After having failed to get the residents of Oamaru, Christchurch, Wellington and Napier to pay for Auckland’s CBD rail loop, Len Brown has proposed half a dozen new taxes as possible ways to pay for the loop.

The proposed taxes include:

• Regional income tax – new income tax paid only by Aucklanders.
• Regional payroll tax – new income tax paid by Auckland employers.
• Regional GST – raising GST in Auckland.
• Regional fuel tax – raising petrol and diesel taxes across Auckland.
• Visitor taxes – nightly charge for hotel and motel rooms.

Richard McGrath blogs at Not PC on how if you want the rich to pay more tax, you should tax them less. Recall that only half of our 100 wealthiest New Zealanders pay the top tax rate. Under the Goofynomics plan to have the top tax rate at 39% and the corporate rate at 28%, I’d say the number paying the top tax rate would drop to under 1/4.

McGrath quotes Keynes:

“[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget.”

And then he goes on to give some examples:

• UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
• UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
• US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
• US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: “[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates…” As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
• US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  
• Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.

Goff should know this. He was one of those who voted to lower the top tax rate to 33% in the 1980s.

If you spend all your after tax income, then those on the top tax rate already pay 43% of their income in tax, when you include GST. We’ll leave ACC out of this for now. I think that’s more than enough.

Paul McBeth reports:

Inland Revenue is chasing unionist Matt McCarten’s Unite Support Services for $150,750 in unpaid taxes after the department forced the company into liquidation last month.

McCarten’s vehicle, which supplied administrative support services to the youth-orientated union Unite, was put into liquidation by a High Court order last month after the IRD pursued it for “failure to provide for taxation,” according to the first liquidator’s report.

As far as I now this is not just unpaid income tax and/or GST. But it includes unpaid PAYE, which is quite horrific as the employer acts in a trustee capacity for the employee who actually pays the tax. An employer that spent the employees’ PAYE on other activities would be lashed by unions as a bad employer.

You also have the hypocrisy of a union (and its spin off the Mana Party) advocating that people should pay more taxes, when they don’t even pay their own taxes, and effectively stole the PAYE tax from their employees.

I asked on Twitter whether Labour were likely to use their “Ax the tax” bus in the election campaign. Lots of humourous feedback, but the best retort came within a few seconds from Revenue Minister Peter Dunne who said they were going to rename the bus to “Max the Tax”.

Whale has provided this new graphic. Thanks to Peter for the slogan, which I suspect we have not have heard the last of.

In a desperate attempt to justify whacking the “rich” with higher taxes, Rob Salmond comes up with a new form of maths – when a figure is negative you count it as zero, rather than include it in the calculation.

According to Rob if you had assets and liabilities of (for example):

1. Term Deposit – $200,000
2. Shares – $100,000
3. Loan – $50,000

Then your term deposit is only 67% of your net assets ($200,000/$300,000) rather than 75% 80% ($200,000/$250,000).

Hilarious. And desperate.

Labour have said that over 15 years their tax package will reduce debt by $8b. Steven Joyce says it will increase debt by $15b. Let’s have a look at where their numbers differ.

First it is worth recalling that what is undisputed is that Labour’s package will result in more debt for at least the next seven years. It is only if Labour win this election, the 2014 election and 2017 election that in their third term would their tax switch start to reduce debt – by their own calculations.

By Steven Joyce’s calculations, it will never reduce debt. At a time when debt is growing massively, Labour is actually proposing to borrow for tax cuts – they very thing they have accused National of in the past.

Now I’m going to go through the differences line by line. Keith Ng has also blogged on some of the differences. Keith, like me, is a former parliamentary staffer for Labour (National for me of course) so we both tend to have a more favourable disposition towards numbers from our own side. But that doesn’t mean one can’t also look at the quality of the argument.

CGT – The $1.6b difference is not hugely significant, both Keith and I agree. This is for revenue over 13 years, so the difference is around $100m a year. Joyce uses a Treasury CGT model developed in 2011, and Cunliffe uses BERL. Joyce makes the point though (which has not been covered much) that getting a CGT in place by April 2013 would be nigh impossible considering the huge number of issues being left to the expert panel. You need time to appoint panel, have the panel do its work, then draft a bill up, and then go through select committee process.

