The Herald’s political and specialist reporters examine the big issues facing New Zealand and how the main political parties plan to deal with them. Here, Jenée Tibshraeny and Thomas Coughlan talk tax.
You’re probably sick of hearing it by now, but this is a cost of living election, in which each party is doing its best to persuade voters that they empathise with the plight of families facing the inflation crisis and know how to deal with it. The most recent Ipsos Issues Monitor confirmed inflation and the cost of living as the top issue on voters’ minds - a position it has occupied since February 2022.
Every party in Parliament has gravitated towards tax cuts as one of the key ways to address this problem. For the first time in a long time, every party represented in Parliament is promising tax cuts of some kind, and four of the five Parliamentary parties (even the Greens) are offering income tax cuts - only Labour has said it will leave the income tax brackets unchanged.
The politics of this are obvious. Tax cuts are an easy and effective way of boosting people’s incomes. They’re easy to talk about on the campaign, to the point where you can even calculate for someone exactly how much better off they will be.
Unlike more affordable, targeted measures like boosting working for families, other tax credits and benefits, tax cuts affect the vast bulk of voters, including swing voters.
Economists, however, sound a note of caution. If done the wrong way, tax cuts simply inject a wave of cash into the economy, entrenching inflation. The worst-case scenario is that tax cuts simply push up inflation, making people no better off in real terms, but making the state poorer. In fact, it was not uncommon in the 20th century to hike taxes to kill inflation by sucking money out of the economy. Such a policy might help tame inflation, but it probably won’t win an election.
Political parties have responded to this by promising fiscally neutral tax plans. This means that each party promises to fund their tax plan by spending cuts or tax hikes, meaning the net effect on the economy is roughly zero.
Some parties, like Act, go even further. The party promises severe spending cuts, promising to reduce deficits faster while also offering tax relief. This is known as running a contractionary fiscal policy. The cuts are deep, and could be painful, but the benefit is that spending is reduced, allowing the state to put downward pressure on inflation.
Income taxes
The big challenge afflicting the tax system at the moment is that the last time the tax brackets were substantially readjusted was in 2011. Since then, 13 years of inflation has lifted people into higher tax brackets, increasing the amount of tax they pay despite the fact they don’t necessarily fit into that bracket in real terms.
In 2010, about 75 per cent of taxpayers had their income taxed in the bottom two tax brackets - avoiding the $48,000/30 per cent tax bracket. The remaining quarter paid tax in the top two tax brackets.
Over time, that has crept up so that by 2021, just under 60 per cent of income earners had all their income taxed in those bottom two tax brackets, with an increasing number having at least some income taxed at 30 per cent.
National’s policy simply lifts the brackets slightly, accounting for four years of those 13 years of inflation - they then bolt on a tax credit for middle-income earners to make the policy look more generous for middle-income earners.
Properly adjusting the tax system back to 2011 levels is prohibitively expensive. Back then, core Crown tax revenue as a percentage of GDP was 25 per cent. It’s now 29.2 per cent. A back-of-the-envelope calculation using 2024 GDP forecasts puts the cost of such a cut at $16.8 billion a year - rather than the $14.6b over four years National has budgeted for its more modest package (which includes other income tax changes).
Act, the Greens and Te Pāti Māori take a more radical approach, streamlining the tax system and making big changes to income tax thresholds.
Act wants to “flatten” the tax system. Currently, people pay proportionally more of their salary and wage income the more they earn. Under Act, this system would gradually flatten so that wealthier people still pay more tax in nominal terms, but proportionally, they pay a similar proportion of their income to other taxpayers. What this means in practical terms is a tax cut for wealthier earners and a tax hike for people on lower incomes.
The Greens and Te Pāti Māori are proposing a tax-free threshold, meaning people would not pay any tax on the first $10,000 or $30,000 of their incomes.
Labour’s main tax policy does not look at take home pay, but instead tries to increase people’s incomes by taking GST off fresh fruit and vegetables.
Other taxes
While income tax and GST are front of mind this election, parties are also proposing changes elsewhere.
National and Act promise to roll back some of Labour’s changes to property taxes, returning the ability of landlords to deduct interest costs from their tax bills, and rolling back the bright-line test (a tax on capital gains for investors) or abolishing it altogether.
Meanwhile, the Greens and Te Pāti Māori want to hike the corporate and trust tax rates and introduce a wealth tax. Wealth taxes look at a person’s total wealth and tax a proportion of it each year. Both the Greens and Te Pāti Māori promise to limit these taxes to the wealthy. Both have opted for this tax, rather than a capital gains tax, which has been more popular in the past.
See a summary of parties’ key policies below. All the costs and savings listed relate to the four-year forecast period from 2024-25. The two major parties’ plans have been summarised to a more detailed extent than the smaller parties’ plans.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Huge crowds gathered at Christchurch's Bridge of Remembrance and crossed over Auckland's Harbour Bridge on Wednesday.