Labour Opposition Leader Phil Goff has proposed creating a 'tax free zone' for the first NZ$5,000 of income earned annually by all income earners.
Goff said in its State of the Nation address Labour would pay for the tax break by cracking down on tax avoidance and imposing a new higher tax rate on those earning "comfortably into six figures."
Here are key sections of the speech announcing new Labour policy.
I am setting two goals:
• To make it fairer for everyone;
• And to encourage growth and jobs.
We will get rid of loopholes for tax dodgers and cut back tax avoidance.
We will make sure everyone gets their fair share of tax cuts.
And I guarantee everyone will be treated fairly whether you live on main street, struggle street - or easy street. In New Zealand you pay tax on the first dollar you earn.
Under Labour that will change. Labour will introduce a tax free zone in our first Budget and look to increase it during our first term. In Australia your first six thousand dollars of income has no tax on it.
I believe the Aussies have got it right. My goal is to make the first five thousand dollars of your income tax-free.
You wouldn’t pay tax on the first hundred dollars a week you earn. For a couple, that would be worth a thousand dollars a year in take home pay. Everybody gets the same, whether you are single, married, low, middle or high income.
It’s simple. It’s also fair. It will reduce the squeeze on middle-income earners and really help those on low-incomes. A tax free zone gives families struggling to make ends meet the ability to decide how to spend their extra income.
A tax-free zone is a good idea but we have to know how we will pay for it because there can’t be something for nothing. I won’t make any promise that I can’t keep or that the country can’t afford.
So I want to explain some of the options we are exploring to cover the cost. But first I’ll tell what we won’t be doing to pay for it. We are not going to borrow for it. National’s doing that already.
They’re borrowing net $120 million a week - more than the cost of the tax cuts, which they targeted at the most wealthy. So before we introduce the tax free income zone in Government we will show how we are going to pay for it.
The first area we’ll look at is how to crack down on tax evasion and avoidance. No one knows exactly how much is lost by people dodging their tax - but it’s been estimated in the billions.
The Tax Working Group pointed out that only about half of the wealthiest individuals in New Zealand are paying the top tax rate.
It said that many with wealth can restructure their affairs through trusts and companies to shelter income from taxes and even to receive social support they shouldn’t be entitled to.
The Tax Working Group points out that $200 billion worth of rental property doesn’t provide any net tax revenue - it actually generates tax losses.
The incoming Labour Government will immediately set up a highpowered Anti-Avoidance Tax Taskforce to close tax loopholes. A second source of funds to allow us to create a tax free zone will be to claim back some of the windfall tax cuts from the very top income earners. We haven’t yet set a new top tax rate.
Nor have we determined the level of income that it will apply to. But it will only affect incomes comfortably into six figures, the top few per cent of earners.
We will also make sure these very highest earners do not use trusts to avoid paying the top tax rate. We are waiting with interest to see the Law Commission’s work in this area.
How big we can make the tax-free zone will depend on how much we get back by making the tax system fairer and closing the loopholes. I fully expect those who have arranged their affairs to avoid paying their fair share of tax to come after me.
Some people with a lot to lose will attack me on it and campaign loudly against it.
But the fact is, with National’s tax cuts, never has so much been given to so few. And it’s time that some of the windfall goes back to middle and low income earners who work hard and deserve a break.
Unless we do this, the gap between rich and poor will grow. We are seeing two New Zealands developing, with major social and economic consequences for all of us.
Meanwhile, Finance Minister Bill English responded to the speech, saying Labour had not detailed how it would pay for various tax breaks and spending plans.
English described Goff's speech as irresponsible and a very expensive recipe for more borrowing and tax increases.
“Labour has clearly learned nothing from the failed policies of its previous term, when New Zealand’s net liabilities to the rest of the world soared to more than $170 billion and we ran the highest balance of payments deficit in the developed world,” Mr English says.
“When the incoming National Government took office, we faced an economy deep in recession before the rest of the world and Treasury forecasts of never-ending deficits and ever-increasing Government debt.
“Phil Goff has today confirmed he wants to jump back on the conveyer belt of more debt and higher taxes. His recipe will do nothing to help lift New Zealand’s national savings – it will do precisely the opposite. In fact, it will discourage savings and encourage property speculation.”
By Labour’s own calculations, making the first $5000 of income tax-free for all taxpayers plus taking GST off fresh fruit and vegetables would cost more than $1.5 billion a year – with much of the benefit going to high income earners. On the other hand, increasing the top personal tax rate on incomes above, say, $120,000 and ring-fencing property losses would raise only $440 million.
“And that’s the shortfall from just two of Labour’s promises. They also want to restore research and development tax credits (annual cost $330 million); introduce paid parental leave to 18 weeks ($50 million); increase Working for Families for under twos (unknown cost) and not take dividends from State-owned power companies $700 million).
“It’s telling that Phil Goff would not spell out precisely where all this money will come from. It’s now abundantly clear that he will have to borrow it and increase taxes – and New Zealand can’t afford it.
“I’m sure New Zealanders will be interested to know that despite all the rhetoric, Labour still stands for more debt and higher taxes. By contrast, this Government stands for responsible management of the economy.”
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