$70,000 no longer the benchmark for 'high earning', critics say

Friday, 25 January 2019

While tax brackets stay on hold, what we pay in tax increases every year.

New Zealand's tax brackets don't accurately reflect what counts as 'high earning' in this country, critics say.

Since 2008, the highest personal income tax rate has kicked in on earnings over $70,000 a year.

Compare that to Australia, where the highest tax rate of 45 per cent takes effect on income of $180,000 a year or more.

In 2008, there were 335,000 people paying the top tax rate. By the 2016-2017 tax year, that number had risen to 665,000 people. People earning over $70,000 pay 63 per cent of all income tax.

If you earn more than $70,000 you pay $14,020 a year on the first $70,000 and then 33 per cent of any extra income you receive.

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'I don't think too many people would consider $70,000 to be high-paying,' Kiwibank chief economist Jarrod Kerr said.

'I don't know the appropriate level it should go to but it should be at least six digits, not five.'

The Tax Working Group has acknowledged concerns about 'bracket creep' and the suggestion they should be indexed to inflation but said that would increase compliance costs

Economist Shamubeel Eaqub agreed the $70,000 limit should be higher and said there should be an extra, higher band above that.

Australia had a more practical approach to tax, he said.

'There's a bigger burden on people who earn more, because they have the ability to pay. The argument that no one will want to work in Australia because of the tax rate is obviously not true because we see chief executives from New Zealand go to Australia all the time.'

Treasury estimated that a $1000 change in the top personal income tax threshold would result in $20 million less tax being paid each year.

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John Cantin, a partner at KPMG, said, on the basis of inflation alone, the top tax bracket should now be higher than it was 10 years ago.

If it was assumed inflation had been a compound 10 per cent since the brackets were set, the 'bracket creep' would mean low earners were paying about an extra $150 a year in tax.

His earlier work showed that, assuming wage growth of 2.5 per cent a year, by 2026 the average earner would be in the top tax bracket.

But he said the Tax Working Group could yet propose other changes that could have more effect.

Changing what was taxed and what was not would make a bigger difference to the overall tax take than adjusting rates or tax brackets, he said.

Crowe Howarth tax partner Craig Macalister said there should be a mechanism that triggered a review when inflation reached a certain level.

'If you hold tax brackets in place, every year you increase your tax take as people's incomes creep up with inflation. But the Government knows if it's holding them in place they're getting an increase without telling anyone.'

The Tax Working Group has acknowledged concerns about 'bracket creep' and the suggestion they should be indexed to inflation but said that would increase compliance costs

'The group believes that bracket creep is best dealt with through the periodic review of the rates and thresholds of income tax to ensure they remain appropriate rather than some form of indexation assessment.'

It said it would provide recommendations about the thresholds and rates in its report, which is due to be made public in the coming weeks. It is believed those recommendations centre on a $7999 tax-free threshold or cutting the lowest rate on tax under $14,000 a year to 5.25 per cent.

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