When the magician on stage flamboyantly waves the handkerchief with his left hand, it’s generally a good idea to keep an eye on what’s going on with the other hand.
And I’ve failed that test.
On Sunday, Labour surprised nobody by announcing it would break the world’s cleanest consumption tax by exempting fresh fruit and vegetables. Citing tight household budgets and rising living costs, the Government promised to save the average household about $20 per month on their grocery bill.
Every tax expert that any journalist has been able to find has said the same thing about the policy: it is a terrible idea. It does very little to help those that the policy is intended to help. What help it does provide comes at high cost to tax revenue. And the holes it causes in tax policy will beget litigation and more holes in future.
Only a few years ago, Labour’s Deborah Russell tweeted that “GST reduction is swamped by seasonal variation and the biggest benefit goes to people who buy off season mangoes”. She was right.
If you care about decent tax policy – and a whole lot of tax analysts left and right do care about decent tax policy – it’s an abomination.
Of course this kind of senseless policy draws attention. Including a fair bit from me.
But what’s going on in the other hand? Why are household budgets so tight in the first place?
Well, that’s the part that didn’t make it into Sunday’s tax announcement.
The part that everyone had been expecting for months but forgot about because of the promised senseless destruction of our world-leading clean GST.
Labour announced nothing about inflation adjustments to the tax thresholds.
The normal cycle is bad enough. Governments enjoy large increases in tax revenue as inflation pushes taxpayers into higher tax brackets. Every decade or so, a government unwinds some of the prior tax bracket creep while pretending it is a tax cut. And then the cycle repeats.
Automatic inflation indexing of the tax thresholds would mean that governments would have to legislate higher taxes if they wanted more tax revenue, and that they could not pretend that an inflation adjustment was a tax cut.
But at least that normal kind of tax cycle would result in an eventual inflation adjustment.
This one has not.
The last inflation adjustment to the income tax thresholds was in 2010.
There are lots of ways of inflation-adjusting the tax bands.
If you think that government sets the tax bands so that the poorest fifth (let’s say) of the population pays a low rate, then you would want to scale the tax bands to the income distribution.
If you think government sets them with after-tax household income in mind, then you would want to scale them to general inflation.
A year ago, I’d run the numbers on it, looking at an inflation adjustment that would move the tax bands to the income percentile ranges from 2017/18. The changes were pretty substantial: the $14,000 threshold would increase to $19,000.
But Labour has said that it's targeting the high cost of living and household budgets. And that means CPI.
Consider someone who earned $48,000 a year when Labour took office in 2017. That person paid 10.5 percent on the first $14,000 of earnings and 17.5 percent on the rest: $7420 in total. Or an average tax rate of 15.5 percent.
If that person’s wages only just kept up with inflation since then, they’d be earning $58,800 today.
They’re no better off in straight dollar terms: $58,800 today has the same spending power as $48,000 in 2017.
But they’d be paying 30 percent in tax on the extra $10,800 in nominal earnings. For a total of $10,660 in tax, or an average tax rate of 18.1 percent.
In 2017, that person had $40,580 left after tax. They kept 84.5 percent of their income.
In 2023, that same person has $48,140 left after tax. They’ve kept only 81.9 percent of their income.
This person’s real after-tax income, in 2017-dollars, is about $1,280 lower. Or about $25 per week.
If government steals an extra $1,280 from you in tax, by failing to inflation-adjust the tax thresholds, while making a big show of taking a wrecking ball to GST to give you $20 per month in cheaper fruit and vegetables, are you really better off?
And might that be a big reason why they’ve made so much noise about the wrecking ball they’re taking to GST?
The Government will say it needs every penny and can’t afford ‘tax cuts’. But look again at the numbers.
When Labour took office in 2017, Core Crown tax revenue was $75.6 billion, or 27.5 percent of GDP. In 2022, it was $108.5 billion, or 29.9 percent of GDP. Core Crown expenses rose from $76.3 billion, or 27.7 percent of GDP, to $125.6 billion, or 34.6 percent of GDP, over the same period.
This is not just Covid spending. Core Crown expenses are set to remain far higher than they were in 2017, for a long time. As a proportion of GDP, Core Crown expenses will remain sharply higher than they were in 2017, for the entire forecast period. Even 2027’s forecast of 31.5 percent is well above pre-Covid Core Crown expenses in 2019 of 28 percent of GDP.
It is perfectly defensible for a government to choose a combination of higher taxes and higher expenditures; political parties and voters vary in whether they prefer government spending and redistribution to play a larger or smaller role.
But the Government has funded a substantial increase in government spending by letting more and more taxpayers drift into higher tax brackets, leaving far less in after-tax household budgets across the income distribution.
Someone on the average wage today pays tax at what was the highest tax rate in 2010.
But what about those on lower incomes?
Adjusting the bottom tax threshold to compensate for inflation since 2017 would see that threshold increase from $14,000 to $17,000. The adjustment would return $210 to anyone earning at least $17,000 a year.
Jobseeker support pays more than $17,000 a year, before tax, unless you are 18 or 19 and living at home. So even those on jobseeker benefits would see a real increase in after-tax income.
Coincidentally, $210 a year from adjusting the bottom tax threshold is not that far from what the Government is promising the GST policy will save average households – and poorer households get less from the GST change. And inflation adjustments have the added advantage of not screwing up the tax system.
And so I wonder a bit about Sunday’s big, showy, and long-signalled announcement. Every tax expert in the country seems up in arms about the Government’s promise to break the GST.
But did anybody notice that Labour failed to say anything at all about the long-overdue inflation adjustment to the tax thresholds?
Perhaps that was the point.
You have to be careful with stage magicians making a big show with one hand. The other hand could be rummaging around in your wallet.