New top tax rate – Joyce has this coming in at $934m less over 13 years. Not a big difference per annum. I would tend towards the lower figure because I think it is inevitable that a top personal tax rate of 39% and a company tax rate of 28% will see massive (legal) avoidance. We already know half the top 100 earners don’t pay the top rate. This policy will probably see it drop even lower.

Loss ring-fencing. The TWG said loss ring-fencing will lead to behavioural changes, so Labour’s policy will only bring in half of what Labour says. Keith Ng basically agrees, so little dispute there.

Anti-avoidance. Labour have just invented a figure of $300m a year from greater anti-avoidance work. Now this is pie in the sky. If Labour announced actual law changes to reduce avoidance, then maybe you can estimate revenue changes. But this is the equivalent of “I hope it happens”. Keith Ng is right that it is probably not realistic to say Labour will not be able to get any extra revenue at all, but when you consider most experts are saying their tax package will make the tax system more complicated, I think avoidance will increase not decrease. In the absence of any specifics around anti-avoidance measures, I think you go with zero.

Agriculture ETS. this is basically an argument about what the price of a carbon credit will be. Cunliffe uses $50 and Joyce $25. Ng backs Cunliffe on the basis that the PCE has said they estimate the price will be $50 by 2030 if there is little international action on climate change and $100 if there is a moderate commitment. Australia’s ETS is priced at NZ$30.

However against that the current international price is 11 euros, which is NZ19 only. And bear in mind this is for the whole period 2013 – 2025. Let’s say the PCE is right and in 2030 the price is $50. Then if you assume linear price increases, maybe an average price is $35 for the period of the forecasts. So around halfway between what Joyce and Cunliffe say. Personally trying to predict ETS revenues more than a few years out is very challenging as it all depends on if a post-Kyoto agreement can be reached.

The first $5,000 tax free zone has a $2.2b difference over 13 years. Keith says:

Everyone earning over $5000/year would get the benefit of the whole tax free threshold. That’s pretty much everyone in the workforce. So if everyone already gets something, how would more people get it?

The cost of a tax-threshold only grows when new people enter the workforce.

So unless Joyce thinks he can create 3 million jobs (and find 3 million workers to fill them) in the next decade, this is a patently stupid and ridiculous result. Common sense would tell you that it is impossible.

This one goes firmly in Labour’s favour.

But Keith misses a key point. It is one I have blogged on many times, but gets so little media attention. Labour’s tax free zone is not just for people in the workforce. They have pledged it will also apply to everyone on benefits, even though benefits are calculated on an after tax basis.

Labour are actually promising to increase all benefits by $10 a week – the first ever increase (beyond inflation) for over 20 years. Tax cuts have never applied to benefits in the past (as they are calculated on an after tax basis). Cullen’s 2008 tax cuts did not. But Labour is saying they will pay people on the dole more money for not working.

Also as superannuation is calculated with a floor linked to the after tax average wage, their tax free threshold will increase the cost of superannuation.

So Keith is wrong when he says the tax-free threshold will only increase in cost when new people enter the workforce. It will increase in cost whenever we get new workers, new beneficiaries or new pensioners.

Now having said all that, National’s numbers do still look a bit high with the cost increasing approx $80 million a year, which suggest an extra 160,000 people per year working (as tax free zone is $500 of foregone revenue), on benefits or retired. So while Keith gets some stuff wrong, National’s numbers may be too high.

On GST there is no dispute, and for R&D tax credits Keith says National’s figures look more robust.

Then finally we have the biggie – finance costs, or the extra interest on the extra borrowing. There can be no debate that one should calculate finance costs, unless Labour has convinced the People’s Republic of China to loan us money at 0% interest. This is an extra $7.5 b of costs. Even if you take Labour’s numbers for some of the items, you will still have billions in finance costs.

Using Cunliffe’s numbers Labour is borrowing for at least seven years. If you go to Keith Ng’s numbers then I’d say (Keith didn’t do formally calculate this) that the borrowing is for at least a decade, and if you think Joyce’s numbers are more realistic (and for the most part I think they are) then Labour’s package is never fiscally positive.

