Tax-free income threshold too costly for little benefit

Who said a tax-free threshold on income “. . .  would have only a minimal benefit for a very small number of low income earners.”?

None other than then-Finance Minister Michael Cullen before delivering his 2008 Budget:

His initial preference had been for a tax-free income threshold.

“This would have seen, for example, the first $9500 of income not attract income tax,” Dr Cullen said.

On the surface this had appeared to be an appealing idea.

“However, it became clear that it would have only a minimal benefit for a very small number of low income earners.”

Up to 90 per cent of those earning below $18,000 were on temporary low income – students and youths – or supported by benefits or superannuation.

Dr Cullen said it would deliver less assistance to low income workers than the $3.7 billion cost in the third year warranted, and he “would be unable to provide meaningful relief for those further up the income scale”.

If the costs outweighed the benefits of a tax-free threshold of $9,500 in 2008 how can the benefits of the lower threshold proposed by Labour leader Phil Goff justify the costs now?

Dr Cullen also rejected calls for removing GST on food and petrol saying it would make the tax system inefficient and any gains would be quickly wiped out.

Goff was a senior member of the same Cabinet in which Cullen served.

Even if his duties as Trade Minister took him overseas when Budgets were being set, Goff must have known about options and justifications for choices.

If removing GST on all food and petrol wasn’t a good idea in the last Labour government, tinkering at the edges of that policy by taking GST off fresh fruit and vegetables wouldn’t achieve enough to jsutify the costs in the next one.

5 Responses to Tax-free income threshold too costly for little benefit

  1. […] This post was mentioned on Twitter by First Income, Trade Income. Trade Income said: Tax-free income threshold too costly for little benefit « Homepaddock […]


  2. ZenTiger says:

    Cullen is talking nonsense in the above example, but equally so is Goff (for different reasons).

    I’ll explain why when I get a chance. On a deadline.


  3. gravedodger says:

    Electoral success in NZ 2011 depends on locking up the center. Mr Goff’s latest foray is simply idiotic in fiscal terms and will be an epic fail as the target audience will get zero benefit as they pay bugger all now and the rest who aspire to becoming higher earners will see the danger that they will contribute more to a Labour government that will be used to ensure the support of the people in struggle street on low incomes.
    Gives another prime example of Goofynomics to me.
    Mr Goff is very close to the blinkered support percentage who would vote for Ghengis Khan if he turned up to an election wearing a red rosette.


  4. ZenTiger says:

    Genghis Khan running you say? Last thing we need is another centrist softy.



  5. ZenTiger says:

    Essentially, a tax free threshold is no different in complexity and cost to applying a series of tax rate across different bands, which is the case now.

    Cullen was saying its not worth doing because essentially, every tax payer gets the tax cut, not just the low income workers and students, and the implication is he just wants to help those people.

    On that basis, Cullen should either put the tax rate up to the top band for everyone (one flat tax rate of 39%) and then work out his rebate scheme for the low income workers, or he should make the first 50K tax free and impose a high flat tax rate on every dollar above that, and cut out heaps of bureaucracy.

    They would have been braver policies more closely aligned with the stated objectives. Instead we end up with multiple bands and lots of bureaucracy managing tax credit rules.

    However, I agree with him in substance that the costs would be high, and his figures are much higher than Goffs, even adjusted for the limit differentials. There’s a story there somewhere for a journalist.

    Goff’s suggestion of a 5K tax free threshold, introduced over several years is just wimpy, and designed to make headlines not help pockets.

    And I note that the pattern has always been to introduce GST in exchange for dropping the top tax rate, then raising the top tax rate when Labour get back in, then raising GST rates in exchange for dropping the top tax rate, then putting it up again.

    Consequently, our GST rate of 10% sits now at 15% and the top tax rate could well be back to the same old high levels as it was before GST. Fantastic, and the whole point about aligning the top tax rate and company tax rate and trust tax rates is lost and loopholes that Goff promises to close to get what he calls bludgers will still exist, because Labour never fixed that issue when they had 9 years in power.


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