lower taxes. Most will be able to repay their loans more rapidly under National's lower tax policy than with Labour's interest write-off.
And a lower tax structure over your working life will continue to give a large benefit even after a loan is repaid, and that advantage will grow as the loan balance and interest payments decline.
Moreover, with National's tax package those with loans get extra dollars in the hand. They can make their own decision about whether to pay down their loans more quickly.
Under Labour's scheme, there is no additional cash in the hand - just high taxes and the 10% compulsory repayment on top of them.
National's student loan and childcare deductibility packages are fair and principled.
Our tax package gives a lower tax burden and restores the incentive to get ahead from your own efforts.
And it signals to hard-working New Zealanders that they too can share in the benefits of a growing economy.
This is a substantial tax and family package, rising to around $3.9 billion in revenue foregone by the third year.
We have prepared our costings on the basis of the Budget revenue forecasts but, as revealed in the Pre-Election Economic and Fiscal Update last week, tax revenues are now expected to be $1 billion higher in the next financial year.
There is no doubt whatsoever that this package is affordable.
It is balanced, responsible, and fair to all taxpayers.
And I have no doubt that it will end up costing less than indicated in our fiscal announcement last week. Lower marginal tax rates give people more powerful incentives to work and get ahead.
And as they do that the economy grows faster, personal incomes grow faster, and thus revenues will rise faster.
It is all about getting ahead.
I am determined to let working people get ahead from their own efforts.
And that is what this package will do.