But the up to $15b of extra debt is just the beginning. You see Labour done a big lie, and said it is a choice of asset sales or their tax package. But they have not calculated for any increased borrowing through no sales. If you add on the extra $7b they will need to borrow, then the borrowing figure climbs to up to $22b. Of course there will be over the long term less income from dividends.

But even putting aside the asset sales issue, the big big issue is spending. You see Labour’s debt track is already up to $15b higher – before they even fund a single spending promise. it is impossible to think that Labour is going to campaign on spending no more than National. Labour were increasing spending at $2b a year and National reduced this growth to $1.1b, then $0.8b and finally zero. Each time, to protests from Labour. Let’s say Labour promises an extra $1b a year of spending (they have implicitly already promised many billions through their opposition to spending reductions).

The cumulative debt from an extra $1b/year of spending is:

• Year 1 – $1b
• Year 2 – $3b
• Year 3 – $6b
• Year 4 – $10b
• Year 5 – $15b
• Year 6 – $21b

Basically Labour are going to increase debt with their tax package, increase debt with their spending, and increase debt through not doing partial floats of SOEs.

Cost of Labour’s Promises

Steven Joyce has put Labour’s numbers through the Treasury calculator (found at http://www.treasury.govt.nz/government/fiscalstrategy/model) and found that it is far worse than even Labour were revealing.

Labour’s own numbers revealed that their tax plans would lead to greater deficits and debt for the next six to seven years. They desperately did not want people to know this, so left this document off their website.

But their own numbers were inflated, such as as imaginary $300m a year from reduced tax avoidance (despite them wanting to have an 11c gap between the top tax rate and the company rate). They also failed to take account of interest costs, and over-estimated revenue from some of their measures. The numbers on the CGT itself were largely accurate, but on the rest of their package were crap.

So what does it mean? It means Labour’s package will result in less tax revenue until 2024! And then when you take account of the interest on the extra borrowing, it will result in an extra $15b of borrowing between now and 2025.

But it does not end there. This assumes that Labour will keep to National’s spending track. That they will not pledge one cent extra in spending than National. That there won’t be one cent extra for early childhood education etc.

So the $15b of extra debt is just on the revenue side. Wait until they release their spending plans and see that number increase exponentially.

The problem is not Labour’s CGT per se. The problem is that their promise to remove income tax on the first $5,000 of income is unaffordable. It has no fiscal credibility and can only be funded by increased borrowing.

Labour Tax Costs

My column in the NZ Herald focuses on the numbers in Labour’s tax policies. They stuck up masses of data on their site, but the one document they did not stick up was the one above, which shows that it will take seven years for Labour’s tax package to be fiscally neutral. They’d have to win a third term for it to start to bring in more income than they forego. And they also project $300m a year less tax avoidance by waving a wand. In reality an 11c difference between the top personal tax rate and the company tax rate will lead to much greater levels of tax avoidance.

Here are details to hand. On radio shortly so won’t have time to check full details of timing, and whether the numbers add up.

• Cullen’s envy tax of 39% put back on, but starting at $150,000
• The first $5,000 tax free (which includes increasing benefits by $10 a week)
• A CGT of 15%
• Boats will be exempt from the CGT.
• A farm house will be exempt, but not the farm itself
• Jewellery is exempt. So if you invest in a start up company which makes money you pay CGT, but if you buy jewellery which appreciates you do not
• If you are over 55 and have owned a small business for 15+ years then first $250,000 capital gain is tax free.
• No GST on fresh fruit and vegetables

I’d say tax accountants will be celebrating the extra work, if this came to pass

Stuff reports:

Inland Revenue Department figures provided to Labour revenue spokesman Stuart Nash show that, in the latest full year for which figures were available, the average tax paid by dairy farms was $1506 a year, despite an average Fonterra payout understood to be well over $500,000.

The 17,244 registered as being in the sector, including companies, trusts and individuals, paid only $26 million in tax.

