KEY POINTS:
The Government's failure to raise tax thresholds to compensate for inflation has boosted its revenue by at least $1 billion a year but has widened the income gap with Australia, a study by the New Zealand Institute of Economic Research shows.
Senior economist Patrick Nolan said that for an Australian earning one-and-a-half times the average wage, net (after tax) income had risen 36.2 per cent between 2000 and 2006.
That is nearly twice the 18.4 per cent increase in net income a New Zealander earning one-and-a-half times the average wage would have had over the same period.
For someone on the average wage the increases in net income were 33.6 per cent in Australia and 18.9 per cent here.
Most of the difference is due to faster growth in gross wages across the Tasman (34.3 per cent compared with 22.1 per cent) over the 2000 to 2006 period.
Finance Minister Michael Cullen has attributed that to greater union bargaining power in Australia.
NZIER gives more weight to New Zealand's labour productivity or output per hour worked. Despite some recent improvement it remains low by international standards and about a third below Australia's.
But Dr Nolan said the two Governments' different approaches to tax policy and to adjusting income tax thresholds in particular had amplified the underlying wage gap between the two countries.
Increases in gross incomes - even if they only keep pace with inflation - mean that over time people get pushed into higher tax brackets unless the thresholds are adjusted.
When the Government introduced the 39c rate for incomes over $60,000 in 2000 it affected only 6 per cent of taxpayers.
But last year nearly 12 per cent of taxpayers were in the top bracket, and they collectively contributed over half the income tax take.
Dr Nolan said to compensate for inflation between 2000 and 2006 the threshold up to which the 15 per cent rate applies, now $9500, would have to be raised to $11,300.
The 21 per cent rate should then apply up to $45,300 (currently $38,000), the 33 per cent rate up to $71,500 (now $60,000) and the 39c rate only on incomes above that $71,500 level.
Adjusting the thresholds to those levels would cost the Government about $1 billion in revenue - using its own ready reckoner figures. But the cost might be less, as people would have more incentive to earn more and less incentive to engage in tax avoidance.
The "chewing gum" moves to adjust the tax thresholds announced in Dr Cullen's 2005 Budget are not due to come into effect until next year and were estimated to cost about $360 million a year.
They would only offset three years' inflation at 2 per cent a year. Inflation has been above 2 per cent for five of the past six years. By contrast Australian Treasurer Peter Costello's Budget this week was the fifth in a row to deliver income tax cuts.
While he has cut some rates, most of the relief has come in the form of threshold adjustments, Dr Nolan said.
In the latest Budget, Mr Costello announced that from July 1 the 30 per cent rate would kick in at A$30,000, up from A$25,000 now, and from July next year the threshold for the 40 per cent rate would rise from A$75,000 to A$80,000 and the top 45 per cent rate from A$150,000 to A$180,000.
By the numbers
36.2 per cent Increase in after-tax pay between 2000 and 2006 for Australians who earned one and a half times the average wage
18.4 per cent Increase for NZers over the same period
$60,000 Starting point for the top 39c tax rate
$71,500 New starting point if the tax scale was adjusted for inflation
