Two-thirds of voters across the political spectrum support adjusting tax brackets at the rate of inflation, to prevent the average tax rate from drifting higher over time.
Bracket creep, also known as “fiscal drag”, refers to inflation pushing taxpayers into higher tax brackets, despite not having higher incomes in real terms.
This has contributed to an uptick in government tax revenue, which has risen from $97.4 billion in 2021 to a forecast of $117.4 billion in 2023.
A poll conducted by the Taxpayers’ Union and Curia found two thirds of eligible voters were in favour of automatically shifting income tax thresholds to adjust for inflation.
Callum Purves, the Taxpayers’ Union campaign manager, said politicians should have to pass legislation when they want tax rates to increase.
“Why should working New Zealanders be punished with stealthy tax hikes when they are not actually earning more in real terms?”
67% of those surveyed supported adjusting tax brackets at the rate of inflation—referred to as indexation—while just 14% were opposed and 19% were unsure.
This level of support was relatively consistent across political parties, with 66% of National voters supporting the idea, compared with 64% of Labour voters.
60% of Green Party voters were in favour, with 21% opposed and 19% unsure, while 82% of Act voters supported indexation and only 9% were opposed.
This is an inversion of the two parties’ actual policies; indexation is Green Party policy, while Act opposes the idea.
David Seymour, leader of the Act Party, said the poll question had been phrased in a way that implied indexation was the only way to get lower taxes.
“If they were to ask, ‘do you want Labour’s tax policy indexed for inflation, or real tax cuts that reduce the rate of tax?’ most who want tax relief would pick real tax cuts,” he said.
The Act party has proposed just two tax rates: 17.5% on income under $70,000 and 28% on everything higher. This flatter tax structure reduces the need for indexation.
However, inflation would gradually increase the average tax rate, particularly for low income earners, and pull in more revenue for the Government over time.
Act’s proposed tax reform would cut revenue by roughly $12 billion, once fully implemented, and would be funded by laying off public sector employees and lifting the retirement age.
On the other side of the political spectrum, the Green Party has proposed adding a tax free threshold of $10,000 and lifting the highest income bracket to 45%, from 39%.
These income tax brackets would be indexed to wage inflation and adjusted every three years.
The Green Party’s proposed reform also includes 2.5% wealth tax, a 1.5% trust tax, and an increase of the corporate tax rate. It would raise $15 billion in revenue to fund an income guarantee.
The National Party has promised to adjust current tax brackets to compensate for the past four years of inflation, which was 11.4% when the policy was announced in March 2022.
Inflation has remained high and in March 2023 the consumer price index has increased 21% since the final quarter of 2017, when Labour first formed a government.
Nicola Willis, National’s finance spokesperson, said the proposed policy was a minimum inflation adjustment and the full tax policy would be announced before September 12.
“National is the party of low tax, and we will deliver tax relief for lower and middle income earners by adjusting current tax brackets to compensate for inflation,” she said.
“Our threshold adjustments will mean someone on an average wage will keep around $900 more a year. If we can responsibly provide further tax relief for Kiwis, we will”.
Interest.co.nz asked several Labour ministers whether they were considering adjusting tax brackets to compensate for inflation, but all declined to comment.
Finance Minister Grant Robertson said the Labour Party would have a revenue policy and it would be announced “well in advance of the election”.
Lisa Marriot, a professor of taxation at Victoria University, said the bottom personal income tax thresholds haven’t changed since 2010.
“If you work 41 hours at the minimum wage, every additional dollar that you earn will be taxed at 30%. At that point our progressive tax system is looking very unprogressive”.
This means the lowest wage workers are being taxed only 9% less than the highest income earnings when working overtime.
A recent statement from the International Monetary Fund encouraged the NZ government to reform the tax system and address bracket creep.
“A well-designed tax reform could allow for lower corporate and personal income tax rates by broadening the tax base to other more progressive sources, such as comprehensive capital gains and land taxes, while also addressing fiscal drag and improving efficiency,” it said.
The IMF said the country was earning enough overall tax revenue but it could change where it was collecting those taxes to better align with long-term economic goals.
Complex & considered
Robyn Walker, a tax partner at Deloitte, said any implementation of tax indexation would need to be carefully considered.
Indexation can be complex and administratively burdensome, plus it would reduce government revenue even as the cost of providing services increased.
“A reduction in revenue would require spending cuts; if those cuts are too substantial, there is a risk of plunging the country into austerity,” she said.
On the other hand, bracket creep tightened the cost-of-living squeeze and had impacts across the economy.
“Inflation can increase inequality, as those who own assets that benefit significantly from inflation (such as housing) receive an advantage, whilst those reliant on fixed incomes suffer,” she said.
Tax indexation every three years was legislated by the Helen Clark Government in Budget 2005, to first take effect in 2008, but was scrapped in 2007 when John Key was elected.
The Reserve Bank also looked into tax indexation in 1981 when inflation was running at high levels, but the Muldoon government did not pick up the policy.
Walker said it was important not to look at tax policies in a vacuum and indexation should be considered in the context of the entire economic system.
Callum Purves said it shouldn’t be a difficult policy to implement, as NZ already adjusted welfare benefits for inflation and other countries already adjusted taxes for inflation.
The poll was conducted by Curia Market Research in early June and surveyed 1,000 eligible New Zealand voters.
It asked: As welfare benefits automatically increase with inflation, would you support or oppose a law so that income tax thresholds also adjust for inflation, so that someone whose income increases in line with inflation doesn’t end up paying proportionally more income tax than previously?