Keith Rankin Analysis – Income Tax and Common-Sense: the Aotearoa New Zealand case

Analysis by Keith Rankin.

Last week we heard the Labour Party leader, Prime Minister Chris Hipkins, practically rule out changes to the marginal income tax rates or the associated income thresholds. In particular, he indicated that a Hipkins-led government would not proceed with proposals to introduce a tax-free income bracket. And he ruled out new taxes on capital gains or wealth. (Refer Hipkins rules out capital gains tax, wealth tax if Labour re-elected RNZ 12 July 2023.)

Subsequently there was much criticism from the political left, who want ‘redistribution’. The redistributive proposal that was being investigated by Treasury included a new tax-band of zero percent on the first $10,000 of a person’s gross annual earnings. Such a tax cut would benefit all earners – including millionaires – so there would have needed to be a new wealth tax to provide the ‘redistributive’ and ‘affordable’ elements. (Treasury, apparently, did not consider a compensatory change to at least one of the higher tax rates to offset the new bottom rate.)

Important (though unstated) context behind the prime minister’s call is that the concept of ‘redistribution’ is anathema to the majority of politically active Aotearoans, and creates bigger income traps for those who would be touted as the main beneficiaries of redistribution.

Table 1 below summarises the present simple income tax scale, for various amounts of annual gross earnings. Table 2 adds a $10,000 tax-free income zone. (Note that ‘tax on last dollar’ is also known as the marginal tax rate. For example, each dollar earned above $48,000 and below $70,000 is taxed at 30% which may also be called ’30 cents in the dollar’.)

Tables 3 and 4 includes the zero percent bottom rate for the first $10,000 of annual gross income (as in Table 2), but with compensatory increases in income taxes on higher incomes. They show ‘tax cuts’ as change in ‘tax due’ compared to the 2023 amounts shown in Table 1.

Table 3 removes the 30% marginal tax rate, and raises the 33% rate to 33.5%. We see that, in this case, people grossing over $126,000 per year would pay slightly more tax than in 2023. The maximum tax cut – $1,050, which is just over $20 per week – occurs at annual incomes between $10,000 and $48,000; essentially for parttime and fulltime minimum wage workers.

Table 4 retains the 30% and 33% marginal tax rates, but lowers the threshold for the 39% rate from $180,000 to $100,000. In this case, people grossing over $117,500 per year would pay more tax than in 2023. The maximum tax cut occurs at annual incomes between $10,000 and $100,000.

Table 3 and Table 4 show affordable options which could be introduced without either introducing a wealth tax or raising the top tax rate.

Unconditional Tax Credit (UTC) options

There is another simple common-sense way of addressing the need to ease the burden only on lower income recipients, by creating an annual unconditional tax credit (UTC). This is how it works.

I present three simple versions (Tables 5 to 7), which blend with the present (Table 1) income tax scale, followed (Table 8) by a fourth version which is a universal basic income (UBI).

In these options, nobody is worse-off in terms of income tax, with the ‘tax cuts’ only falling on lower income earners and disproportionately on the lowest income earners. Note, with these tables, that a negative tax amount is fiscally equivalent to an unconditional benefit. (Here, I put ‘tax due’ and ‘tax cuts’ in quotes in the table, because if we regard the UTC as a ‘benefit’, then this becomes a combination of a new benefit outweighing a small increase in income tax. Alternatively, the UTC can be simply categorised as a negative tax.)

Note that where persons are receiving a mainline benefit – job-seeker, assisted-living, superannuation, student allowance – the UTC should be regarded as the first part of that benefit. This means that ‘beneficiaries’ keep the UTC component of their benefits when they come off those benefits. At present, in 2023, all beneficiaries may gain some wages from parttime employment without losing any of their mainline benefit. (This is true to a much greater extent for those whose mainline benefit is ‘superannuation’, which is not clawed back when private earnings are too high. For those with mainline benefits, their parttime wages are presently taxed at 17.5%.)

We should also note that the UTC should be understood as an adult benefit. (I favour defining ‘adult’ for tax purposes as being the same age as the definition used for electoral purposes. Family Tax Credits – aka ‘Working for Families’ – would be payable to parents on behalf of people classed as ‘minors’ for electoral purposes.) A person qualified to receive the UTC may be called an ‘economic citizen’.

The ‘minimal UTC’ option in Table 5 means that an adult with zero income does not pay net income tax until their income reaches $5,600. The unconditional tax credit is ‘clawed back’ when the ‘tax on last dollar’ increases, that is for incomes over $48,000. The UTC is fully clawed back at an annual income of $55,840. For incomes between $5,600 and $55,840, the UTC exactly offsets higher taxes. After the clawback, the ‘tax due’ in the table is calculated in the same way as in Tables 1 to 4. Compared to 2023, people earning less than $14,000 per year are (slightly) better off and people earning $14,000 or more are as well-off (or as poorly-off as in 2023, for ‘glass-half-empty people!).

