Cullen ready with a tax sweetener

All wage and salary earners are expected to get the promise of a tax break today when Finance Minister Michael Cullen foreshadows a rise in the income thresholds at which higher tax rates kick in.

The new thresholds will not take effect until at least the next tax year, beginning April 2006.

Raising the thresholds will mean a person can earn more income before being taxed at a higher level.

The new rates are thought to be based on those proposed last year by United Future. It argued that the $9500 limit for the effective 15c rate be raised to $10,750; that the $38,000 threshold for the 33c rate be raised to $43,000; and that the $60,000 threshold for the top rate of 39c go up to $68,000.

The gains are not the same as tax cuts - which would mean a gain on every dollar earned - for which Dr Cullen has little enthusiasm.

Lifting thresholds is different. A person earning $168,000 will gain the same amount from the new top threshold as a person on $68,000: both will see $8000 more of their income fall into a lower tax band.

Dr Cullen will be able to argue that the change is an inflation adjustment.

Wage and salary earners have a higher share of their income eaten away as their incomes move into higher tax brackets - it is called "fiscal drag" or "bracket creep".

The last time a threshold was lifted was in 1996, from $33,000 to $38,000.

If more of United Future's proposals are adopted, the thresholds could even be linked to inflation.

Before it entered Government in 1999, Labour pledged that no more than 5 per cent of earners would pay their promised top tax rate of 39c.

Asked by Act leader Rodney Hide what the threshold would have to be now so no more than 5 per cent of taxpayers pay the 39c rate, Dr Cullen told Parliament it would be have to be around $80,000, at a cost of $275 million a year.

Dr Cullen will also reveal more detail of the plan unveiled last year to encourage workplace savings schemes, and reveal a related scheme to help first-home buyers with a deposit.

In the pocket

Estimates of extra income from possible changes in today's Budget:

* $6 a week for someone earning $40,000 a year

* $13 a week for those on $50,000

* $22 a week for those on $70,000