To ensure that people were not being unfairly taxed the same amount as millionaires, the bill also introduced a top rate of 45 per cent. In effect, it meant that anyone with a $500,000 income or more in a year would pay the same rate as the prime minister, even if he or she earned $5 million.
While the measure is expected to cost between $3 billion and $8 billion a year, the federal government estimates that it will save $8.3 billion in lower income tax over the next 10 years.
‘We need better policies’
While the legislation got royal assent yesterday, there is still a way to go before the changes become law.
The Senate will have to debate the bill on whether to change it back to a $200,000 income cutoff. This change is expected to be made by MPs in the form of the government’s budget bill, to be tabled in Parliament today.
The Senate Finance Committee report released earlier this week said the government needs to increase revenues, and tax the poor as much as the rich.
“This means there is a need for a series of tax-increase measures, the most important of which is the reinstitution of the proposed low-income tax offset,” it said.
Prime Minister John Key said the report was “a damning indictment” of National’s record on tax collection.
“We need better policies and better priorities to grow our economy,” he said.
“That means making sure we can’t afford the promises that were made in this government’s policy document – particularly the promise that taxes would go down for people at the lower end of the income spectrum.”
National’s finance spokesman Simon Bridges said it was important to get the changes right.
“The government has to work hard to get the changes right in order to make sure that we get those extra revenues into the budget. It will be an extra cost to the budget,” he said.
A Treasury analysis of the tax changes suggests they will cost the government an extra $3 billion a year. The changes take into account revenue increases already achieved through previous increases to the tax thresholds in the past two years.
The Treasury says that while people’s tax bills will be higher, they will be lower on average than at present.
Tax increases also mean the deficit will be higher, due to lower growth in the economy.
A Treasury estimate says income taxes will be $3.4 billion higher per year, once fully implemented, compared with the current forecast.
Mr Key confirmed that was the extra cost, in a written response to Green Party leader Jeanette Fitzsimons, who asked him how much the changes would cost.
There will also be other costs, such as to the economy and to households.
Mr Key said in the past a higher income tax threshold has been a deterrent to people earning more, which has hurt growth.
The proposed changes have also been slammed by small businesses, with the Federation of Small Businesses saying it would make taxes far too high for many.
The report said that small business and individuals would be hit harder by any increases to the threshold, and those with incomes below $50,000 would receive much less of the benefits.
People earning between $50,000 and $100,000 would receive almost all the benefits, while people earning above $100,000 would see the biggest benefits.
It said the biggest losers would be those earning below $50,000 – receiving much less than the $200 increase for those earning $25,000 to $30,000.
It said this group will be hit with an average tax bill increase of $827, after the government increases the threshold from $50,000 to $53,700 for 2012-13.
After that, people earning between $53,700 and $150,000 will receive almost all of the benefits of the increase, while those earning more than $150,000 will get the biggest benefits.
The government is already increasing the threshold to $60,000 next year and to $61,000 from July 2013.
The Tax Working Group said this will increase tax revenue by about $5.5 billion over three years.
That will cover more than half of the increase in tax revenue needed to fill the projected shortfall, and would increase the deficit to between $2.1 billion and $4.2 billion next year, the report says.
More than half of all taxpayers earning between $40,000 and $50,000 will be better off than they were before the changes, while around half of people earning between $50,000 and $80,000 will benefit.
Only around a third of taxpayers earning $80,000 and above will be better off after the changes, according to the report.
The report says many people earning under $100,000 will still end up paying less after the changes, because of the new low-income tax offset.
“What we are saying is that you can’t keep promising more and more tax cuts and say that you are cutting taxes for the low-income,” it said.
“We also need to look at our spending more. A lot of the people affected by the changes are children and students.”
The Treasury said it planned to spend about $1 billion over four years to bring tax rates down for everyone, including the lowest income earners.
Its document said the income tax changes will mean the poorest 20 per cent of the population will receive about $100 a year in tax cuts.
“This will be the equivalent of an increase to $200 per week,” it said.
“For the typical household in the lowest 20 per cent of income tax payers, this equates to $400 a year of tax cuts.”
New Zealand’s wealth distribution is skewed in favour of the wealthiest New Zealanders, with the richest 20 per cent accounting for more than half of all wealth, and the wealthiest 20 per cent accounting for nearly a quarter of all wealth, says a new study released today.
The research was done by the Auckland Council, which had previously commissioned the Otago University study of wealth distribution that found a huge divide between the wealthiest and the poorest in New Zealand.
It is the first time in a New Zealand setting that the distribution of wealth has been measured using a detailed database, showing the true proportion of wealth held by New Zealanders at any given time.
“Our research shows that, in New Zealand, the richest 20 per cent of households are responsible for the vast majority of wealth, and they account for more than 80 per cent of all the wealth in New Zealand,” the Council said.
The new database shows the top 20 per cent of households have the following average wealth:
- $10,817,891 – the average annual household wealth of the top 20 per cent of New Zealand households is $6,566,566 per year.
- $10,082,636 – the average household wealth of the wealthiest 20 per cent of households is $6,038,812 per year.
- $2,744,420 – the average annual wealth of the wealthiest 1 per cent is $1,716,420 per year.
- $1,342,664 – the average annual wealth of the wealthiest 0.01 per cent is $1,342,664 per year.
However, the bottom 40 per cent of households (the bottom 20 per cent of households) have a very different profile of wealth:
- $31,039 – the average annual household wealth of the bottom 20 per cent of households is $31,039 per year.
- $1,913,638 – the average annual wealth of the bottom 40 per cent of households is $1,913,638 per year.
- $1,827,860 – the average annual wealth of the wealthiest 20 per cent of households is $1,827,860 per year.
“Our data shows that in New Zealand, wealth inequality is highly concentrated amongst those at the top of the wealth pyramid,” the Auckland Council said.
The data was collated and released today at a media launch in Auckland, where the Council said it showed wealth inequality was a significant problem in the city, which is home to the world’s most unequal society.
“Auckland is far from being alone in the problem of income and wealth inequality. New Zealand’s data also shows that the richest 20 per cent of households are responsible for 80 per cent of all wealth, compared with just half of the income.
“By any standard, this is obscene, and it is important for us to start talking about this problem to help us find real solutions to reduce it,” the Council said.
“There is no quick fix, but we do know that the solutions that work to reduce inequality are often the same as the ones we use to increase productivity, growth, competition and innovation.”
It said policies and actions to reduce inequality were not just about government action to redistribute wealth, but also about business policy, labour market policy, land, tax and regulation, all of which affected the distribution of wealth.
“These policies affect what we build, what we buy and how much we earn. There are all kinds of policies, policies we use for making sure every Kiwi has a fair share of the wealth we create,” the Council said.
“While redistribution and taxes are important, we can’t pretend they are the only answers to what has gone wrong with wealth in New Zealand.
“We also need policies and actions that build a more productive economy, and ensure that all New Zealanders have a fair share of the rewards we create. That’s what these new data show us. New Zealanders are a very productive people. But the rewards of that success are not being shared by all in the same proportion.”
The Council said if more work was done to find ways to reduce inequality, it would generate large benefits to New Zealand’s wellbeing and prosperity in the medium to long term.
It said the data showed more unequal wealth distributions were not caused by any one group – they could not be pinned on business, the government, or the wealthy.
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