Family Incomes Package carefully targeted at middle New Zealand
There have been no changes in tax rates, but the thresholds where the progressive tax rates kick in will increase from 1 April 2018. The $14,000 income tax threshold will increase to $22,000, and the $48,000 tax threshold to $52,000.
Changes intended to correct, or at least mitigate, the effects of “fiscal drag”.
Fiscal drag is the effect of rising wages pushing people into a higher tax bracket. When the brackets were last amended in 2010, the average wage was $49,500. The average wage has since risen to $58,900, but part of this increase only compensates workers for inflation; their real (ie after inflation) wages have risen by much less, even in the low inflation environment we have enjoyed for the last decade.
In 2010, the average worker would have had only the last $1,500 of their income taxed at 30% and the bulk of their earnings taxed at 17.5%. As at today, $10,900 of their income will be taxed at 30%. Increases in the tax bands will go some way to addressing this. Anyone earning over $52,000 will be $20 per week better off under the changes.
Changes were expected in an election year.
High-income earners will inevitably receive the largest tax cut, because the increased thresholds will leave these taxpayers with more income exposed to the lower rates. That said, the changes are unashamedly targeted at low- and middle-income earners. As it stands, the top tax rate will kick in at just 1.2 times the average full-time wage – one of the lowest ratios in the OECD.
The tax-rate changes are combined with a simplification to, and increased funding of, Working for Families. The Independent Earner Tax Credit, which less than a third of eligible people actually claim during the year, is being scrapped. The Family Tax Credit is being aligned so that it is the same no matter how old a taxpayer’s children are (up to 18 years of age) — a significant simplification compared to the five different rates we have today.
A central theme is simplification.
Mr Joyce wants people to be able to see marginal benefit in their own pockets when they earn more. The impact of the increased thresholds goes some way towards reducing the marginal tax rates of low-income New Zealanders, but is partially counteracted by the effect of the adjusted rate for the abatement of the Family Tax Credit to 25c in the dollar. Mr Joyce commented that the elements of his Family Incomes Package work together; arguably this was essential. The higher abatement of the Family Tax Credit and abolition of the Independent Earner Tax Credit could be politically unsavoury without the rest of the package.
The final component of the Family Incomes Package sees an increase to the Accommodation Supplement. The Accommodation Supplement rates have been unchanged since 2007, and were based on 2005 rents, so are well overdue for review.
There is a risk that the increased Accommodation Supplement will simply increase rentals and make landlords the true beneficiaries, especially given the length of me required to build additional housing. Given that, it might be appropriate to have a more comprehensive review of the Accommodation Supplement, which has been part of housing assistance since the 1990s.
Read our full NZ Budget 2017 report here.
It is now seven years since we last altered the income tax system. Over that time the average wage has risen from $49,500 to $58,900.
That’s good news. But because of that change many more middle-income earners are faced with a marginal tax rate of 30 per cent cutting in at just $48,000.
We also have a number of lower income people with young families that are struggling to get ahead.
And we have a system that is becoming too complex. As a result of Working for Families and other changes, it can be very hard for people to work out what they are entitled to, and how the work they do is linked to the income they receive.
If the level of complexity is indicated by the number of businesses advertising to do people’s tax returns, then confusion is at near record highs.
Today I am announcing a $2 billion a year Family Incomes Package commencing 1 April next year that will start addressing some of these issues.
The Package will make changes to tax thresholds, Working for Families and the Accommodation Supplement to help Kiwi families get ahead.
It is a first step towards simplifying the income tax system.
The Family Incomes Package is carefully designed to assist low and middle-income earners with young families and higher housing costs.
It will benefit 1.3 million working-age families in New Zealand by, on average, $26 per week.