The maximum UTC benefit would be just under $20 per week, and would raise the incomes of non-earners in non-beneficiary households. While the UTC benefit amount in the Table 5 case is trivial, nevertheless this is better than the 2023 status quo in that it provides a small new benefit to a few otherwise unrecognised people; and it is unquestionably affordable. Most importantly, any level of UTC establishes a principle; that every economic citizen of a society has a right to some form of citizen’s benefit.

The Table 6 option means that a person does not pay net income tax until their income reaches $23,267. This is close to 20 hours employment per week at the 2023 New Zealand minimum wage. Incomes would be the same as in 2023 for people earning over $48,000. (The unconditional tax credit is fully clawed back at an annual income of $220,889.)

The Table 7 option means that a person does not pay net income tax until their income reaches $27,515. This is close to 23.3 hours employment per week at the 2023 New Zealand minimum wage. Incomes would be the same as in 2023 for people earning over $70,000. (Note that $70,000 is close to the average fulltime wage or salary in Aotearoa New Zealand in 2023. The UTC is fully clawed back at an annual income of $331,333.)

The principal beneficiaries of the UTC are people in some kind of employment – or whose households depend on income from employment (including self-employment) –who earn too much to qualify for an unabated mainline benefit. (We should note, however, that the Table 6 and Table 7 options would slightly increase taxes on most people who are receiving wages and unabated mainline benefits. In the event that Table 6 or Table 7 were implemented in 2024, this problem could be ameliorated by adopting the Table 5 rates as a special option for working beneficiaries.)

If we take the dynamic benefits – increased opportunities and incentives for beneficiaries to undertake substantial parttime employment, plus decreased administration arising from fewer people seeking mainline benefits – then Table 7 becomes an affordable option; an option which facilitates a flexible work environment and facilitates contract self-employment (as in the creative sector). This UTC option removes the existing dangerous chasm between underclass beneficiaries (who find themselves trapped close to the poverty-line) and the unionised labour force.

Table 7 gives little extra to persons currently earning over $48,000 – the minimum wage for a 40-hour-a-week worker; or the living wage for a 35-hour-a-week worker. But it cushions them substantially if circumstances – including a recession – reduce their hours per week of paid work. A UTC of $9,080 protects them from the chasm of poverty and homelessness that beckons if or when the present “technical” recession begins to bite.

Universal Basic Income option

If we extend the unconditional tax credit by taxing all income at 39%, then Table 8 applies.

$19,880 represents a generous UBI, equivalent to $382.31 weekly. We note that people already earning $180,000 or more would have no change to their after-tax incomes; the person on $180,000 would pay income tax (net of their UBI) at 28% of their gross earnings, same as under the 2023 tax scale in Table 1. Nobody is worse off. With its associated ‘flat-rate’ income tax, the UBI is not subject to any clawback; there are no tax-threshold incomes.

The UBI would almost replace all mainline benefits; for example, all mainline benefits which amount to less than $382.31 per week. The first $19,880 of all mainline benefits would now become unconditional publicly-sourced income, with only grants over and above this being regarded as income transfers. (These higher grants would apply to single superannuitants, some single-parent households – depending on the dynamics of Child Support payments from absent parents, and the contributions of step-parents – and some persons with disabilities.)

In addition, and again on grounds of affordability, Working for Families tax credits could be discontinued. The central principle here would be, like the oxygen masks on airplanes, that children would be helped through the unconditional support of their parents.

There would be substantial reductions in administrative costs with respect to the micro-management (and policy management) of beneficiaries, tertiary students, and working families. Government departments such as MSD and IRD could substantially reduce their payrolls. Many people directly or indirectly employed by the government, some presently on generous salaries, could pivot to productive self-employment, in many cases using their savings as capital.

In addition to bureaucratic savings, there would be less private-sector work to do in the areas of tax avoidance, investment planning, and corporate law. The re-incentivisation created by the removal of tax brackets would enable some in the highly-paid workforce to redeploy their undoubted talents into activities which create more societal added-value. As David Graeber (author of Bullshit Jobs) might have said, ‘more productivity, less bullshit’.

As mooted Universal Basic Incomes go, the one shown in Table 8 is on the generous side. But it meshes neatly with New Zealand’s existing taxation infrastructure. It enables a substantial reduction in the size and scope of government in New Zealand. And it progresses democracy. A fullscale democracy must confer on all its taxpayer citizens a return on the public equity which has arisen as a result of past economic growth.

Conclusion

A universal basic income as in Table 8 will be a step too far for Aotearoa New Zealand in 2024 or 2025. But a unconditional tax credit as in Table 7 also meshes neatly with New Zealand’s existing taxation infrastructure, and is not a step too far. For most of New Zealand’s labour force and all of New Zealand’s elites, Table 7 would mean no change, ‘business as usual’. Rather, it attends to the underclass rumblings below.

The agitation for a comprehensive wealth tax will not go away. Those who stand to be affected by a wealth tax or a capital gains tax should be eager to embrace Table 7 as a pre-emptive alternative means to address poverty and income traps.

If the UTC option is seen – by progressives and others – as a progressive step too far, there are always Tables 3 and 4 to consider. Table 3 in particular is clearly better than the 2023 status quo. And is unquestionably affordable.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.