Jordan Williams: Budget is a chance for major tax reset

Jordan Williams

In the next few weeks, Cabinet Ministers will be making decisions on this year's Budget and its tax relief package.

Despite National-led Governments being in power since 2008, the average tax rates paid by New Zealand workers have been increasing thanks to bracket creep - where inflation and average income growth pushes workers into higher marginal tax brackets.

The average income earner pays $483 more tax per year than in 2010, because of inflation alone. If income tax thresholds had been adjusted with average changes in earnings, so the average rate of tax paid stayed the same, they would be paying $1,361 per year (or $26 per week) less in tax.

In assessing proposals for tax relief, compensating for bracket creep should be the starting point. Any 'tax cut' up until that amount, is simply a catch up to what was the status quo in 2010.

Last year John Key told Newstalk ZB that delivering 'meaningful' tax cuts would require the Government to set aside $3 billion. To put that into perspective, since the National Party was elected in 2008, $10.3 billion (or $6,015 per household) has been budgeted as new spending initiatives. Only four percent of that amount ($415 million) has been delivered in tax relief. This is from the centre-right party that, according to Mr Key, "philosophically believe[s] in lower taxes and smaller government".

We had our economist model five options for tax relief with fiscal implications of less than John Key's suggested $3 billion. They form the basis of a report we published earlier in the week. One option is creating a tax-free threshold of $13,000 - giving every Kiwi worker earning over $13,000 a tax cut of $1,295 per year, or $25 in the pocket per week.

Another option targets middle income earners and would reduce taxes for the average worker by more than $35 per week.

Too often the media describes tax cuts as a 'bribe', as if they should be treated as an area of public spending. Sadly, in the political realm public money is for the elite to bestow magnanimously on the people. In reality, tax cuts are nothing more than a commitment from the school bully to take less lunch money. They are not government spending.

While it is moral for the rich to pay more - to cover the social safety net and ensure public services and the good infrastructure which the government is in the best position to provide - it is morally wrong for the government to take even a dollar more than is needed. As taxes increase, more and more transactions that would otherwise result in benefits to both parties are foregone.

This shifting of economic activity from higher to lower value uses costs between $13 to $17 billion. That equates to roughly the amounts spent by government on education ($13.5 billion) and superannuation ($12.9 billion).

As the Taxpayers' Union demonstrates by shining the light on government waste, there is plenty more to do before anyone would accept that every dollar being collected is well spent. Until that happens, the Government should be making every effort possible to reduce the tax burden.

Treasury's 2016 Half Year Economic and Fiscal Update shows economic growth is expected to average around 3 percent over the next five years. Surpluses are projected to rise to $8.5 billion by 2020. In addition, the financial accounts for the seven months to January show the tax take is tracking even higher than expected. Prior to the 2014 election Bill English committed to reduce taxes "when conditions allow it". If the current conditions aren't that, what are?

May's budget is a chance for a major tax reset to set a course for economic prosperity.

Tax cuts incentivise wealth creation and hard work.

They fuel economic aspiration and growth. Bill English should grab the opportunity.

Jordan Williams is the Executive Director of the New Zealand Taxpayers' Union.