ANALYSIS
So there you have it. Labour and National have released their tax plans.
Labour’s is by far the more modest. Its GST cut and Working for Families changes total $3.62 billion over the four-year forecast period.
National’s, released on Wednesday, comes to a far greater $14.6b. Why does National’s cost so much more, and is it really worth the cuts the party has promised to pay for it?
Come, bring a calculator, and find out.
The problem
National’s plan is targeted at what it calls the “squeezed middle”, middle income earners in the $40,000 to $70,000 band who are under pressure thanks to the cost of living.
This claim is both true and untrue, depending on how you look at it.
New Zealand workers are currently facing historically high rates of tax. Core Crown tax revenue will rise to 30.4 per cent of GDP by 2027, up from just 25 per cent in 2011 and 27.5 per cent in 2017.
As people earn more, they are pushed into higher and higher tax brackets. Suddenly, tax brackets that were only meant to tax high earners, are now taxing a share of ordinary people’s income.
The dirty little secret of New Zealand’s income tax system is the $48,000 tax bracket. Income earned below that threshold is taxed at 10.5 per cent up to $14,000 and 17.5 per cent up to $48,000.
Above $48,000, each additional dollar is taxed at a relatively high 30 per cent. It means that people who earn relatively “middle” incomes are taxed at relatively high rates.
This is a new problem. Many people who are currently having part of their incomes touched by the 30 per cent rate were not intended to be captured by it when the brackets were set more than a decade ago.
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.
What this means is that when an employer gives you a pay rise to help grapple with the increased cost of living, a lot of workers will have a third of that increase taxed, despite the fact that the 30 and 33 per cent tax brackets were only really designed for the top quarter of income earners.
If you feel like you’re owed a tax cut, well, the data agrees with you.
The tax system is really juicing income earners right now. It’s why Labour is thinking twice about its social unemployment scheme (the “jobs tax”) which would cost an average employee hundreds of dollars a year in levies. It’s not that the idea is a bad one, it’s just that workers are really being squeezed by the tax system.
This is a real problem and is recognised as one by Treasury. In July 2022, officials told ministers that, “[r]evenue growth, largely as a result of fiscal drag, has helped fund growing expenditure demands. It could continue to do so. However fiscal drag is likely to involve greater trade-offs, particularly distributional trade-offs, than it has in the past”.
It was those warnings that eventually led to the wealth tax idea, which would have relieved the tax burden on individuals by slapping a tax on the wealthy.
So there is a problem and officials, and people in Labour, know it.
But - there’s always a but.
While we are currently taxed at relatively high rates historically, we have relatively low rates of taxation compared with our international peers.
The OECD measures something called a “tax wedge”, which is a measurement of how much it costs to employ someone, and tax as a percentage of the total salary of that worker.
New Zealand performs very well on this score: an average single worker had a tax wedge of 20.1 per cent, compared with an average across the OECD of 34.6 per cent.
If you include things like Working for Families, New Zealand is again one of the lowest-ranking countries, with a family with children facing a tax wedge of 7.9 per cent, compared with an OECD average of 25.6 per cent.
Both of these tax wedges have increased in recent years - so there is a problem with the Crown taking a steadily increasing portion of people’s incomes, but they are still very low.
You can argue this either way. New Zealand isn’t a spectacularly wealthy country like some other OECD nations, and the cost of living here is quite high, so you could argue New Zealand households need lower taxes to keep up.
Likewise, you could argue the poor services we have here are a function of low rates of tax.
Fixing the problem
The most expensive part of National’s tax plan takes the existing tax brackets (minus the 39 per cent top rate, which is staying for National’s first term and is probably goneburger in its second) and lifts them by 11.5 per cent.
It is unchanged from a policy announced by former finance spokesman Simon Bridges last year. The 11.5 per cent figure was to account for inflation between when Labour took office in 2017 and the end of 2021.
It was marketed as allowing households to keep up with inflation, but the eagle-eyed will notice that for most of the 2017-2021 period, inflation was fairly low. It was late 2021 and 2022 when inflation really took off. The policy ignores those months, probably because including them would have been incredibly costly.
People on low incomes do not get much from the bracket adjustment. Low-income households, people who work part-time, earning $20,000, miss out. The bottom bracket is only being lifted $1600. People around that threshold (part-time workers) would save about $112 a year thanks to that change.
