Labour leader Phil Goff unveiled the policy yesterday and it will be a cornerstone of the party's election campaign.
He said most families gained nothing from the Government's tax cuts last October because of increased costs while 700 people earning more than $1 million a year were given more than $1000 extra a week.
The tax-free zone would give families $1000 extra a year.
Mr Goff said it would cost about $1.3 billion a year in lost revenue, and told reporters wealthy tax dodgers were getting away with "billions" through loopholes a Labour government would close.
Labour hasn't yet decided how much it will raise the top rate of 33 cents.
Mr Goff said the new rate would affect only the top few percent of earners, those who were "comfortably into six figures".
Prime Minister John Key said Mr Goff was making totally irresponsible election promises because Labour would have borrow huge amounts to cover lost revenue -- although Mr Goff had said there wouldn't be any borrowing.
Mr Key said a limited amount could be raised by closing loopholes and raising the top rate.
"On our numbers he is short by at least $1.1b a year," Mr Key said.
"It's just fiscally irresponsible... we live in New Zealand, not in fantasy land."
Finance Minister Bill English said Mr Goff should spell out precisely where the money for the tax cut was going to come from.
Revenue Minister Peter Dunne, who also held the portfolio under the previous Labour government, said former finance minister Michael Cullen had rejected tax free zones.
"In Dr Cullen's own words, such a move would have `minimal benefit for a very small number of low income earners'," Mr Dunne said.
"People see through these kind of flip-flops and hip pocket bribes."
ACT's finance spokesman, Sir Roger Douglas, said Labour's historic "tax and spend mentality" was being maintained.
"The fact is New Zealand is in trouble, we are living beyond our means, and rather than solving the problem we have, Mr Goff is trying to add to it," he said.
Mr Goff said the Government's criticism was "feeble and hypocritical" because it was borrowing money to pay for its own tax cuts which had benefitted the wealthy.
"It is borrowing $120 million a week to pay for that policy, yet Bill English has got the cheek to suggest that Labour will not be able to afford a much more prudent and fair tax free zone -- a policy that treats everyone the same," he said.
