Phil Rennie: Taxes increase by stealth

Lotto's Powerball is up to $16 million, a pretty tidy sum, but it pales in comparison with how the taxman has hit the jackpot in recent years.

It's become a predictable cycle: every few months Treasury announces they have underestimated the actual amount of tax collected, and that the government's coffers are much healthier than expected. Just as predictably, the government says "sorry, we still can't afford to give tax cuts".

Over the course of six years, the amount of extra tax the government has confiscated is staggering.

We now pay 50 per cent more tax than we did in 2000, well ahead of all predictions. The government has been laughing all the way to the bank as a result, with the budget surplus approaching $10 billion.

With the cost of living rising by 3 per cent a year, New Zealanders have the right to ask why the government is doing so well. .

Is all this extra revenue from higher taxes? Not really. The major rise was in 2000 with the top rate of income tax moving to 39 per cent for income over $60,000, and there have been regular increases in petrol, tobacco and alcohol excise. But the biggest single reason why the government is so well-off is because the economy has been growing.

A strong economy has meant more people in work, which means fewer people on benefits and more people paying tax. It also means higher salaries, and more GST and corporate tax collected.

It also means higher wages, and the government has taken advantage of this "bracket creep". This occurs when people's incomes increase over time, through promotions, working extra hours or just annual pay increases, yet the tax thresholds stay exactly the same.

In real terms, this means our tax rates subtly increase every year. The last time our rates were adjusted in 1996 the average worker paid a top tax rate of 21 per cent. These days a person on the average wage has a good chunk of their income in the 33 per cent bracket.

The same goes for the top tax rate of 39 per cent. When it was introduced, Labour promised that only the top 5 per cent of taxpayers would be hit by this rate.

But $60,000 is not worth as much as it was in 2000, and now 11 per cent of taxpayers (330,000 people) pay this rate. There is a glaring double standard in that the government adjusts benefits every year to match the increase in the cost of living. Why is it different for taxpayers? By not adjusting the thresholds the government is increasing taxation by stealth with no public acknowledgment or debate.

Even more galling is that some taxes are actually increased every year to follow inflation, such as excise duty on petrol, tobacco and alcohol.

There are lots of good arguments for reducing our tax burden, but one of the first steps the government should take is to automatically index our tax thresholds to inflation. This is what countries like Canada, the United States and Britain do every year.

These subtle increases in tax are a big reason why New Zealand is highly taxed on a world scale. Central and local government now takes around 35 per cent of GDP in taxation, meaning that over a third of the wealth created by New Zealanders is automatically confiscated.

This is a much higher ratio than Australia, the US, most English speaking countries and the dynamic economies in the Asia-Pacific region. Instead our level of taxation is dangerously close to the European average of 39 per cent, where many economies are stagnant and facing serious financial problems.

* Phil Rennie is a Policy Analyst with the Centre for Independent Studies. His paper "Are New Zealanders Paying Too Much Tax?" is available from the link below.