This article was published on 28 February 2006. Some information may be out of date.

Let’s keep that chewing gum money

Please forgive us, Dr Cullen, and don’t take away our chewing gum tax cut!

I know some of us have been scathing about it. As you said recently, “I have noted that people have said they don’t really think it’s worth having. If people say that, then of course they may find their wish has been granted. Be careful what you ask for, or you may get it.”

Given that the government is trying to save money, the chewing gum tax cut seems an easy target. But not all of us are unappreciative of the proposed change. Those who look beyond the short term can see that, in decades to come, it could make a big difference to our taxes.

The tax cut was announced in the Budget last May. Finance Minister Michael Cullen said the personal tax rate thresholds will be raised, starting in April 2008, to take inflation into account.

Currently, we are taxed 15 per cent on the first $9,500 we earn, then 21 per cent up to $38,000, 33 per cent up to $60,000 and 39 per cent on all income above that.

Under the proposed changes, the cutoff points would be raised by 6.12 per cent in 2008 — to $10,081, $40,324 and $63,672.

That would mean $35 a year more in the pocket for someone who earned $10,081, ranging up to $534 a year for anyone who earned more than $63,672. The amounts were so small for many New Zealanders that some wag suggested all they could do with them was buy chewing gum.

But the change doesn’t stop there. Every three years after 2008 the thresholds are scheduled to rise another 6.12 per cent. That’s 2 per cent a year compounded, the midpoint of the Reserve Bank’s inflation target range.

“This means that in future taxpayers will pay more tax only if their incomes rise in real (inflation-adjusted) terms,” Cullen said at Budget time.

Under the current system, whenever your income increases past one of the thresholds you pay a higher tax rate, even if your pay rise is lower than inflation. Before tax, you are going backwards in terms of what you can buy. After tax, it’s worse still.

This is sometimes called bracket creep, tax by stealth, or fiscal drag, and its effect is widespread.

Figures from Inland Revenue show that, in 1996, only 4.7 per cent of taxpayers had taxable income above $60,000. By 2004 — the latest data available — that had almost doubled to 8.7 per cent.

There was also a big jump in the $38,000 to $60,000 group, from 10 per cent to 16 per cent, leaving percentages in the lower brackets to decrease.

The numbers get complicated because there were tax cuts in 1998, and the $60,000 threshhold was introduced in 2000. Still, we can be certain that over those eight years, many New Zealanders paid higher tax even though the purchasing power of their before-tax income had risen only a little, or in some cases had fallen.

Without measures like the chewing gum tax cut, that would continue, slowly but surely making us all worse off. Bracket creep is not fair, and Cullen should be applauded, not derided, for planning to get rid of it.

Footnote: Don’t you just love the way the government sticks rigidly to its percentages, so that we move from easy-to-remember numbers like $38,000 and $60,000 to horrors like $40,324 and $63,672? I suppose we should be lucky they didn’t include cents.

But couldn’t you guys round the numbers at least to the nearest hundred? The amount of difference that would make to anyone’s tax really would be chewing gum money. And we would all be a little saner.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.