National’s tax plan: How would it affectmost people?

The National Party’s proposed temporary tax cuts would make some households better off – but they would likely use the extra income to pay off mortgages rather than spend the money to stimulate the economy, one tax expert says.

Releasing its alternative budget yesterday, National outlined plans for changes to tax thresholds that would apply from December 2020 to March 31, 2022.

The party estimated this would make more than a million New Zealanders $2500 better off.

Instead of being taxed 10.5 per cent on their first $14,000 of income, people would earn up to $20,000 at that tax rate. Income between $20,000 and $64,000 would be taxed at a rate of 17.5 per cent; that rate applies up to $48,000 at present.

Income between $64,000 and $90,000 would be taxed at 30 per cent – at the moment, income over $70,000 is taxed at the top rate of 33 per cent.

Under National’s plan, this top rate would not kick in until $90,001.

It would mean that people earning the median wage would pay a top tax rate of 17.5 per cent rather than 30 per cent.

Average earners would benefit by $46.50 per week or $3226 over the 16-month period. National said this would give New Zealanders the confidence to consume, which would benefit the economy.

But the average hides significant difference. Someone who earns $90,000 a year would be $58.08 better off a week, compared with $1.35 for someone earning $15,000. An $80,000 earner would have an extra $52.31 in their pocket and someone on $70,000 would have another $46.54.

Deloitte tax partner Robyn Walker said the tax thresholds had not changed for a long time.

‘‘People felt the thresholds were due to move … so many people are on the top rate. It does make sense that some thresholds would be increased. It would be great if it was a permanent change but if they are doing it on a temporary basis, that is a good start.’’

Walker said that by the time the changes were due to end it would be clearer what sort of shape the economy was in. ‘‘Increasing the thresholds will make a meaningful difference.’’

Tax expert Terry Baucher said this sort of short-term stimulus was common around the world.

He said higher-earning households would benefit the most. But they were also more likely to save the money or pay down debt. ‘‘With a progressive tax system, the further up the chain, the bigger the benefit.’’

He said the proposal, combined with National’s plan to reduce the bright line test to two years and allow landlords to once again claim their losses against other income, could create problems.

The bright line test requires property owners to pay tax on gains made on an investment property bought and sold within a specific period. ‘‘It will exacerbate the problems with the taxation of capital.’’

People who had reliable income would use the extra money to pay down debt in times of economic uncertainty, he said. ‘‘If they know it is not permanent ... when they get the extra money they will stash it.’’

Baucher said he would have preferred to see a plan that targeted tax cuts at lower-income families and helped those on benefits. ‘‘Lowerincome households spend any money that comes in – it circulates back through.’’

National also pledged to adjust tax thresholds every three years to match inflation, which Baucher said was welcome. He said governments had for too long let bracket creep push more people into higher tax brackets and then claimed a ‘‘tax cut’’ when that was adjusted.