Average income earners are paying more tax than 12 years ago because thresholds have not been adjusted, a tax specialist says.
Terry Baucher has just written a piece for The Spinoff arguing that our tax system is "broken".
The tax thresholds were last set in October 2008, Baucher told Jesse Mulligan.
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When you cross a threshold, you jump a tax rate. If a person’s income rises they cross the threshold which means the next dollar of income gets taxed at a higher rate, he says.
The first threshold is $14,000 up to which the tax is 10.5 percent, the next one is $48,000 and between $14,000 and $48,000 tax is 17.5 percent but then you jump to 30 percent.
“It’s the biggest jump in the whole system, between $48,000 and $70,000, it’s 30 percent and then it goes to 33 percent, the old top tax rate.”
Median and average wages crossed the $48,000 threshold a long time ago, Baucher says.
Governments have got into the habit of leaving thresholds unchanged, he says.
“There was an adjustment in 1999 when Helen Clark’s government came in and then in 2008. Tax rates changed in 2010 and that is it – so we are talking 21 years.”
Making a change would be costly, he says, perhaps more than $400m a year, but under the current setting people on the lowest incomes are shouldering the heaviest burden.
“When these brackets were first set back in ‘08 the average rate of tax for the average earner would have been 17.5 percent so they have seen a significant jump in their tax liability on the quiet.
“We may need more tax, well let’s have that open debate about it rather than hide it in the bushes,” Baucher says.
A high proportion of New Zealand’s tax burden falls on labour, he says.
“The OECD suggested that inheritance tax, if well designed, should be part of the armoury for governments, in particular, and it was almost like they were talking to New Zealand, for jurisdictions which do not tax capital income.
“We are very reliant on taxes on labour, and we have a distortion building in the system where if we don’t tax capital, not under taxing it would be another way of looking at it, then inevitably people start moving investment into that.”
Housing unaffordability stems from not taxing capital, he says.
“The burden is increasing being borne by labour earners while we are piling up heaps of capital elsewhere which is not being taxed and not being used efficiently.”
