Tax matters?

This is the first post in a two part series about the tax changes announced in the budget last week. Part two is Working for families?

“New Zealanders expect far too much from the tax system. It now seems unfashionable to regard the tax system as simply being the Government’s primary means of collecting revenue to run the country. People expect it to also resolve poverty, reduce income inequalities, compensate for surging food and petrol prices and incentivise savings.”
— John Shewan, Chairman of PricewaterhouseCoopers, commenting on this weeks budget.

Who would want to be a Minister of Finance?

Can you wait until the election campaign, and the “my tax cut is bigger than yours!” smack down contest, starts? Or will it be the “my propensity to cut spending is bigger than yours!” content now?

Now the team in the red corner has announced their package, how many more blocks of cheese can you afford? That seems the be the question.

And, how many blocks are you expecting the blue corner to offer?

Have you factored in the cost of petrol?

A litre of 91 unleaded now costs NZ$2.00, which is about US$1.56 at current exchange rates. Let’s hope that the dollar doesn’t drop back to 62c anytime soon (like it did at the peak of the last economic cycle), as even assuming the price of oil stays the same as it is now (which seems unlikely) that would mean we’d be paying closer to $3.00 a litre. Suddenly cars are a luxury item!

There is no point, surely, in having the cash for an extra block of cheese when you can’t afford to drive to the supermarket to pick it up.

Do we pay too much tax? Compared to what?

Does the amount of tax we pay make us all less productive?

I don’t know, but I suspect there is an argument to say that lower tax rates just mean that those who are motivated to be successful either way get to keep more of the money they earn.

Although it does create the right incentives for government to keep their spending under control (just like an over-funded start up business, they don’t seem to struggle to find ways to spend the money they have). More about this tomorrow.

Like John Shewan explains above, I think we’re all expecting too much from “the system”.

Is it up to the government to make us feel rich?

Or is it more about the number on the top line of our pay slips (i.e. the bit we influence)?

Here is a interesting comment about the changes to the business tax system which were introduced earlier this year:

“Businesses need to ask themselves two basic questions. Will a bit of tax relief for export marketing and R&D be worth the bureaucratic trouble to get it? And is your failure to export or do R&D simply a matter of being short of a few dollars? Or is it a fundamental failure of ambition, management skills and strategy?”

— Rod Oram, in Dominion Post (sorry, the link I have no longer works: http://stuff.co.nz/4042265a1865.html)

I think the same questions could be asked of individual tax payers too.

What do you think?

What will you do with your tax cuts?

Will they make you work harder? Or bugger off to Australia?

Does a few dollars a week change your vote in either direction?

Or, are there other things that are more important?

6 thoughts on “Tax matters?”

  1. In many countries (especially in Asia, e.g. Indonesia), salaries are quoted “in the hand”. i.e. what you get in your bank account. Companies pay the tax, calculated as either a percentage of the nett or gross, but the result is the same. It is seen as a payroll tax not an income tax. and therefore not a big deal for the average citizen. If tax goes up, it’s the company that suffers, not the employee. Consequently pay-related tax lobbying is driven by companies, not citizens.

    It might certainly change the dynamic of NZ politics if pay-related tax was applied as a payroll surcharge rather than an employee deduction. I don’t know which is better overall. My preference is for transparency so people know what the govt is taking directly, ie. the current system in NZ, but I have my doubts as to how real is that understanding.

  2. Rowan,

    I would have to say that since the Labour govt came into power, they have managed to tweak and mould “the system” so their tax take. The average (and above average) household is most likely worse off than they were prior to Labour coming into power circa 2000, especially those who were lucky enough to be awarded the “envy tax” @ 39%

    As the saying goes, there ain’t no such thing as a free lunch.

    ref http://www.stuff.co.nz/4560063a13.html

    This quote hits the nail on the head:
    “This means Cullen’s “tax cuts” are effectively only returning many taxpayers to the situation they were in when Labour first came to power.”

    Regarding business, well, anyone who owns a trucking or construction firm will say that OSH compliance costs have risen, and other associated costs of conducting business in NZ – whatever your product or service – outweigh the concession made prior by this Govt. If you’re lucky enough to be in the select few who are entitled to claim the 15% R & D tax credit, then, well good for you, but it would appear the other 90% of businesses in NZ (contractors, tradespeople etc) get ______________ …

    I for one love paying tax – it means my business is profitable, and [sarcasm]I am making my contribution to the Govt’s coffers so they can spend money on growing the economy[/sarcasm]. If I actually had a tax cut, I’d invest it outside my business in other areas hoping to avoid being burnt by the next finance company.

    Its certainly not up to the Govt to “make us feel rich” its up to the individual. But lets be honest, most people won’t get rich unless the are poorer people working for them – and all the government seems to do is keep the two groups separate.

    Bert

  3. Bert: The average household is A LOT better off now than they were in the 90’s. It doesn’t matter which way you measure it… on average households are better off today rather than 1999.

    Find stats to prove me wrong ;)

  4. JL:

    Sure.

    Its been hard to find a good comparison of after tax annual income less expenditure – in real terms – for 1990 – 2008. I have come across something of interest though:

    http://www.kiwiblog.co.nz/tag/wages

    Ref: “And if you look at the average annual increase in real ordinary after tax earnings, then the increase is $5.66 from 1990 to 1999 and $2.82 from 1999 to 2007.”

    My first reference was to be the household economic survey from stats.govt.nz, however unfortunately the data is only available back until 1998, so it is of little use.

    All I could reliably calculate is 2001-2004 there was a 13% increase in household income, and a 17% increase in household expenditure, and for 2004-2007 there was an increase in household income of 12%, and an increase in household expenditure of 7%.

    Hardly enough data to base any conclusion on :)

    So I will conceed that there has possibly been a marginal increase in household disposable income since 1990.

    However, just look at household debt and the amount of servicing as a % of disposable income: http://www.rbnz.govt.nz/keygraphs/fig5.html

    First comment in the text:

    “By mid-2006 the outstanding debt of households had increased around five times in dollar terms since 1990, more than doubling as a percentage of households’ disposable income”

    Also ref http://www.rbnz.govt.nz/finstab/fsreport/3311557.pdf

    If you are to look on page 16 of the report, the two graphs on the right hand sde are extremely alarming. “The ratio of total household debt to disposable income is estimated to have risen to around 160 percent by March this year, up from 100 percent in the late 1990s (figure 3.9)”

    Home owners may well be feeling a lot better off (the capital value of their property has experienced significant growth the past 8-9 years, but the reality is that money is tied up in the value of their property and is not what you would call disposable income. Over the next 2-3 years we can expect some erosion of this tied up wealth.

    With high interest rates, and large portions of a household’s income (~30% in some cases) already tied up servicing mortgages on property, we can expect there to be some tension between bank managers and stretched householder’s budgets. I read an article on stuff.co.nz suggesting up to 150,000 households could be at risk of facing mortgaggee sales.

    Can you tell me that that’s “better off”? :)

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