Keith Rankin: Letter to Labour about Income Tax

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Economist Keith Rankin argues that if Labour is elected as the lead party of Government then it should embark on a brave "twenty-first century income tax" reform package.

Letter to Labour about Income Tax – By Keith Rankin.

As the fog clears, three options emerge for the 2017-2020 government:

·         conservative: National and New Zealand First (English or Peters as PM)

·         Peronista: Jacinda Ardern (as Evita) and Winston Peters (as Peron)

·         progressive: Labour, Green, Māori (Ardern as PM)

Whichever of these we get, I would like to see a government true to its parties’ philosophies, and with good twenty-first century income tax policies.

The progressive option is looking much more probable than at any other time since 1999. Jacinda Ardern can act now to make this outcome both more likely and more authentic.

Understanding the reality of the economic struggle of low- and middle-income households is critical. Among other things, these people need more money, unconditionally. No bureaucracy, no abatements. Unconditional benefits have always been delivered in liberal democracies through the income tax system. These tax benefits, in the past, have taken the form of allowances, exemptions and progressive graduations.

The Present

What can Labour announce this week, to replace the Budget 2017 income tax adjustments? It needs to do something in addition to extending existing bureaucratic benefits. A political party representing ordinary people, with a good ear for their people, would hear that the bureaucracy around the benefit system is even more frustrating than the penury of those benefits.

The following simple remedy will work for Labour in the 2017 election campaign:

·         Remove the 30% income tax bracket by joining it with the 33% bracket.

·         Reduce the rate on the first bracket from 10.5% to zero, and lower the threshold to $9,370.

Why?

This will give ‘tax cuts’ to everyone earning less than $70,000 per year, while leaving all persons earning more than $70,000 at 2017 levels of taxation. More specifically, it would give everyone earning from $14,000 to $48,000 an extra $12.69 per week of unconditional cash, over and above any other benefit increases Labour would like to provide. This would make it a policy – albeit a tentative policy – that acknowledges everyone on struggle street.

Perhaps more importantly, as a guide to future income tax policy, please note the following simple tax formula:

  • weekly after-tax personal income equals 67% of gross earnings, plus $175

This formula is the present reality for every New Zealander earning $70,000 or more per year. The simple tax change suggested above extends that formula to every New Zealander earning $48,000 or more per year, while delivering symbolically important unconditional tax benefits to every New Zealander earning less than $48,000 per year. Further, it does nothing to antagonise anybody. It raises nobody’s income tax, from 2017 levels.

Let’s do this.

The Near Future

By following the same principle, the other middle tax bracket at present (the 17.5% bracket) can also be eliminated (for example in Budget 2019). This would mean having a zero-tax bracket upto incomes of $27,500 and a 33% marginal rate on all income in excess of $27,500. (This would also displace the present Independent Earner Tax Credit.)

As a result, everybody earning above $27,500 would be subject to the simple tax formula above. This would deliver significant unconditional tax benefits to people whose annual incomes are in the $20,000 to $40,000 range; benefits to the precariat, Labour’s new natural constituency.

Just Beyond the Near Future

As productivity increases progressively, the ratio of capital income (income arising from what we own) to labour income (income arising from what we do) must increase. So, say in Budget 2021, raise the tax rate from 33% to 35%, and raise the threshold from $27,500 to $32,000. The simple tax formula, which would apply to all persons earning over $32,000 per year, would become:

·         weekly after-tax personal income equals 65% of gross earnings, plus $215

Further, extend this simple tax formula to all independent people under 25 years of age, displacing youth benefits, student allowances, and student loan living allowances. (Young adults with dependent children or with disabilities would continue to be eligible for indexed Work and Income benefits. Eligibility for accommodation benefits would not change.)

It’s not rocket science. It is the twenty-first century. Let’s do these, one simple step at a time.

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