This is such a bullshit story, I don’t know where to start. Here’s a few vital facts:

1. The tax data is from 2008/09 and the Fonterra payout figure is from 2011. Epic fail. As I understand it commodity prices in 2008/09 were much lower, and most farmers in that year made a loss.
2. The $500,000 is a revenue or turnover figure, not a profit figure. This is not comparing apples and oranges. A company can have a $500,000 turnover and a $30,000 profit. Turnover by itself is meaningless for tax purposes.
3. The $26m in tax paid in 2008/09 only relates to tax entities classified as dairy farmers. Many dairy farmers are in the unclassified category which paid an additional $1.5b in tax.
4. Labour and the Dom Post divided the $26m by the 17,244 tax entities registered as dairy farming. Many of these are defunct shelf companies etc. The actual number of dairy farms is thought to be around 11,500.

MAF have some data on the average dairy farm. In 2008/09 they found the average farm had $750,000 income, $529,000 expenses, $235,000 interest and depreciation resulting in a loss of $6,300. Their average tax bill was $18,600 so profit after tax was -$25k.

So the story is a total beatup. They commit two cardinal sins. One is comparing revenue from one year against tax of two years earlier. You’d be thrown of of accountancy school for that. Equally bad is comparing turnover to profit. A mistake that only people who have never worked in business would make.

Having said all that, I am a supporter of a land tax (subject to a reduction in income taxes to compensate). A land tax is near impossible to avoid, very simpleto calculate and provides an incentive for land to be out to good economic use.

If Labour are serious about closing tax loopholes, then they should propose a land tax. It would over time boost NZ’s economic growth as it encourages better economic use of land.

Good news. Tomorrow is Tax Freedom Day. This means everything you have earnt up to tomorrow has gone to the Government to fund its spending, and you get to keep everything from tomorrow onwards.

I’d love tax freedom day to be held in March. That won’t happen anytime soon, but what would be realistic is a goal of having government spending no more than 30% of GDP. I’d like the Fiscal Responsibility Act amended so that a Government has to publicly state what its target or limit for government spending will be. This would not be binding, but would give some transparency over Government policy, and allow a more informed choice between parties.

There is considerable merit in having a tax free threshold as Phil Goff has proposed. I personally think no income should be taxed until a person is earning enough to live on – otherwise you just plough that tax back to them in the form of welfare which leads to inefficient tax churn.

But, and this is crucial, you need to make changes to welfare, WFF, child tax credits etc at the same time as you bring in a tax free threshold. It is worth remembering that many workers do not even pay net income tax until they reach $50,000 income (if they have two kids).

The other issue is affordability. If Labour had proposed a $5,000 tax free threshold when we had massive surpluses in the mid 2000s, then I would have cheered. But the Government is currently borrowing $300 million a week just to finance current spending. And if National had not made changes to Labour’s spending plans, the deficit and debt would be on a track to be ever-increasing – which would require Ireland or Greece type intervention.

The proposed “rich prick” tax on those who dare to earn a six figure income will not raise anywhere near enough money to cover a tax free threshold of $5,000. And frankly there are limits to how much one can clobber the top taxpayers – recall that the Tax Working Group found the top 10% of taxpayers pay 76% of net income tax. The more you try to clobber them, the more they will avoid tax – or leave. Recall also the finding that of the 100 wealthiest NZers, only half I think were actually paying the 38% tax rate.

Phil Goff should know this. He was part of the Government that got rid of Muldoon’s top tax rate and put in a top tax rate of 33%. And if you recall, that actually led to more tax being collected.

Then we have the so called crack down on tax avoidance:

Labour is also promising to crack down on lucrative tax loopholes used by property investors, saying it will set up an Anti-Avoidance Tax Taskforce to close the loopholes.

Billions were estimated to have been lost by people dodging tax, Mr Goff said. He singled out the ability of investors to offset rental properties against their salary to avoid paying tax.

First of all, one thing I guaanatee is that tax avoidance will increase not decrease if you stick the top tax rate up.

Secondly Goff has missed the boat. The current Government in the last Budget clamped down on several tax avoidance loopholes, plus has funded the IRD to be more aggressive here.

But even more critically, the investment property route to making money has been almost killed off by the Government’s changes to depreciation rates, plus the bubble bursting on house prices. Goff is two years too late with his policy.

