Tax cuts - what you'll get
By GRAHAME ARMSTRONG - Sunday Star Times
Last updated 05:00 14/03/2010

The Government is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 which represents the bulk of wage earners from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

If the changes are implemented, someone on the average wage of about $48,000 will be about $5-$10 a week better off, according to New Zealand Institute of Economic Research figures to be published this week. Those earning more than $70,000 would be about $20 a week better off (see table).

The government has signalled that GST will rise from 12.5% to 15%, raising an estimated $2 billion in revenue that would be used to pay for the tax cuts. Lifting the tax to 15% will add $21.25 to the average weekly household bill.

In 2007 the average Kiwi household spent around $950 a week, including groceries, fuel, clothing and healthcare, around $106 of which was GST.

Other savings will be made in the budget by tightening the rules to stop high income earners "rorting" tax credits and collecting more tax from property investments, especially rentals. Losses claimed by people with rental properties were $575 million more than the income declared from residential rentals. This meant that the government lost a further $150m in revenue despite a doubling in the total value of all rental properties.

A spokesman for Finance Minister Bill English would not confirm any of the numbers the Star-Times had obtained from a government source, saying no final decisions have been made.

"Having said that, fairness and equity will be an important consideration as the government works through the details. That's why we are not only looking at possible reductions in the top personal tax rate, but at the whole personal tax structure across the board. Therefore the vast bulk of New Zealanders will be better off.

"From an economic perspective, the government wants a tax system that encourages savings and investment, rather than borrowing and consumption."

A government source said income thresholds were unlikely to be adjusted in this year's budget because the government was able to achieve its goals by reducing tax rates.
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Shamubeel Eaqub, principal economist with the NZIER, said those on higher incomes would receive the most benefit, but, because they also spend more, they would pay a bigger share of GST than they did now.

Eaqub said a level tax playing field would help our competitiveness with Australia but was "not a silver bullet". It was one less reason for companies to shift, but it was not enough to stop our best and brightest leaving.

"Lots of factors drive competitiveness. Tax is one of them. Proximity to market, industrial mix, education of workforce, appetite for risk, other policy settings all play their part."

He believed the government needed to be bolder and take a "10-year horizon and look through the electoral cycle".

"From a political perspective, making wide-ranging changes may not be feasible with an election next year. From an economic perspective, New Zealand undoubtedly needs radical reform ... However, radical policies almost always have a cost, usually on incumbents. Short-term pain for long-term gain.

"If we want to improve competitiveness, it's not enough to just be the same as Australia. We need to be the destination, a la Ireland. Our tax policy needs to be revamped to not only match Australia, but to make us super-attractive."

From here.