POLITICS A Fiddly Business

Six years ago the Labour party promised 95 percent of people would pay no more income tax. Some promise. Labour’s ploy was to reassure the great majority of taxpayers that it would not be an old-fashioned tax-and-spend government.
It kept the promise, more or less. But only briefly. Earnings rose. More and more taxpayers went up through the 39c barrier, just by their earnings keeping pace with inflation. Now, well over 10 percent are in that top bracket.
But the promise was also broken lower down. Within four years average earnings climbed through the $38,000 threshold at which the 33c rate kicks in. So the average earner started paying higher proportion of earnings in tax. This is called bracket creep.
Now average earnings (including overtime) are $40,664. Tax as proportion of that is 20.4 percent. When the average wage was just $38,000 at the end of 2002, tax’s proportion was 19.5 percent.
In other words, the share of income going in tax is full percentage point higher. To recover the lost after-tax income in real terms, the average earner would need another one percent gross income.
No wonder unions have been getting agitated. These are not the “rich”. They are the people that Labour hopes votes for it.
Hence National’s tax cut pitch. Hence ACT’s claim that in offering tax cuts it is the “workers’ party”. And hence United Future’s attempt in 2003 to get Michael Cullen to raise tax thresholds in line with inflation, preferably by indexing them.
After all, number of excise taxes are adjusted (upwards) for inflation and so are pensions and benefits. Why not do the same (downwards) for income tax?
There is an administrative reason: the tax tables would change each year, which would push up compliance costs. And in any case it would not exactly compensate taxpayers, not least because average earnings rise faster than prices.
But Cullen has ruled out point-blank any adjustment. Surely, logic – not to mention justice, still less to mention that unkept 1999 promise – suggests an adjustment every two or three years.
Not if you are Labour. Bracket creep is good for the Exchequer. Without raising tax rates – politically hazardous activity modern governments shun – the total tax take goes up and individual taxpayers hardly notice because they are, after all, getting more in the hand. This has been significant element in Michael Cullen’s large operating surpluses.
Cullen can counter that the public demands more spending on health – and he is delivering. There is also big “infrastructure deficit”, which the public wants plugged. He needs the cash.
And he can argue earners with children are about to get some relief. This month Steve Maharey’s Working for Families programme of tax credits and other assistance for low-middle-income families with at least one earner cuts in.
Around 300,000 families will get something and some get quite lot. So while the raw tax goes up, they get some, all or more than all of it back, depending on what they earn and how many children they have.
Cullen’s taunt to National and ACT is that their blanket rate cuts would not benefit these people nearly so much. That is why National has not yet said it would scrap Working for Families. Too many middling voters would take one look and vote Labour.
Instead, National is more likely to freeze it at the present stage, adjust it somewhat and offer limited tax rate cuts. Cullen has snookered John Key and Co for this election.
Key has some leverage with taxpayers who have no children and so are outside the Working for Families package. But for those with families Key will argue in vain that there will be no incentive for someone now in the low-$40,000s to strive to increase gross income because the tax credits and assistance abate as the gross goes up. Big wage increases won by the unions would deliver the same result.
But sometime in the next few years Key’s line will start to bite. The package is complicated now and will get more so over time. It will require constant fiddling to keep its recipients happy.
Wasn’t the fiddliness an objection to indexing tax thresholds? Which fiddling you prefer depends on your politics. For the moment Cullen has got the inside running. But three years from now? Maybe he is too clever by half.

Colin James is Management’s regular political writer.
Email: [email protected]

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