I’ve just purchased a new apartment (in fact moved into it yesterday) and one of the decisions I’ve had to make is whether I sell the old apartment or keep it and become a property investor (like Phil Goff is). I’ve done the sums and now you can’t claim depreciation, the interest and other costs well outstrip the income you would get from rent – and any tax reduction on a loss, is less then the actual loss. If I was certain that property prices will increase constantly, then it would be worth doing for the capital gain. But I don’t think that is at all certain.

Up until this announcement, Labour had already indicated they wish to borrow an extra $6b a year or so (if you add up all the extra spending they have called for etc). With this policy that becomes over $7b a year.

Labour have only two tax policies – remove GST off fresh fruit and vegetables, and reintroduce a rich prick tax.

To help them with their policy development, Cactus Kate has proposed ten tax policies for them:

1. Reduce GST to 10%
2. Require all trusts in New Zealand to be registered with the IRD with the name of the settlor and beneficiaries
3. Farmers, the largest of polluters (according the the numbnuts measuring of carbon) should be taxed per head of animal per year with the cost that New Zealand has to pay to the invisible pie in the sky
4. Anyone with assets or is a beneficiary or settlor of a trust with more than say $500,000 can no longer receive Superannuation.
5. Reduce the deductible amount to 20% of the total interest expense on real property (land) such that land owned by farmers, property “investors” and the like cannot pay less or even no tax by increasing the interest deductions based on leveraging property.
6. Reintroduce gift duty
7. Introduction of a 20% duty for the sale of all property including primary residence and all forms of land.
8. A new top tax rate of 45% on those rich pricks earning over $120,000 and an increase of the current top tax rate for income between $70,001 to $120,000 from 38 cents up to 40 cents.
9. Abolish Marshall clauses (which excludes the shortfall in interest as a “gift”) where the loan is repayable on demand
10. Taxing New Zealand citizens (passport holders) at a 45% deemed disposal rate on expatriating their wealth at the date of departure if they become non-resident and a 15% inbound transaction tax on their assets coming back in even while they are still non-resident.

I’m worried that they may adopt a few of them.

In a follow up to the story I blogged about yesterday, Rebecca Stevenson at the Dom Post reports:

The Council of Trade Unions wants an explanation from Unite on why it failed to pay the IRD more than $36,000 in PAYE on behalf of its employees.

Unite, one of New Zealand’s largest unions, owed IRD over $130,000 for the year ended March 2009 (its most recent filing), including more than $57,000 in unpaid GST. For the same financial year its liabilities outweighed its assets by more than $170,000.

It is the unpaid PAYE that will be causing most concern, as this is in fact money owed by the employees to the IRD, and UNITE has appropriated it for its own purposes. It is the sort of stuff that the newspaper boss Maxwell did – but on a much smaller scale.

Unite head Matt McCarten confirmed yesterday that the union owed money to the IRD but said he had made choices to pay for union campaigns rather than clear the debt. “I don’t shy away from these decisions, I make the calls.”

He said Unite paid $8000 in PAYE each month to the IRD but kept incurring late payment penalties. He claimed not to know exactly how much it owed the IRD.

The late penalties do add up – as many businesses know. But if it was a deliberate decision to keep running campaigns, instead of paying off the debt, then few will have sympathy.

He agreed it was not a good look for a workers’ union to fail to pay its employees’ tax.

I don’t think Matt realises how bad a look it is. The next time UNITE or Matt calls for greater government spending, this issue will arise.

CTU president Helen Kelly said Unite did good work in an area that was difficult and expensive to organise. That required it to juggle its finances. “All unions are always short of resources.”

However, when questioned on Unite’s tax failure, she said: “I need an explanation for that”.

I’m not sure I would say all unions are short of resources. The combined wealth of the union movement puts the Business Roundtable, Business NZ, and the Chambers of Commerce to shame. I did a blog post a couple of years back comparing them.

The Herald reports:

A Ngapuhi leader is calling for a nine per cent economic development tax to be levied on everyone living inside the iwi’s boundary as part of its treaty claim.

