Tax thresholds might be lifted

 

Michael Cullen  has hinted that tax thresholds might be lifted in Thursday’s budget.

 

Finance Minister Cullen has ruled out a number of options for his tax cuts package, but today suggested there could be an across the board lift in the thresholds at which people pay more tax.

Answering questions from independent MP Gordon Copeland about why he had not cuts personal taxes over the last nine years, Dr Cullen said he had good news for the MP.

“On Thursday I will be announcing such cuts. I look forward to his support for those which are consistent with the views he has expressed over many years,” Dr Cullen said.

 

Thresholds would be a good place to start because people on lower earnings have also found the benefit of normal inflation-based wage rises partially negated because they’ve put them into the next tax bracket. When the top tax rate was lifted to 39c it was only supposed to catch 5% of tax payers but now gets more than twice and it is ridiculous that many of these so called rich people are also eligible for Welfare for Families payments.

 

Dr Cullen announced in 2005 that from the beginning of the 2008 tax year tax thresholds would have inflation indexing built in. They were mocked as the “chewing gum” tax cuts and last year Dr Cullen axed them and instead made KiwiSaver more attractive.

Parliament will go in to urgency to ensure any tax cuts announced in the budget are enshrined in legislation to forestall accusations from the Opposition that the promised cuts won’t happen.

Dr Cullen’s comments today suggest that he could be reintroducing some form of indexation to the thresholds as part of his package, though it is also possible that he was just teasing Mr Copeland.

Most speculation around Parliament is that Dr Cullen will cut the tax rate at the lower end of the scale as the centrepiece of the tax cuts. This would meet his self-set test of fairness and equity, as it would deliver something to everyone – even if it is very expensive.

Revenue would fall by around $1 billion for every $10 a week put into taxpayers pockets.

Dr Cullen has already ruled out the creation of a tax free income bracket and cuts to GST. Yesterday he indicated there would be less money to deliver cuts but they were less likely to be inflationary given tougher economic times. He also ruled out a lump sum dividend payment saying there was “no basis” for speculation about one.

The simplicity of a tax-free income bracket is attractive and it is one way to help everyone, where a straight rate cut helps those who earn more most because of course they also pay most.

 

It’s interesting that tax cuts are almost always referred to as giving something as if it’s some sort of Government largesse, rather than as allowing people to keep more of what they earn.

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