The real heavy lifter is raising the $48,000 bracket to $53,500 and the $70,000 bracket to $78,100. That will come at a massive cost, but it also means that people in those brackets take home quite a bit more money.
The way National has been able to make these tax cuts look far larger - and legitimately claim to help the squeezed middle - is to ramp up something called the Independent Earner Tax Credit (IETC).
The IETC is a Sir John Key invention targeted at people who miss out on Working For Families and other support but do not earn large incomes. It gives $10 a week to people earning between $24,000 and $48,000.
The credit has two problems. The first is that people who arguably should receive the credit now earn too much to claim it - bracket creep again. The second is that when the credit was first rolled out, many people who qualified for it did not receive it.
It created a cottage industry of tax agents who helped taxpayers get the credit in a lump sum at the end of a tax year (in exchange for a fee).
The IRD’s new computer system means more or less anyone who qualifies will get the tax credit when it is owed to them.
National had broadened the eligibility up to $66,000 to get the full credit, and $70,000 to get a partial credit.
National thinks around 380,000 people would benefit from the changes.
It costs a lot of money to give people a $10 tax cut (Labour’s wealth tax plan would have cost more than $3b a year to give a tax cut of about $20 to everyone). Tax credits are substantially more targeted and cheaper. National has costed these changes at $180m a year.
It’s a clever way of delivering quite a lot of money to middle-income swing voters without breaking the bank. The likes of Sir Michael Cullen, Helen Clark, Key and Sir Bill English knew this - in fact, National’s plan looks like something the four of them might have concocted (before you get to the costings).
What it does not do
The plan offers relief for the “squeezed middle” - but nothing for the squashed poor.
The plan copies verbatim Labour’s modest Working for Families changes, increasing the In-Work Tax credit by $25 (which only makes up for inflation since the last time it was lifted), and lifting the abatement threshold to $50,000 in 2026, which will not make up for inflation, but is important nonetheless.
Beneficiary families get nothing, as they do not qualify for the In-Work Tax Credit.
Labour should be embarrassed that after six years National has been able to match it on Working for Families support. The Greens have an ambitious plan in this area, but it comes with a hefty cost - in the billions of dollars.
Both parties should look at boosting the Family Tax credit, which is received by families in work and not in work, and seriously lifting the abatement threshold to account for the fact that inflation means families with a household income of more than $50,000 need support. Fifty-thousand dollars is no longer what it was.
Landlords
The plan offers large tax cuts to landlords, who will be able to deduct interest costs from their tax bills and will only be subject to a two-year bright-line test rather than 10 years (removing a de facto capital gains tax).
Even some in Labour think the interest deductibility changes are questionable. Associate Revenue Minister Deborah Russell, in her pre-political life, even wrote a blog criticising the idea.
The changes are unfair when compared with other investments and may, in some circumstances, lead to rent rises, particularly as the Government continues to phase in the changes.
National leader Christopher Luxon thinks removing the changes will lead to downward pressure on rents.
This seems fanciful. It is hard to think of what would prompt a landlord to pass on the savings in reduced rents. The only instance in which this would be likely to happen would be if there were far greater competition between landlords for tenants, but this would be less likely under National than under Labour, thanks to National dialling back its support of the Medium Density Residential Standards (MDRS) planning change.
An analysis by the cross-agency Housing Technical Working Group found the claim that the interest deductibility changes were putting up rents was questionable at best.
This does not necessarily undermine the need for the tax change.
It’s arguable that landlords should be able to deduct some or all of their interest costs from a tax fairness perspective, and to prevent some unfortunate cases at the margin, but it that is about the best that can be said of it.
The change is not quite a tax break for landlords (as Labour claims it to be) but having the same treatment of residential property as other investments. That is a good reason to change the rules back, particularly if we see pressure on the supply of rental properties. There’s also no spectacular harm in keeping them where they are either.
National, like Labour, promises to end the ability of commercial landlords to depreciate buildings, saving the Crown $525 million. Labour introduced the change in 2020, saying it would be permanent.
This will be a deeply unpopular position to take, but there is a very good argument for not getting rid of this change. It encourages investment and growth, which New Zealand - currently at the bottom of the IMF’s growth forecasts - desperately needs.
A real carbon dividend?
