Make a change, don’t keep the change

By Jeremy Vargo February 05, 2019

Quick question. If a checkout operator gives you too much money back in change, do you tell them and give it back? Or do you keep it? Simon Bridges recently announced that if elected, National would bring in a policy that would essentially start to give the extra “change” back, by inflation-indexing personal income tax thresholds, so that over time each person is effectively still paying tax at the rate that was agreed upon when the thresholds were set in place.

What does that mean? Let’s take an example. The current top personal income tax rate is 33% of all income over $70,000. It was introduced in October 2010 and hasn’t changed since then. What has changed is what $70,000 means in today’s economy. According to the Reserve Bank’s inflation calculator, wage inflation would make 2010’s salary of $70,000 the equivalent of $87,530 by the end of 2018. To look at it another way, a wage of $70,000 today is more comparable to someone earning $55,000 in 2010. Comparatively, that wasn’t a rich person’s salary in 2010, and Mr Bridges is betting that we’d agree that $70,000 doesn’t make someone rich today, especially if they live in Auckland.

Given that this policy has now been put forward by three different parties, but has yet to be actually implemented, what stands in its way?

For long-time political watchers, this is simply another episode in a long running show that has yet to resolve. Sir Michael Cullen proposed a very similar policy for the Labour Government in May 2005, promising a “commitment to inflation proof incomes.” It was characterised and derided as the “chewing gum tax cut” by Winston Peters and the rest of the opposition, and ultimately dumped after the 2005 election. In 2015, ACT followed the trend and proposed their version of the policy, which was not adopted by the National Government of the day. And now we have National’s proposition, which was immediately opposed by Finance Minister Grant Robertson saying that while the ‘cuts’ will only deliver $1 a week back to people on $40,000 a year, it would carve a $650 million hole in the country’s budget.

Propose, oppose; reverse positions, and repeat. Given that this policy has now been proffered by three different parties, but has yet to be actually implemented, what stands in its way?

It isn’t that it’s a politically difficult sell. Our progressive tax system is generally understood to be aiming to ease the tax burden on lower income earners, keeping tax rates lower on lower incomes, and rising at certain thresholds to tax those who have higher incomes more. The grounding political assumption here is that higher earners can afford to pay a greater percentage of their income in tax, and that it is reasonable to expect that they should.

But what makes someone a “higher earner?” And once you’ve decided where the threshold is to qualify as “rich enough to be able to afford to pay more in tax” is, shouldn’t you take steps to make sure that the threshold stays where it’s supposed to be?

If a checkout operator gives you too much money back in change, do you tell them and give it back? Or do you keep it?

The problem is that implementing this kind of automatic, roll-over adjustment into the tax system takes away a handy political lever. In 2015, political commentator Vernon Small put it this way: “Let’s face it, when it comes to vote-harvesting, drip fed tax cuts will never beat a multi-billion dollar election year tax package.”

This policy is a straight-forward reform, a fair way of maintaining the implicit promise of how our system of progressive tax was set up to work. Even if it makes it harder to find fat in the system to fund shiny election-year promises, politicians shouldn’t baulk at the opportunity to make our tax system fairer for us.

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