By Tristan Dean – 28 October 2015

When presenting this year’s budget, Bill English announced that tax cuts could be on the cards for next year. It is hardly a coincidence that a tax cut would arrive in an election year, putting more cash in the back pocket of voters just as they are heading to the polling booths.

It was around the time of the 2010 election when National put through the last round of tax cuts, which amounted to about $41 a week for people earning over $70,000 and around $29 a week for people earning $48,000. At the same time GST increased from 12.5% to 15%, which took away some of the benefit. The total annual cost of the income tax cuts was apparently estimated to be around 4 billion dollars.

It is hard to imagine the government raising GST again in the near future, so any income tax cuts are likely to be in isolation this time around and I suspect smaller than the last tax cuts made in 2010. If we took an educated guess and said that tax rates may be dropped by 2% across all the lower tax brackets, while leaving the top rate at 33%, someone on $70,000 a year would gain about $1400 a year, or around $25 a week. This benefit would apply if you earned $70,000 or $500,000.

While many reasons could be given for such a tax cut, one of the most common is that it stimulates people to spend more (and thereby encourages the economy) – basically that it alters behaviour. While I recognise that $25 a week may make a real difference for a single income family living on $70,000 – for the likes of David Hisco (ANZ CEO – who earns over $4 million a year), the $1400 a year would likely go completely unnoticed. For people earning over say $120,000 a year, the reaction from the majority would likely be the same – basically no discernible difference in the way they spend money.

My question is then simply why do it? Why give a tax cut across the board, costing millions of dollars a year when I suspect that a lot of people won’t care or even notice a few extra bucks coming in each week. In fact, when talking to many business people in New Zealand I find that most would actually prefer that the government put more targeted money into child poverty, health care or education. It would also be great to see the government start making annual contributions to the superfund again, which have now been on hold for about 6 years. Not contributing to the super fund is just digging a bigger hole for the next generation to fill in and the government are not forecasting to start contributions again until 2020.

In my opinion, if National are intent on tax cuts, then the answer lies in being much more targeted with who receives them. People earning the average wage in New Zealand are not living a glamorous lifestyle therefore a few extra dollars a week would really help. So let’s consider giving those people some tax relief without also giving it to the people who don’t need it and won’t even notice it. This is reasonably easily done by playing with the way the tax brackets work or just implementing a simple tax rebate system as has been used in the past.

Unfortunately, this doesn’t sound like a National Party approach given that their most loyal support is generally from people earning $70,000 a year or more. There is also the argument that the people paying the most tax should be given the tax benefit as well, as they are doing the most to drive the economy forward. However, my argument is that those people generally don’t need it and as a country we can’t afford it. The current personal tax rates are pretty favourable when compared to Australia and there are just too many things that need attention in New Zealand to start handing out a few bucks a week to people who don’t need it. So please Bill, by all means give a tax break to those in need, but leave it at that rather than trying to buy votes. I’d have more respect for a National government that kept my tax cut and put it to good use somewhere else.

Tristan Dean Business Advisory Director
T +64 9 448 3231
E tristan.dean@hayesknight.co.nz