Adjusting the income tax brackets for inflation
New Zealand has a progressive income tax system. This means that as your income increases you pay proportionally more income tax .
Most western countries have a progressive income tax system as it is regarded as fair that those who have a higher income should pay more.
However, a progressive tax system has one huge disadvantage and that is inflation.
Even with modest inflation people on lower incomes can be pushed up into higher tax brackets so that their after tax income falls in real terms.
This phenomenon is known as bracket creep or fiscal drag. If the brackets go unchanged then someone on a benefit would end up on the highest rate of tax.
So the solution is to adjust the tax brackets on a regular basis but this often does not happen because the government of the day gets a tax windfall and politicians are good at finding ways of spending that windfall.
The last time the NZ tax brackets were adjusted was back in October 2010 when John Key was our prime minister.
The last two labour governments have not adjusted the tax brackets and left it up to a national government.
Each time when the tax brackets are changed then the government making the adjustments gets criticised for giving tax cuts to the rich.
The reality is that the brackets have to be adjusted for a progressive tax system to operate properly and not overtax people on lower incomes.
I think it is time for the adjusting of the tax brackets to be taken out of the politicians hands and put into the control of the public servants such as the Reserve Bank or the Inland Revenue Department.
One country that does this is the United States.On the 9 November last year the American Internal Revenue Service announced the annual inflation adjustments for more than 60 tax provisions for the 2024 year.
They do it annually but we struggle to do it each decade.
You should contact your chartered accountant or financial advisor before making a financial commitment.