Tax and families package – signs of a resilient economy

By Alex Mitchell

Budget 2017 delivers the expected tweaks to tax thresholds targeting low and middle income earners, but goes further with a $2 billion “Family Incomes Package” that includes changes to Working for Families, and increases in the Accommodation Supplement and Accommodation Benefit.

Tax threshold changes

Personal tax reductions have not been a feature of the Budget since 2010. Rather the focus of successive budgets has been on returning to surplus, with the occasional hint that the government would consider tax rate reductions when conditions allow.

As the economy has continued to grow, and the much vaunted surplus was eventually reached, personal tax reductions are once again back on the table - seven years after the last adjustment.

Over the last seven years average wages have increased, and individual taxpayers have found themselves subject to higher marginal taxes. Because marginal tax brackets are not pegged to inflation, workers can find themselves paying more in income tax, without a proportionate increase in their real (inflation adjusted) income. This phenomenon is known as “bracket creep” or “fiscal drag”.

Fiscal drag can perhaps best be illustrated by the increased number of taxpayers that are currently subject to the highest marginal tax rate of 33 percent. In 2010, the Government estimated that 12 percent of individual taxpayers would earn taxable income of more than $70,000. In Budget 2017, this has increased to 19 percent.

The changes announced in Budget 2017 are in some way a response to fiscal drag, as the focus is on increasing tax thresholds, rather than reducing rates. But they are only possible because of the resilience shown by the economy in responding to some significant domestic and internationally induced shocks over an extended period.

As part of the package, the Independent Earner Tax Credit will be discontinued. Those earning between $24,000 and $48,000 who are eligible for this credit currently (around $10 a week up until $44,000 and then fully abated by $48,000) will lose that entitlement, but are fully compensated through the threshold changes – noting that only 32 percent of eligible recipients have actually been claiming the credit, so this change is a welcome simplification of the system.

The threshold changes will take effect from 1 April 2018, and are set out in the table below.

What does this mean for me?

• If you earn the average wage of approximately $57,000, you will receive an extra $20.38 a week ($1,060 annually).
• If you are on a lower salary, say, $35,000, and claiming the Independent Earner Tax Credit, there will be a negligible net change to your after-tax income – the $10 credit is replaced by a $10.77 saving through the threshold adjustments – equivalent to $40 a year.
• Those earning above average wages don’t see a considerable benefit over and above other taxpayers, as the $70,000 threshold for the top tax rate remains unmoved – as demonstrated by the table below.

* Assumes that the individual already benefits from the existing Independent Earner Tax Credit.

Tax reductions of course allow individuals choices.  What are you going to do with the extra cash in your take-home pay?  Some will spend it, and that is of course no bad thing to help keep the economy humming.  But others will pay down debt, or save that little bit extra – being more prepared and resilient for the next economic cycle.

Providing relief to families through other transfers

A significant part of the package is the support being provided to low and middle income earning families through other measures. These include:

• Working for Families adjustments - changes to the Family Tax Credit rates for children aged 0 to 15, so that this aligns with the rates for children aged 16 to 18 years. This will increase the maximum credit for the first child under 16 by $9 a week, and for each subsequent child under 16 by between $18 and $27 a week.
• Increases to the Accommodation Supplement – payments will increase to reflect the cost of housing, benefiting around 136,000 households by an average of $36 a week, with the maximum payment rates for a two person household increasing by between $25 and $75.
• Accommodation Benefit rates for Student Allowance recipients will increase by up to $20 a week to reflect the cost of housing for students – benefiting approximately 41,000 students.

These changes, in addition to the tax threshold adjustments, will make for a meaningful increase to after tax income for many families.

To illustrate, a couple with a household income of $85,000 and 3 children, who qualify for the in-work tax credit, would have a $2,133 increase in after-tax income, made up of the following:

The focus of these measures are deliberately well and truly targeted at middle New Zealand, as the Government continues to seek to demonstrate to voters that it isn’t just out to look after the top-earners.

However as more and more taxpayers are pushed into the top tax bracket, the demographics of who are subject to the 33 percent rate are changing. The average wage is now close to $60,000. There will be considerable pressure to increase the band for the existing $70,000 threshold, noting that the 19 percent of taxpayers in that bracket pay 62 percent of all personal income tax.

Watch this space.