Analysis by Keith Rankin.
Christopher Luxon and Nicola Willis have a bottom-line policy of delivering “tax relief” to New Zealand’s “squeezed middle”. Their modest policy is to increase the first three income tax thresholds by 11.5%, representing compensation for about two years of inflation-driven tax increases.
(Labour’s policy, by contrast, was to take advantage of CPI inflation which served as a tax increase – through bracket creep – in addition to the cost-of-living increase. Thus, once adjusting for CPI-inflation, National’s policy is a small real increase in income taxes whereas Labour’s policy was a much larger real increase in income tax.)
For some unknown reason, the methods of financing this modest tax relief became so important in the election campaign that vitally important issues such as tertiary education, healthcare and deteriorating international security were barely mentioned. National included a tone-deaf ‘speculate-and-tax’ housing policy. It now looks that this proposed housing deal is the sticking point in coalition negotiations; and it’s proving costly for the Prime Minister elect.
There is a simple solution. Make one small adjustment to the tax policy. Lower the top income tax threshold from $180,000 to $162,625.
The ‘Achilles Heel’ – the most tone-deaf part of the Luxon/Willis rhetoric – is that the tax policy is for high income earners, as well as for middle-income earners and for two-earner families with children. While the rhetoric emphasises middle-income earners, the policy is not only middle-income earners. All Luxon and Willis have to do is give a little on the ‘high-earners’ part of their policy.
And it’s so easy. By just making a small downwards-adjustment to the top income-tax threshold, the tax cut can be fully clawed back for all persons earning over $180,000 per year. (There would be no change for persons earning under $162,625 per year.) I can only presume that Mr Luxon is not aware of this. Hence, I would judge him to be slightly innumerate.
This would be a policy of no pain and immense political gain. It would be an adjustment which would address the concerns of both ordinary New Zealanders and the elite bean counters. It would be a political win that could offset the likelihood that he will have to ‘swallow the rat’ on his proposed foreign property speculator tax.
The problem of low-income earners
Part of the problem with National’s policy was that it was oversold, with promises of “upto $250 per fortnight” less income tax. Yet the vast majority of couple households would get less than $40.11 per fortnight. And we need to note that these are ‘nominal’ tax decreases, not ‘real’ increases in spending power. (Though they are real increases in spending capacity relative to what Labour was offerring.)
Part of the overselling was the claim of “up to $100 more per fortnight for an average-income household with no children”. I tried out National’s calculator on a few examples of households without children.
- A minimum-wage household with each person working 35-hour weeks ($82,628 per year total gross income). Calculator says $8.62 per fortnight.
- A household with $140,000 total income, split $70,000 each. Calculator says $61.50 per fortnight, meaning each person gets an extra $15.375 per week.
- Same total household income, but with one earner receiving $100,000 and the other $40,000. Calculator says $44.40 per fortnight, meaning each person gets on average an extra $11.10 per week.
- A household with $160,000 total income, split $80,000 each. Calculator says $80.19 per fortnight, meaning each person gets an extra $20.05 per week.
- A household with $360,000 total income, split $180,000 each. Calculator says $80.19 per fortnight, meaning each person gets an extra $20.05 per week.
- A household with $1,000,000 total income, split $500,000 each. Calculator says $80.19 per fortnight, meaning each person gets an extra $20.05 per week.
I was unable to come up with any case where a couple without children could get anything like $100 per fortnight.
Summary of Policy
The core of National’s tax policy is to give individuals earning more than $78,100 per year a nominal tax decrease of $20.05 per week, and other people on or above the minimum wage a lesser amount. It’s modest tax relief for the squeezed middle, the squeezed top, and the unsqueezed. Very little for the most squeezed, though there are some exceptional situations for which families with children will get more than $40.10 per fortnight per couple.
National could easily limit its income-tax relief program to those earning less than $180,000 per year, while still giving the proposed $20.05 tax cut to people earning $160,000 per year. It would be excellent politics. But is Christopher Luxon numerate enough to make this change which should facilitate the coalition negotiations?
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.
Reference: National will deliver meaningful tax relief, 30 Aug 2023:
Tax calculator: https://www.nationaltaxcalculator.com/2023