Back to the creepy stuff
Well, he did it. Despite my impassioned plea in this column in February last year, Finance Minister Michael Cullen took away our chewing gum tax cut in the recent Budget. And we’re much bigger losers than most people realise.
According to BNZ chief economist Tony Alexander, the Government will save $1.44 billion over the next four years by removing the tax cut. That’s not much less than the $1.6 billion it is giving us through the KiwiSaver tax credits.
What’s more, after five years, “inflation will be pushing more and more people into higher tax brackets, but the government’s contributions to KiwiSaver will not be inflation-adjusted. It will remain at $20 a week.
“The upshot is that the government has increased the personal income tax burden in this year’s Budget,” says Alexander.
The chewing gum tax cut was named because, in the short term, it didn’t amount to much on a weekly basis. Also, it was announced in May 2005 and didn’t take effect until April 2008, which seemed a long way off.
The tax cut was in the form of a rise in the personal tax rate thresholds.
Currently we are effectively 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.
The proposed change would have raised the cutoff points by 6.12 per cent in 2008 — to $10,081, $40,326 and $63,672.
That meant someone who earned $10,081 would pay $35 less tax a year, ranging up to $534 less a year for everyone who earned more than $63,672.
Then, every three years, the thresholds were to rise another 6.12 per cent — which is 2 per cent a year compounded.
Said Cullen in 2005: “This means that in future taxpayers will pay more tax only if their incomes rise in real (inflation-adjusted) terms.”
I liked the idea a lot. It got rid of an insidious little thing called bracket creep, tax by stealth, or fiscal drag. It means that, as your income rises, you find yourself in a higher tax bracket.
Your pay rise might not even keep pace with inflation — meaning you are going backwards in terms of what you can afford to buy. Nevertheless, your taxes go up.
Most people don’t notice bracket creep. But even in these low-inflation times, the effect builds up over a few years.
In 1996, less than 5 per cent of taxpayers had taxable income above $60,000, says Inland Revenue. By next year, that’s expected to be 14 per cent, according to Budget papers. Almost three times as many people will be in the top tax bracket.
In the $38,000 to $60,000 group, the jump is from 10 per cent to about 18 per cent.
That leaves only 68 per cent in the lower brackets next year, well down from 85 per cent in 1996.
The numbers are a bit messy because of tax changes over the period. But the trend is obvious.
And that’s why, early last year, I was concerned when Cullen said, “I have noted that people have said they don’t really think (the tax cut) is worth having. If people say that, then of course they may find their wish has been granted.”
And that’s just what has happened.
I concluded in February 2006, “Bracket creep is not fair, and Cullen should be applauded, not derided, for planning to get rid of it.”
Where does that leave me now? Deriding, not applauding.
No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.
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.