Tax policy is a perennial election battlefield and the upcoming General Election is no different. In this series of articles, I aim to explain and comment on each party’s tax policies from a ‘neutral accountant’ point of view. The aim is to cut through some of the campaign spin and help voters make their minds up come October 17. The information is sourced from content on the parties’ websites.
In today’s article I look at Labour’s policies, with a focus on the other parties to follow. From my reading of Labour’s policies on their website, there are four main policies.
Policy 1: A new top tax rate of 39% on personal income earned over $180,000.
This new top tax compares with the current top tax rate of 33% for income earned over $70,000. Labour estimates this new tax bracket will generate an extra $550 million of tax revenue. This may sound like a lot, but as a percentage of overall tax revenue it is not very much. In the 2018/19 financial year total tax revenue to the Crown was $86.5 billion, so this higher tax will only generate about an extra 0.6% of revenue.
While this new policy would eke out a little extra revenue for the Crown, are there any downsides? One factor worth considering is that the new rate would widen the difference between the top income tax rate (39% proposed) and the rates at which trusts (33%) and companies (28%) are taxed.
This wider difference may increase people’s emphasis on tax planning methods such as routing income through trusts or companies as they try to avoid having to pay the 39% tax rate. Aside from generating a lot of accounting and tax advice fees, this sort of tax planning focus does not really benefit New Zealand as a whole.
Policy 2: No new taxes or further increases to income tax next term.
One factor worth mentioning in relation to this policy is a concept called ‘bracket creep’. When tax brackets remain static, the Crown still brings in more revenue each year simply because average wages tend to increase. The antidote to this would be for tax brackets to increase each year by the same amount as inflation, something Labour does not propose, but which at least one other party (New Conservatives) does propose.
Policy 3: Will not raise fuel taxes
The current fuel excise is about 77 cents per litre, with an extra 10 cents per litre for fuel sold in the Auckland region. These excises have GST added to them. A bit like the ‘bracket creep’ idea, the amount of GST collected increases as the fuel price increases, which means that the total tax take per litre of fuel sold in NZ would go up if fuel (oil) prices go up.
Policy 4: Will continue closing tax loopholes to make sure multinational corporations pay their fair share
This effort has been going on for several years and has proved an elusive nut to crack. In a world of global corporations, especially those that do their business in cyberspace such as Facebook or Google, it can be hard to work out which country gets the right to tax them, where the product or service is delivered and how to calculate the tax.
Labour’s policy around this does not give any detail, so I assume it to be a continuation of New Zealand’s current efforts which mostly centre around entering OECD and G20 agreements to prevent tax avoidance methods such as Base Erosion and Profit Shifting (BEPS) where profits (and tax) are funnelled to countries with low tax (i.e. away from New Zealand).
Overall the Labour tax policies seem to involve a bit of tinkering with the status quo. The additional top tax rate would bring in a relatively small amount of additional revenue. Certainly the extra $550 or so million wouldn’t go amiss as the Crown looks to claw its way out of the COVID-19 debt hole, but the extra complexity that comes from increasingly divergent tax rates (income vs trusts vs companies) would take the edge off the gains.
In the next article I will focus on National’s tax policies, before moving to those of the Greens, NZ First, New Conservatives and TOP. Having looked at them all, it seems to be the smaller parties where a lot of the most interesting tax policy ideas are coming from.
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