Matarahurahu hapu chairman David Rankin said the proposed flat tax rate, which would be administered by the Inland Revenue Department, would “pull Ngapuhi out of a depressed state” and ultimately benefit the entire region.

He would like it to fund social and economic development projects such as aquaculture programmes, and make Ngapuhi as prosperous as iwi like Ngai Tahu and Tainui, which benefit from rich resources in their regions, he said.

Before people get too excited over this, I should point out that David Rankin does not speak for Ngapuhi. He has a long history of saying things which range from the stupid to the even more stupid.

However, there had also been “one or two” members of the Ngapuhi Runanga, who administer the claim, who expressed their strong opposition and threatened to bar Mr Rankin from speaking at Waitangi Tribunal hearings.

So this is clearly not a formal position of the Iwi.

I won’t even bother to speak to the fact that such a tax would never be agreed to. I want to point out the economic stupidity of it.

If you have a 9% tax on economic activity in Northland, that will not help the region – it will kill it. People will leave Northland in their droves if the tax rate in Auckland is 17.5% and in Northland it is 26.5%.

Kevin Rudd is fighting for his political life with his u-turn on an ETS, and his proposed super mining tax both backfiring. A Nielsen poll just out has Labor at 47% on the two party preferred poll and the Coalition at 53%.

The super mining tax appealed to Labor. They thought everyone would support it, as only a dozen companies or so would be paying it. The tax would be a massive 40% of any profits above the risk free rate of return. Yes, how dare a company make a profit greater than what you can get by sticking your money in the bank.

But it has backfired massively. Western Australia especially has seen it as an attack on the entire state, plus (unlike NZ) many Australians know how important the mining sector is to Australia’s prosperity and have rejected the tax.

The Herald reports that Paul Keating once tried to teach Tony Blair how to hate his opponents. He also advised:

Keating also had some tips for Blair on economic issues, telling him that if he ever became prime minister he should avoid income tax hikes at all costs.

“Tony, promise me you won’t raise income tax. It’s death.

“Labour parties around the world have enough to contend with without hanging that round their necks. It’s not worth it.”

Luckily in NZ, Labour is suggesting they will campaign in 2011 on a policy to increase income tax for rich pricks.

Some wonderful quotes from Hansard. First we have the General Debate of 24 Feb 1988:

From 1 April 1988 the rate of company tax will decrease from 48 percent to 28 percent, and that will create an environment in which enterprises can succeed—both New Zealand enterprises and those that are attracted from overseas. That, too, is the path to future sustainable growth.

So cutting the company tax rate to 28% in 1988 was the path to future sustainable growth, yet something he condemns today.

Then we have the Appropriation Bill (No 3) second reading on 10 November 1988:

Let us consider the Government’s track record. It has introduced a new taxation system that is closing off the loopholes that in the past made paying tax a voluntary exercise for many companies and some individuals. The top marginal tax rate was 66c in the dollar when the Government took office, but it is now half that level—33c in the dollar.

And reducing the top tax rate to 33% and closing off loopholes was also laudable according to Phil.

And finally the second reading of the Appropriation Bill (No 2) on 18 August 1988:

Taxation has gone from 48c and 30c in the dollar to 33c and 24c in the dollar. That reduction allows New Zealanders to keep more of their own money.

And an endorsement of dropping the top tax rate to 33% so NZers get to keep more of their own money.

Now to some degree all politicians will have made statements earlier in their careers, which they later change their mind on. However they tend to be fairly minor issues, not something as core as whether reducing the top tax rates is laudable or deplorable.  And these are not statements from when Phil was a Young Labour member, but as a Minister of the Crown.

Click to watch on YouTube

Now in the budget debate the PM had a great time pointing out the massive hypocrisy in having the Opposition Leader condemn almost everything he had previously praised. And this is quite legitimate – it is not some sort of personal attack – it is highlighting changed policy positions. He then went on to talk about the budget itself.

Now Phil himself, and Annette, took Key’s speech in pretty good humour and were smiling at parts of it. They know that is what it is about. However the same can’t be said of some of the delicate wee flowers in his caucus who within seconds were whining on Twitter.

First Clare Curran complains:

Key starts his speech with a cheap shot. So Prime Ministerial!

