Joyce gets to work with tax-cut shuffle
There’s an art to extracting the maximum political mileage out of the election-year Budget, especially when it comes to tax cuts.
It is a skill perfected over the years by (mainly National) finance ministers.
You can tease, tantalise, half-promise . . . you can even give a steer as to where cuts might come.
And you always say they will be targeted at ‘‘low and middle income earners’’ even if you have to squint through a prism to see them that way.
But you never, ever confirm them ahead of time.
For preference you milk as many headlines as possible from the slow reveal (see: ‘‘tease, tantalise and halfpromise’’, above) while leaving the serious spending until after the election.
That way you get to spend only a wee slice of the election-year Budget, to cover just three months of your first year’s tax largesse – from April to the end of the financial year on June 30.
Even better, you can also preserve the best possible surplus for the pre-election Budget, granting yourself bragging rights over your awesome fiscal management.
But at the same time you can promise mega-bucks from the post-election Budget – in the current case the May 2018 document – safe in the knowledge that forecast surpluses will be bigger next year (they always are) while at the same time dangling the cash as a not-so-subtle election bribe.
‘‘You’ll have to vote for me if you want to get them. Vote for them and you may not.’’
This time around there are signs the public is more sympathetic to spending on public services, help with extra incomes for the poorest, and extra cash to improve infrastructure – with the Kaikoura earthquakes fresh in mind.
Before he quit John Key showed he was alert to the politics on the income side of the equation with his talk of a ‘‘family and tax cut package’’ – because tax cuts in themselves could not deliver much to those earning the least.
Starting soon after he was appointed last year, Finance Minister Steven Joyce has been largely playing the same tune.
In two key speeches over the past week he has set out his four priorities; better public services, building (more sustainable) infrastructure, reducing the debt burden as a percentage of GDP, and lowering ‘‘the tax burden . . . in particular the impact of marginal tax rates on lower and middle income earners’’.
When it comes to the tax cut aspect he has been playing from the score composed by his predecessors.
The cuts will only come when the Government has the (undefined) room to do so. The plan will ‘‘start’’ this year or next but there will not be big bikkies in the May 25 Budget.
And he has been making it clear since before Christmas that the focus will be on the thresholds.
Under the current regime the tax rates are 10.5 per cent up to $14,000 a year, 17.5 per cent from $14,000 to $48,000, 30 per cent above that until the top 33c rate cuts in at $70,000.
But Joyce has repeatedly highlighted the $48,000 threshold, pointing out that the rate makes a big jump at that point, from 17.5 per cent to 30 per cent.
When student loan repayments of 12.5 per cent are added (which are triggered at income of $19,084 – so look for a move there too) the marginal tax rate balloons to 42c in the dollar.
Poverty researcher Susan St John has pointed out that it can get worse.
Someone with children and a student loan, who earns more than $48,000 also faces a loss of 22.5 per cent of their Working for families entitlement, making their effective tax rate as bad as 64.5 per cent.
Even so, if Joyce is true to his spruiking, wouldn’t a move to lift those bottom thresholds meet the promise of helping low and middle income earners? Well, yes and no. First, pushing the $48,000 level up significantly would narrow the gap to the top 33 per cent threshold of $70,000, bringing with it pressures to lift that top threshold too.
And then there is the simple fact that the greatest dollar beneficiaries of a move to the thresholds are the people with earnings above the new threshold.
So an increase in the threshold from, say, $48,000 to $60,000 will give all those between those two levels something.
But it is those on $60,000 and above who would reap the most; $1500 a year or about $30 a week.
Changes to other thresholds cascade up in a similar way.
But big threshold moves are not cheap.
Lifting the $48,000 threshold to $60,000 would cost a cool $1.5 billion a year out of a pot that Key, before he quit, said should be about $3b a year (about $30 a week each) to be meaningful to voters.
Truth to tell, anyone can play the taxcut shuffle. All you need is Treasury’s handy ready reckoner.
Each $1000 increase in the top threshold (currently $70,000) costs $20m. Each $1000 increase in the middle threshold (currently $48,000) costs $125m. Each $1000 increase in the bottom threshold (currently $14,000) costs $160m.
Give yourself a $3b pile of coin, and mix and match the options.
At least it will be more fun than watching Joyce do the dance of the fiscal veils.
Will lifting the bottom tax thresholds help out low and middle income earners? Well, yes and no.