The $1.7bn 'stealth' tax grab - work out how much 'extra' tax you have been paying?

Workers paid $1.7bn in tax collected through inflation - in part - pushing wages into higher tax brackets. Photo / Michael Craig

Wage and salary earners paid out $1.7 billion in "stealth" tax last year after inflation increases pushed workers and their pay packets into higher tax brackets, according to advice to the Tax Working Group.

Officials have warned the public could see the money as having come through a stealth tax and Government may want to change it as a "value judgment".

They have also said if the Government did change tax rates it would increase transparency and account for inflation but money would need to be found to pay for public services.

The $1.7bn quoted by officials is the equivalent of the budget for our entire police force.

The extra tax was scooped up after the former government left tax brackets largely unchanged during its time in office, with the highest tax bracket fixed to kick in at $70,000.

It means worker like Stephanie Teohaere, 27, pay about $12 a week more in tax - an extra annual cost of around $600 a year.

Teohaere, an account manager, said she would have used the extra money "mainly on living expenses, just to get by".

"Petrol is the main one, because it's gone up - it's sky-rocketed. And food and bills, power has gone up as well."

How much 'extra' tax did you pay?

App users click here to use the tax creep calculator

She believed the highest tax bracket should start at $80,000, rather than the present $70,000.

Since 2008, inflation combined with pay rises has doubled the number of workers paying the full 33 per cent tax rate on earnings over $70,000. Those in the highest tax bracket increased in 10 years from 335,000 people to 665,000 people.

The Tax Working Group, led by Sir Michael Cullen, received a stack of submissions calling for an end to "bracket creep" by linking the tax thresholds with inflation.

Sir Michael Cullen, who has led the Government's Tax Working Group. Photo / Doug Sherring

The working group's report showed only lukewarm enthusiasm for any change, saying occasional deliberate changes would do a similar job as linking the threshold but would still give Government the option to keep the level unchanged.

The group's final report is now with Minister of Finance Grant Robertson.

Robertson said the working group was set up to make sure everyone was paying their fair share and he looked forward to its recommendations.

"We specifically asked for the group to come up with options that are revenue neutral, [for example] that may result in some taxes going down if others are introduced.

"It has to be remembered that any cut in tax revenue means less money to spend on services like health and education.

"At the 2017 election, the public backed parties to form a government who rejected untargeted tax cuts and reinvested the money in support for families."

The issue has been seized on by the National Party, which has pledged to change the system to force a review every three years.

National's finance spokeswoman Amy Adams said the first reset would come after the 2020 election if the party was returned to power.

"It's a lot of money. It shouldn't be (taken) by stealth. It shouldn't be because Government can get away with it.

"The Government takes a bit more tax every year by letting inflation do the work for them."

She said National had been interested in changing the system with former leaders, and Prime Ministers, Bill English and John Key speaking in favour of change prior to National's last time in government.

National's finance spokeswoman Amy Adams. Photo / Mark Mitchell

Instead, they had to deal with the pressures of the Global Financial Crisis and Christchurch earthquake.

A briefing paper by staff from Inland Revenue and Treasury for the Tax Working Group said the issue was a "value judgment" based on whether there were concerns it were a stealth tax.

"This 'bracket creep' has, in part, resulted in more taxpayers moving into higher tax brackets."

The officials said the revenue pulled in by those moving into higher tax brackets, without inflation being taken into account, could be seen as "non-transparent" taxation - a "stealth" tax.

"We consider the case for inflation indexation depends primarily on whether there are concerns that bracket creep is non transparent increase in taxation. Whether this is of sufficient concern is a value judgment."

Advice from Inland Revenue and Treasury officials was inflation-adjusted tax brackets would have seen the top level lift from $70,000 to $76,160.

Similar changes at lower brackets would have seen 10.5 per cent paid on earnings up to $15,232 rather than $14,000, 17.5 per cent on earnings up to $52,223 (rather than $48,000) and 30 per cent up to $76,159 rather than $69,999.

Professor Julie Cassidy says New Zealand workers no longer fill out annual tax returns and have become less engaged with their tax affairs. Photo / Stock

Bracket creep doesn't just hit those on higher incomes, as shown by a NZ Herald-designed calculator loaded with a decade's Inland Revenue and Reserve Bank data.

It shows those earning the average wage would be paid an extra $614 paid in tax over the course of 2018.

Even minimum wage earners get hit on an annual wage of $34,320 with the annual tax obligation shifting from $5,026 to $4,940.

The calculator shows someone earning $76,160 - the amount of money the top tax rate would be if it was linked to inflation - would pay $799 extra tax each year simply because the tax brackets did not move.

Tax Working Group member Bill Rosenberg, who works with the Council of Trade Unions, said successive governments had not dealt with the issue.

The new National Party policy came after "they made use of the method as anybody else did", he said.

"National does have to explain how it is responsible to talk about further tax reduction when they left behind huge deficits in all parts of government they are simply not owning up to."

He said indexing could lead to the loss of revenue at a time when much was needed to bolster and restore core government services.

The prospect of a Capital Gains Tax has stalked the walking group since its formation, as shown by Rod Emmerson's cartoon.

"Government needs to gather in revenue to provide decent services."

The lobby group pushing for less tax and smaller government, the NZ Taxpayers' Union, used its submission to push for a link between tax brackets and inflation.

Spokesman Louis Holbrooke said most workers were unaware how much the "stealth" tax cost them.

"Politicians on both sides have taken it for granted taxpayers won't cotton on. Both parties have benefited from it."

University of Auckland law professor Julie Cassidy, who specialises in tax, said the ability existed for the Government to link tax brackets to inflation.

She said New Zealand workers were less engaged in the taxation system through changes such as no longer filling in annual returns.

Cassidy said even basic understandings of the system - such as when the 33 per cent rate kicked in and what it applied to - were not understood by many workers.