National promises to pay part of the policy with a “climate dividend”, a play on the “carbon dividend” idea, which, in its purest form, takes money raised by the Emissions Trading Scheme and funnels it to households to help them adapt to climate change - ideally by decarbonising their lifestyles and pocketing the dividend.
National’s policy isn’t this so much as it is a naked $600m raid on the ETS to pay for tax cuts.
To afford it, National will axe programmes like GIDI, currently funded by ETS receipts, which Labour wants to continue. GIDI offers hundreds of millions of dollars in subsidies to heavy industry to decarbonise. National pillories it as corporate welfare, which it absolutely is, but it is corporate welfare that is very effective at getting emissions reductions at low cost.
Energy Minister Megan Woods said some businesses think the carbon market would need NZUs (a unit in the ETS) to rise closer to $200 a tonne for it to be viable for them to make decarbonisation investments currently funded by GIDI.
The current NZU price is closer to $66. Modelling published by the Government showed that an increase of $10 per NZU sees average annual household costs by about $1.67 per week.
Increasing the carbon price by $130 would therefore hit households to the tune of $21.71 a week, turning a carbon dividend-funded tax cut into something closer to a carbon tax.
If National is to slash and burn climate policies funded by the ETS and rely on a higher ETS price to do the heavy lifting when it comes to emissions reductions, it needs to think hard about how it will work this.
There is some upside to a higher emissions price. It would mean more revenue for the government, which could be funnelled into a real carbon dividend or heavier tax cuts, something National should give some thought to when it eventually releases more climate policy. It would also decimate heavy industries that do not have current viable alternatives.
Costings
The plan’s costings add up in a literal sense, but the assumptions that underpin them seem quite optimistic.
Assumptions are difficult to adjudicate on. National has every reason to make heroic assumptions, giving them extra revenue, Labour has every incentive to say the assumptions don’t stack up.
On the face of things, however, Labour’s criticisms of National’s plan seem fair, if not quite the slam-dunk they want them to be. There are a handful of key areas where National seems to have been very optimistic in its revenue forecasts.
National wants to tax 2000 foreign buyers a year an average of $450,000 each on houses they buy over $2m.
The assumptions underpinning this figure seem questionable.
Corelogic thinks there are only 50,000 properties over $2m in the entire country. Four per cent of these would need to sell each year to foreign buyers to make National’s numbers stack up. This seems plausible but a stretch. In the year to June, 2600 total properties were sold over $2m, the same period the year prior, there were 5700 sold at that threshold, and a similar number the year before that - although those two years were something of a property boom.
Wind the clock back to 2019 and just 1700 homes were sold above $2m - not enough to fund National’s plan even if all those sales were to go to foreign buyers.
Then there’s the question of whether the tax would simply put people off coming here.
Wealthy foreigners are a class of people who are not well known for paying large amounts of tax. In fact, they have a reputation for being exceedingly good at avoiding it.
It is difficult to see why foreign investors, who have an entire world of homes they might buy, would choose to buy here and pay an enormous tax for the privilege.
One bright spot is that Willis confirmed on Wednesday the tax will be ring-fenced, meaning clever clogs investors cannot offset the tax against a loss somewhere else.
In coming days, National is likely to come under pressure to explain how it plans to fillet just under $600m a year from public sector baselines in addition to the $500m announced by Labour earlier this week.
National has some ground to stand on here: in the departments identified for cuts, spending has grown by 62 per cent or $3.5b since 2018 and cuts can be found.
The party’s assumed revenue from taxing and regulating online gambling also seems optimistic.
National also promises to rinse an extra $180m a year out of taxing and regulating online gambling. Labour is itself looking to shake some revenue out of online gambling, so there is undoubtedly some money to be found there.
However is that additional revenue equal to National’s estimate of $180m? That seems doubtful.
Assessment
Overall, the costings add up in a strictly arithmetical sense, but they are certainly based on some heroic assumptions, which undermines some of the plan’s credibility.
National will also need to think a bit about what it does to the ETS.
Overall the tax cuts solve a very real problem in the tax system. That stacks up very well against Labour’s plan which by undermining the GST system creates a bigger problem than it ever attempted to solve.
Whether the merits of that stack up against the questionable assumptions baked into National’s modelling is a question for voters.
Expectations tempered around return to surplus in 2027/28.