That was in response to Key’s opening line that Shane Jones was really happy with Phil’s speech. Good God.

Then Clare complains further:

He’s a comedian. Does he take this country seriously! It’s embarrassing

So the PM is monstering you in the House pointing out (with considerable humour) that everything Phil Goff said is contradicted by what Phil previously said and your response is to complain he is being too funny.

But not just Clare. Iain Lees-Galloway joined in:

John Key thinks he’s on stage. What an embarrasment of a Prime Minister!

Personally I would be embarrassed to be tweeting such whines.

The trifecta was completed by Jacinda Ardern complaining:

hard to tell if this is a budget speech the PM is giving or a pep rally/stand up routine. yet to mention the actual budget.

I’m sorry guys, but it is such a bad look to be whining that your opponent’s leader is doing too good a job of winding his own troops up. Especially when your own leader’s speech was somewhere between awful and really awful (Goff generally has been much better in the house this year but his budget speech was just all over the place).

Finally Clare Curran declares:

Worst budget speech ever

People can watch the video and decide for themselves.

A reader requested this graph. It shows the average tax rate (including low income rebate and independent earner tax credit) at each $10,000 band for April 2008 and October 2010.

A full time worker (without children) earning a bit over the minimum wage at $15/hr has had, over 2.5 years, their average tax rate drop from 19.1% to 12.5%.

A full time worker earning the average wage at almost $25/hr has had their average tax rate drop from 22.7% to 16.0%.

I’ve done some calculations on what the tax cuts mean for working families who get WFF payments. The assumption is one parent working rather than two, which is the conservative scenario maximising tax paid.

The pink line is the standard average tax rate at each $10,000 band.

If you have even just one child you do not pay any income tax until you are earning $42,000! And you keep receiving WFF until you earn $74,000.

With two kids, then your family pays no income tax $50,000 of income. And you receive WFF until you earn $89,000.

If kid number three turns up, then you pay no tax until $56,000 and you receive WFF payments until you income exceeds $105,500.

And for the Catholics amongst us, kid number four means no net income tax until you reach $63,000. And you keep getting WFF until your combined earnings exceed $120,500.

While the tax scale is a bit flatter after the changes in the budget, it is still a highly progressive system when you look at the overall average tax rates at various income levels.

• Those who earn up to $40,000 pay no more than 15% income tax
• Those who earn up to $70,000 pay no more than 20% income tax
• Those who earn up to $110,000 pay no more than 25% income tax

In other words 67% of taxpayers will be paying no more than 15% average income tax.

88% of taxpayers will pay no more than 20% income tax.

The top 12% of taxpayers will still pay 49% of all income tax, which I estimate is over 90% of net income tax!

Out drinking last night, and someone remarked that the official tax calculator (which is very good) assumed people spent all their after tax income. Hence it over estimates the impact of the GST increase.

It was suggested that one needs a tax calculator for people who are good at saving, hence I suggested the name that we need a kosher tax calculator

And Deloittes have such a beast here.

You enter in your income, and how much you spend on goods and services ranging from none, not much, some, half, lots, most to all.

Play away!

Go to www.taxguide.govt.nz to see how you are affected. Quite a neat site with four calculators:

1. Workers with no Government support
2. Workers who get WFF
3. Those on Superannuation
4. Those on a benefit or student allowance

You just insert your income, partner’s income, and the level of rent or mortgage payments and your overall savings are calculated.

Treasury have given some examples of overall change in net income for various persons or couples. You can see which one may be closest to you. In order they are:

