Opposition to 'stealth tax' gains ground

It hardly makes voters sit up and take notice when politicians speak of "tax bracket indexation''.

Even descriptions such as "fiscal drag'' and "bracket creep'' fail to make much impact. Try to explain how wage and inflation rises move parts of income into higher tax brackets and the complexity bewilders. New Zealanders generally take little notice of the details of tax, yet alone endeavour to understand this concept.

But tax bracket indexation might make headway in the next general election in 2020. That, in part, will be because the shorthand term "stealth tax'' is gaining currency. It was used by National last week when leader Simon Bridges announced his party would review tax brackets every three years to take account of inflation.

National is wanting to stress its claimed economic management credentials in contrast to Labour's alleged "tax and spend''. The "stealth tax'' will be part of this push.

More tax is, indeed, paid each year without the Government having to announce tax increases. Everyone just steadily slips up the scales. The tax bracket thresholds, in effect, change each year because of wage rises.

Of course, this begs the question about why National did not introduce indexation when it was in power for nine years. It was useful, especially when confronted by the Global Financial Crisis and the Canterbury earthquakes, to pocket the extra money and give the impression it was not increasing taxes.

By the end of its run, National had moved to surpluses and promised tax changes - including substantial threshold changes for middle and lower earners. As it happens, New Zealand First's official policy before the last election was to adjust thresholds to account for inflation.

Labour promised to ditch National's planned "tax cuts'' and did so. Along with the surging surplus, this has allowed it to pay for the likes of first-year free tertiary fees and state servant pay rises - even if offered amounts have often been rejected as insufficient.

As wages rise, albeit mostly slowly, and as the minimum wage climbs, so too does the Labour tax take. Again, this is occurring without the need for any announcement about tax increases.

The Tax Working Group, set up by Labour, received submissions calling for tax thresholds to be linked to inflation. It was calculated this fiscal drag cost wage and salary earners $1.7billion in extra tax since 2008.

The highest threshold is $70,000 (above which tax rates rise to 33c in the dollar), and numbers earning above that level has doubled in 10 years to 665,000 people.

A paper from Inland Revenue and Treasury, for the tax group, noted bracket creep could be seen as a "non-transparent'' tax or a "stealth'' tax. "Whether this is of sufficient concern is a value judgement,'' it said.

If the thresholds were adjusted for inflation, they would have risen from $14,000 to $15,232 (10.5%), from $48,000 to $52,223 (17.5%) and from $70,000 to $76,159 (30%), the paper said.

Finance Minister Grant Robertson's attempts to bat off the criticism of the "stealth tax'' were ineffectual. By next year, this will become even tougher as more of the incomes of teachers, nurses, police, trades people and many "middle'' New Zealanders and Labour Party supporters shift into the top tax bracket.

The marginal effect of non-indexation in any one year might be modest, but by 2022, the average wage is expected to reach into the top tax bracket.

Ahead of the announcement of details of Labour's tax review, National was able to position itself as reasonable and "fair'' on tax. The term "stealth tax'' has been around for many years. Expect to hear it more in the run-up to next year's election. As this label circulates, support for tax bracket indexation is likely to grow.


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