Thursday, 27 May 2010

Tax cuts for the rich

The New Zealand government budget for the coming year was released recently. Included was some tax restructuring which was anticipated and I have posted my thoughts here. Sales tax was increased and income tax was decreased. All incomes get some tax break. As typical, comments were made by some groups about those on higher incomes getting the better deal. Comments like this may reflect envy, or may be by those who perceive they struggle on their income; nevertheless it still reflects underlying innumeracy (or perhaps it is polemical for those with extreme Marxist views).

Here is the personal income tax structure currently and as it will become in October.

Gross income Old tax rate New Tax rate
0–14000 12.5% 10.5%
14000–48000 21% 17.5%
48000–70000 33% 30%
70000+ 38% 33%

It can be seen that both systems have a progressive tax structure. That is those on higher incomes not only pay more tax by virtue of the fact that tax is a percentage of income, they pay even more because they also pay a higher rate. Because tax is a rate, tax cuts, whether they be an absolute ratio (say 1% for each bracket) or a proportionate ratio (say 5% reduction on the rate), will always have a larger effect on higher incomes. Below is various incomes with the effect of the various taxes. Accident levy is excluded.

Old New
Gross Tax Net Tax Net Difference
5000 625 4375 525 4475 100
10000 1250 8750 1050 8950 200
25000 4060 20940 3395 21605 665
50000 9550 40450 8020 41980 1530
100000 27550 72450 23920 76080 3630

Looking at this table it is clear that even if the $0–14000 tax rate was abolished, i.e. set to 0%, those on higher incomes would still gain an advantage. This is because their tax break is greater than what the lower incomes even pay in tax.

The comment "tax cuts for the rich" is nonsensical as any tax cut is going to affect those on higher incomes at least as much as those on lower incomes. What is worth noting however is how much those on higher incomes pay. A tax saving of $4000 may seem a lot to some people, but this is in the context of someone who is already paying $30000. It is also worth noting that a tax break is not a subsidy, it is allowing the taxpayer to keep more of his earned income.

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