1. New Zealand Income Tax Policy 1973-1982 and its Legacy Keith Rankin School of Accountancy Law and Finance, Unitec, Auckland published New Zealand Journal of Taxation Law and Policy 12:1, March 2006 Unitec School of Accountancy, Law and Finance Research Seminar 15 November 2006

2. Unusual Features of NZ's Income Tax Scale 1.No universal tax concessions for families 2.No tax-free income ie no zero-rated tax bracket, tax-free allowance, or equivalent generally, high average taxes on low earnings Paper focuses on second of these issues –Table of comparative average tax rates in 2005Table –How did NZ come to levy unusually high average tax rates on person's with below-average earnings? the answers go back to the Budgets of 1973 and 1978

3. Ways of Zero-Taxing First Dollars of Earnings Zero rated personal tax bracket –eg Australia Tax-free allowances or exemptions –eg United Kingdom, Ireland, United States –New Zealand to March 1974 Non-refundable (or wastable) tax credits –eg Canada –New Zealand April 1974 – September 1978 called "personal tax rebate" invented by NZ Treasury, in response to challenging brief from Finance Minister Rowling

4. Refundable vs. Non-Refundable Tax Credits Refundable means that recipients may receive more than they pay in income tax. –tax relief: a potentially negative average tax rate tax credit may exceed tax paid (eg NZ Family Support) –a universal personal entitlement: ref. AB Atkinson (1995) Public Economics in Action; the Basic Income / Flat Tax Proposal Non-refundable tax credit/rebate –a tax offset that cannot exceed one's assessed liability example of current NZ rebates for childcare and donations –equivalent to a significant tax-free income bracket requires a flattening of the tax scale to avoid it becoming an unaffordable tax cut

5. Converting NZ's 1998-2000 income tax scale into non-refundable credits Effective Scale: $0-$9,500@ 15% $9,500-$38,000@ 21% over $38,000@ 33% (also company tax rate) For earners over $38,000 –equivalent to flat-tax @33% combined with a credit of $5,130 For other earners, the credit is less than $5,130 –three examplesthree examples –non-refundable credit: only less if income below $15,545non-refundable credit creation of a tax-free income bracket of $0-$15,545 p.a. marginal tax-rate 33% for all earnings above $15,545 } 19.5% average at $38,000

6. The 1973 Rowling Budget Introduction of Personal Tax Rebate –new and confusing use of word "rebate" 1972 Muldoon election-year Budget called tax cuts "rebates" –annual rebate of $125 created tax-free income zone: $0-670 multiply by 10 for approx. 2006 values (Canada now C$1348) –UK-style tax allowances removed –bottom tax rate raised from 7.07% to 18.0% ("flattening") this meant all tax-payers were assessed at 18% on first dollar –many middle-income families got annual tax cut of about $2 –all earners got tax cut if Muldoon rebate seen as temporary –almost no debate about this major Treasury-invented reform

7. 1974 to 1978: period of high inflation Rebate raised to $155 in 1975 Budget –tax rates raised also: bottom rate to 20%, top rate to 60% –overall tax cut by raising bracket thresholds –fiscal drag: tax take record 21.6% GDP 1974/75 (from 18.9%) –tax take record 22.9% of GDP 1977/78 (from 20.5%) Muldoon abolished tax credit in 1978 Budget –focus of debate had now switched to marginal tax rates –way to help fund reductions to middle-income marginal rates –little controversy: credit now significantly eroded by inflation –reduced bottom rate to 14.5%; genesis of today's 15% rate

9. Table 3: New Zealand Marginal Personal Tax Rates Real Income2005 $ 2005beforeafterbeforeafter % 3,000 7.07 0.00 14.5015.00 7,000 7.0718.5019.0014.5015.00 10,000 18.9019.0019.9514.5021.00 15,000 18.9019.0024.7014.5021.00 20,000 22.0522.5029.4514.5021.00 30,000 27.4528.5040.3838.0021.00 40,000 33.3034.5045.6038.0033.00 50,000 38.7039.0046.5548.0033.00 70,000 42.3047.0048.4548.0039.00 100,000 44.1049.0054.1555.0039.00 150,000 45.0050.0057.0060.0039.00 Price LevelJune 2005 (CPI)*1156 * June 1999 = 1000source: NZOYB; RBNZ 122232 1973 Budget1978 Budget June 1973June 1978

10. Income Tax Policy after 1980 McCaw Report 1982 –not even a mention of 1974-78 rebate –recommendations in direction already signalled in 1978 emphasis on reducing marginal rates on account of fiscal drag having placed ordinary workers in higher tax brackets could have introduced Australian-style zero-tax bracket but would have compromised main goal of having a single wide tax band at a relatively low marginal rate Structure of income tax barely changed 1978 to present In 1981 Rowling signalled plans to re-introduce "a basic income completely free from tax" –Rowling replaced in 1982 by Lange as Labour leader

11. Implications for Today of High Average Income Taxes 1.Since the late 1980s, we have had many more people experiencing: low and/or part-time earnings paying child support through the tax system repaying student loans the burdens faced by these people are substantially increased by the higher average personal tax rates they face compared to their equivalents in other countries 2.Neo-conservative lobbyists use the fact of high average taxes in NZ to argue for reduced marginal rates for high earners

12. Implications continued … 3.Reduced scope of debate on personal taxation –loss of opportunity to pursue a simplified approach to income tax (and ways of cutting tax) and family income assistance that can reduce rather than exacerbate inequality the current targeted "tax relief" (Family Support and In-Work Payments) for families is a clumsy solution allowing low income earners to pay less tax would be a better work incentive for beneficiaries than IWPs 4.We do however have a "flat tax" debate of sorts which could be substantially enriched by the reconsideration of personal tax credits. 5.Any reintroduction of personal tax credits must be accompanied by inflation indexation.

14. back Table 1: Comparison of Personal Tax Rates (2005)

15. back new options based on non-refundable personal tax credit of $5,130 per annum

16. back Examples: persons on $50,000, $40,000 & $30,000 Tax on $50,000 = 33% * $50,000 - $5,130 1. Tax on $50,000 = 19.5% * $38,000 + 33% * $12,000 = $11,370 = 33% * $50,000 - $5,130 Tax on $40,000 = 33% * $40,000 - $5,130 2. Tax on $40,000 = 19.5% * $38,000 + 33% * $2,000 = $8,070 = 33% * $40,000 - $5,130 Tax on $30,000 = 33% * $30,000 - $4,170 3. Tax on $30,000 = 15% * $9,500 + 21% * $20,500 = $5,730 = 33% * $30,000 - $4,170