Thursday 5 October 2023

The problems of a tax-free threshold

Jim Rose details the problems with a tax-free threshold for the NZ Taxpayers Union. 

Running one that's revenue-neutral means you have to increase marginal rates further up. Increasing marginal rates to fund inframarginal transfers mightn't make the most sense. And there are better ways of targeting support, if that's what you want to do. 

He writes:

  • The introduction of a tax-free threshold is poorly targeted with many of the intended beneficiaries of the policy already receiving other Government support such as benefits, superannuation and tax credits, which could be increased without spillovers to other higher income groups.
  • The more important tax threshold that needs to be adjusted is the $48,000 income tax threshold that when crossed sees individuals paying a 30% marginal tax rate. Given that a full-time minimum wage worker earns $47,216 annually, they only need to work one additional hour a week or get a 40 cent per hour pay rise in order to be pushed into the higher tax rate. This, combined with the 27% abatement of Working for Families tax credits, can create punishing effective tax rates well above 50%, which has significant impacts on incentives to work.
  • Most of those in incomes low enough to substantially benefit from a tax-free threshold are either in groups where more targeted support can be provided (such as those listed above), are students working part time, or are second earners, again working part-time.
  • The tax-free thresholds proposed by the Greens and Te Pāti Māori, along with the one considered earlier in the year by Labour, would cost more than what is currently spent on Working for Families but spills over to many taxpayers who do not need it, rather than just those the policy intends to help.

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