Gav's Blog

I haven’t done some political blogging for a while, but figured I’d briefly wade in with a couple of comments re: Michael Cullen’s Budget.

One particular comment I’d like to raise and highlight as a point of difference that National could make. In Cullen’s Budget speech he stated that the structure of the income tax system would be simplified.

This programme consists of a combination of a cut in the bottom rate of income tax, threshold changes, a simplification of the structure of the income tax system, a bringing forward of indexation of Working for Families and a forecast second round of such indexation.

In theory the current personal tax system has three rates: 19.5 per cent up to $38,000, 33 per cent from $38,001 to $60,000, and 39 per cent above $60,000 a year.

In practice, the operation of the Low Income Rebate for earned income creates an effective four-step scale with the bottom step split into two: 15 per cent up to $9500 a year and 21 per cent from $9501 to $38,000.

At the completion of the Budget 2008 tax-cut programme the rates will be 12.5 per cent on the first $20,000 of income, 21 per cent from $20,001 to $42,500, 33 per cent from $42,501 to $80,000, and 39 per cent above $80,000.

Call me blind, but aren’t we starting with a four-tier system and ending with a four-tier system? What is simple about that? If Cullen was serious about simplifying the income tax system he would look at removing one, and ideally two of the tiers. This would create a far simpler two-tier structure. Why not have a lower tax bracket for all income up to say $20k-$30k, and a higher rate for everything over that bracket?

For a while I was keen on a single income tax rate, but I have come to recognise that there does need to be some break given to lower income earners to recognise that tax can be more significant.

A simple two-tier income tax system would achieve true simplification. One has to wonder if Cullen only wants to keep complexity in the tax system to make juggling the numbers easier.