When asked whether the tax cut part of the package had conceded the point madeby National, Act, and the Greens that some form of tax cut for working New Zealanders was necessary after 13 years of bracket creep, Finance Minister Grant Robertson bristled.
“Sorry to be pedantic about this. It was a tax switch. It was a fiscally neutral tax switch,” Robertson said.
“I do not believe that right now is time for unfunded tax cuts,” he said.
In the minds of most people, a tax switch and a tax cut are not mutually exclusive. In fact, a tax switch belongs to the genus tax cut - it is simply a tax cut of the variety where its cost is offset elsewhere.
Robertson has every right to use this language. It’s how one of his predecessors, Bill English, sold National’s first-term tax changes - hiking GST to pay for income tax cuts (and breaking a promise not to raise GST).
Parker also said in that speech that “the eternal challenge for politicians who want to improve the system is to convince voters that any proposed tax changes will be fair to them while making the economy stronger and society better” - something many in Labour will be reflecting on in the coming weeks.
Labour is now well and truly on the back foot on tax. Three of the five Parliamentary parties are calling for income tax cuts. The one party not among them, Te Pāti Māori, is calling for the removal of GST from food.
Add to this another powerful voice: Treasury, whose preliminary advice on what became the wealth tax was that the income tax system is bursting at the seams. For 13 years, governments have relied on fiscal drag - inflation putting people in to higher and higher tax brackets - to fund the spending. But Treasury warned we can no longer turn an eye to the uncomfortable “distributional” (tax speak for “fairness) trade-offs with this.
Last week, Trade Me reported the median salary for jobs listed on its site hit $70,000. That means half of all jobs listed are taxed at what was once the top tax rate (the new 39 per cent rate only kicks in at incomes of $180,000).
It means roughly half of workers getting pay rises to contend with the rising cost of living will find that every dollar of those pay rises is taxed at 33 per cent.
Proportion of taxpayers in each tax bracket. Source / Treasury
Wind back the clock to 2010 and you can see how far we’ve come. Back then, just over 10 per cent of people earned above $70,000.
A tax rate of 33 per cent on income earned above that could be justified on people who were in the top quartile of income earners. It’s harder to justify hitting the top half of earners.
Labour’s tax woes don’t end there. Heading into the election, there is a yawning $35 a week gap between National’s tax plan and Labour’s.
People earning $70,000 under National’s indexation plan get an annual tax cut of just under $799, about $15.
But Labour has a problematic tax policy that it needs to clarify policy on: the Social Unemployment Insurance scheme. It acts like unemployment insurance, paying most of someone’s wages if they are laid off at a cost of 1.39 cents on every dollar earned (matched by a tax of 1.39 cents on that person’s earnings paid by their employer).
That person earning $70,000 would be hit to the tune of $973, making the difference between someone’s income under National and Labour $34 a week.
That doesn’t include National’s promise to repeal the Auckland Regional Fuel tax and a promise not to hike fuel taxes next term, which add additional tax - about $6 for each of those taxes on the average tank of gas.
Keep in mind too, that the median voter typically earns more than the median New Zealander, meaning an even larger gulf between what they might save under National and pay under Labour.
Labour needs to do two things as it approaches launching its tax policy sometime in the coming weeks (it was imminent but has since been delayed by a few weeks).
The first is pretty obvious: either decide to make the case on unemployment insurance, or show the scheme the door.
The second, Robertson is doing: reframing the debate around tax cuts by connecting cuts in tax to cuts in public spending.
This is particularly difficult because National’s former finance spokesman Simon Bridges deftly called on the tax cuts to be funded by cutting into the increase in government spending, rather than existing spending itself and National has disappointingly not put up its fiscal plan detailing how the cuts are to be funded.
Labour can say that not increasing spending is a real-terms cut to services, but that’s difficult when core Crown expenses as a share of the economy are about 15 per cent larger than they were in 2018.
It needs to find some way of making people feel the additional $35 or so a week feels like it’s worth the services they’re getting.
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.