1. Foreign owned company has NZ subsidiary earning $8 million and interest expenses of $5.6m and net profit of $400k due to thin capitalization rules. Under new rules taxable net profit increased to $1.52m, so firm is $313K worse off.
2. Professional landlord with 25 properties earning $112,000 and depreciation of $52,000. $15k a year worse off as now pays tax on $112,000 of income not $60K
3. Business owner which makes $120,000 profit but pays salary of $48,000. Has spouse and two children. $8k a year worse off as no longer eligible for WFF.
4. Couple each earning $150K owning 10 properties costing $4m and now worth $6.5m. No tax paid on rental income of around $35K a year due to depreciation. Overall $5,600 a year worse off.
5. Unemployed person on dole pays $100/week rent and gets $36 accom supp. $53 better off.
6. DPB beneficiary with three children paying $300/week rent, $130 better off.
7. Student on student allowance and $100/week rent and $40/week accom supplement. Earns $9K part-time. $140 better off.
8. 19 year old on minimum wage pays $100/week rent. $330 a week better off
9. Retired couple own home, no mortgage or investments. $560 better off
10. Single superannuitant in own home with $10K a year investment income. $620 better off.
11. Sole earner earning $50K and $120/week rent. $830 better off.
12. Couple with two children, earning $80K and $40K with one investment property which generates $2,700 profit and $3,000 depreciation. Property has doubled in value from $300K to $600K. $1,225 better off.
13. Couple earning $50K and $26K with two kids and $300/week mortgage. $1,285 better off.
14. Couple saving for first home both earning $60K, $1,000 a year interest, $250/week rent. $2,100 better off.
15. Couple earning $100K and $40K with three children. $600 a week mortgage. $3,170 better off.

So of the 15 examples, four are worse off. The foreign owned company, the two professional landlords and the company owner who was claiming WFF despite their high income.

The student and the two beneficiaries are marginally better off by $1 to $3 a week. This reflects of course they are not generally (yet) contributing to the economy, but are a net cost on other taxpayers.

A 19 year old on the minimum wage is around $7 a week better off, and those on the pension around $10/week better off.

A sole earner on the average FT wage is $15/week better off.

And those who pay the most tax currently, are of course even better off. They get to keep more of their earnings.

The Government has done a very nice job of not repeating their mistake at the beginning of the year when they over-egged expectations and under-delivered – which had Phil Goff reading out in the House my “B” grade to the PM’s beginning of year statement.

The tax cuts in this budget go well beyond what media had been predicting with a huge drop in the second lowest tax rate, and also a welcome drop in the corporate tax rate from 30% to 28% at 1 April 2011. This will help attract investment to NZ and matches Australia. The tax package gets an A- from me.

The tax rate changes from 1 October 2010 are:

• Up to $14K – tax rate goes from 12.5% to 10.5%
  $14K to $48K – tax rate goes from 21.0% to 17.5%
  $48K to $70K – tax rate goes from 33.0% to 30.0%
  $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of tax cuts goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

The table above shows the change in income tax for the various tax brackets. They’ve done a very good job of having the reductions fairly smooth across the board as a percentage of existing income tax paid. Those under $70,000 get the largest percentage decrease.

Note the table includes the IETC for non WFF recipients (80% of people). If you exclude that it does not change the absolute savings but the % savings at $30K is 16.4% and $40K is 16.5%.

This table shows the net savings after impact of GST (calculated at 2% CPI increase). As one can see, people at every income level are left no worse off which was the objective.

However the above table only covers income tax and GST. There are also increases in superannuation, benefit adjustments, the changes to depreciation rules and the crack down on LACQs etc. Treasury has estimated the overall impact of tax changes as a percentage of the average disposable income. They estimate:

1 Households earning under $40K will be 0.7% better off
2 Households earning $40K to $85K will be 0.4% better off
3 Households earning over $85K will be 0.7% better off

Some of the other tax changes are:

• No depreciation claims on buildings with an estimated useful life of greater than 50 years
• LAQCs can not deduct losses at the marginal tax rate and pay tax on profits at lower company rate
• Changes to thin capitalization rules to limit foreign multinationals reducing NZ tax liability
• WFF eligibility to exclude investment and rental losses
• Remove the 20% accelerated depreciation loading for new plant and equipment

The property changes will see crown revenue increase by $2.5 billion over four years or an average $600 million a year.

$119 million of funding to IRD for increased audit and compliance is estimated to bring in $745m over four years or $200m a year.

Almost all of that extra $800m will come from higher wealth households.

This is why overall high income households are forecast to, on average, have only a 0.7% increase in disposable income – the same as low income households. One has to not just look at the income tax and GST changes, but the overall package.

And overall one has to conclude it has met the twin aims of both being fair and being good for economic growth.