Thursday 3 November 2022

Bracket creep basics

My fortnightly column for the Stuff papers shifted from Mondays to Sundays. This was in this past week's Sunday Star Times:

If you want to know the effects of small changes to tax rates or tax thresholds on government revenue, the Treasury provides a handy calculator. But the calculator breaks if you ask it to tell you the effects of inflation on tax revenues since April 2021, when the new 39% tax rate came in.

It warns, “The change is too large for this model to give a realistic estimate of change in tax revenue.”

Parliament did not legislate for a tax increase large enough to break Treasury’s tax calculator.

Nobody proposed it. Nobody campaigned on it.

It never went to Select Committee for deliberation. No tax experts analysed the distributional consequences of it or its affordability.

It never received Royal Assent. Parliament simply failed to undo that which Adrian Orr gifted it, at our expense.

Imagine if Parliament had increased taxes across the board when it introduced the 39% rate. The $14,000 threshold would be reduced to $13,000. The $48,000 threshold would drop to $44,000. The $70,000 threshold for the 33% rate would go down to $64,000. And the 39% rate would apply to incomes over $164,000 rather than $180,000.

Discussion about whether people earning $65,000 should face a 33% tax rate might have been heated.

Thanks to the Reserve Bank of New Zealand having forgotten about its one big job while pursuing other trendy objectives, $70,000 today is worth the same thing as $64,000 in April 2021.

I went through a few more of the numbers on bracket creep. Susan Edmunds followed it up with a couple more stories on tax and inflation.

One of the more depressing kinds of responses to these stories is argument that inflation pushes government costs up too so all's fine. Think about it this way. 

Imagine we had a 30% flat tax that covered everything and government had a balanced budget. If inflation pushed everything up in parallel, no worries: government collects 30% of the bigger income figure, and its costs go up by the same amount, so it all works out.

Now flip it so that the two-thirds of the population face a 25% tax rate and the top third pays 35% on their last dollars earned. And that the income distribution is such that government collects the same amount of revenue as it would have collected from a 30% flat tax. Run inflation in that model and you aren't just getting 30% of a bigger number, you're getting more dollars taxed at that higher 35% rate. Government revenue goes up extraproportionately.

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