Good day dear Kiwi accounting fans.
Today I will pose an interesting question:
Can we have a 0% tax bracket in NZ?
What does a 0% tax bracket mean?
Simply put, it means that for all income below a certain amount – you pay 0% tax.
0% tax? Wait what?
Yeah, you heard me right, 0% tax means that you pay $0 for tax on all income below a certain threshold.
To better understand this, let’s take a look at how NZ personal income tax works. Personal income tax in NZ is calculated based on a scale rate – this means that all income is taxed based on percentages given at different thresholds. As of 2019/2020, these scale rates looked like this:
This means that you pay 10.5% for all income up to $14,000. The next $34,000 you earn (anything above $14,000 up to $48,000) is taxed at 17.5%. The next $22,000 you earn (anything above $48,000 up to $70,000) is taxed at 30%. Finally, anything you earn above $70,000 is taxed at 33%.
A common mistake many people make is that they assume that once they earn more than $70,000 a year, they are taxed at 33% for ALL their income. This is incorrect. Let’s look at an example:
Jerry makes $77,000 a year as an architect. He pays taxes of 10.5% on the first $14,000 which is $1,470. Then he pays taxes of 17.5% on the next 34,000 which is $5,950. After that he pays 30% taxes on the next 22,000 which is $6,600. Finally he pays 33% tax on the remaining $7,000 which is above his $70,000 threshold which is $2,310. In total he pays taxes of $16,330 which is about 21.2% of his gross income of $77,000. Thus his effective tax rate is only 21.2%.
What the 0% tax bracket means that for all income below a certain threshold (let’s say $14,000 since that is the lowest threshold right now) we pay $0 tax instead of $1,470 under the current system. Financially, this means that all Kiwis get to benefit from an additional $1,470 a year of cash in hand.
Why have a 0% tax bracket?
The most obvious reason – to put cash back in the hands of kiwis. More cash means more money for us to spend. More money for us to spend means the more money circulating in the local economy, which will help us bounce back stronger from the recession that’s coming.
Furthermore, a 0% tax bracket is a more efficient way to keep cash in the hands of kiwis. Simply because, it’s a reduction of $1,470 dollars worth of tax expense. That’s money that you, I, Mum, Dad and Uncle Jerry can have extra to spend.
And as the recession looms, having a bit more money to spend can be quite significant.
Who will benefit from a 0% tax bracket?
Generally speaking, all tax-paying individuals will benefit from it. But low-income earners will benefit more, proportionately.
Let’s take an example of Jerry and Simon.
Jerry is an architect making $77,000 a year. Simon is a grocery attendant making $35,000 a year. With the 0% tax bracket in place, both Jerry and Simon have $1,470 less tax to pay during the year.
To Jerry, this represents only about 2% of his total income, but for Simon this tax reduction represents about 5% of his total income.
In other words, low income earners will have a larger proportion of their income that they can use on important things like groceries, rent, power bills and keeping warm in winter! $1,470 a year is nothing to sneeze at! That’s almost 1 month’s rent or 2 months’ worth of groceries for a 4-member household (actual mileage may vary depending on location).
Ok, that sounds cool – how much will this cost the Government?
Good question.
So according to the 2018 employment statistics, we have 2,644,000 employed individuals in NZ.
Multiply 2,644,000 with $1,470 and the 0% tax bracket will represent a cost in terms of lost tax revenue of about $3,886,680,000 ($3.9 billion). Is $3.9 billion dollars a lot of money? Yes. Yes it is.
But let’s look at it in comparison to the $12.1 billion dollar stimulus package that has been announced to help the NZ economy during the COVID-19 crisis – is another $3.9 billion dollars a significant amount?
Unfortunately, I don’t have the answer to that question and I’m hoping that there are some tax and economic experts out there reading this who can give me a better idea of the impact of this cost. We should also consider the economic impact that giving each individual an additional $1,470 to spend during the year will have in terms of getting money into the economy.
It should also be noted that Grant Robertson said the following in the official release for the $12.1 billion dollar stimulus package:
“I want to make it clear that this is not a one-off package, it is just the beginning. As we go through this crisis towards economic recovery the Government will be constantly monitoring the situation and adjusting its response. As with every action we have taken we will be constantly reviewing every measure to ensure it is getting to the people and businesses that need it the most,”
So, yup it’s just the beginning. Can we add on another $3.9 billion dollars on that?
*Cough, sputter* And how exactly is the NZ government going to pay for this?
Ah, well.
More taxes?
Or specifically, there has been talk about renewing the debate on Capital Gains Tax (CGT), increasing the top tax bracket and the possibility of instituting a wealth tax .
Yes, I know that CGT is a dirty word but I will be writing an article tomorrow talking about how we can implement CGT in our fair country, but still do it in a fair and balanced way which does not screw over all the ‘mom and pop’ investors out there.
Increasing the top tax bracket and instituting a wealth tax are ways of taxing high-income individuals to increase tax revenue. I won’t be writing much on these though as they sound like good ideas on paper, but have to be balanced against the need to encourage entrepreneurial behaviour in our country.
Well, ok, are there other countries that have a 0% tax bracket?
Yes, actually, our Aussie cuzzies have a 0% tax bracket – in fact their 0%* tax bracket is for all income below AUD 18,200:
*note that the tax rates don’t include the 2% medicare levy
Singapore also has a 0% tax bracket for the first SGD 20,000 earned.
Malaysia also has a 0% tax bracket for the first MYR 5,000 earned.
So yeah, there are a few countries out there that operate with a 0% tax bracket. So there are existing case studies which our government can view, analyse and adapt for our local economy.
In conclusion
The point that I want to make is that a 0% tax bracket will put money back in the hands of all Kiwis. It is also the starting point for a progressive tax system which will benefit low-income earners more than high income earners. Ultimately, a 0% tax bracket will help the most vulnerable members of society.
With the global recession looming over us all, a 0% tax bracket would be a good move to help out the people who need the most help in our society. It can also be done without having to introduce additional red tape or bureaucratic hoops in getting that help to these people.
I wrote this article mainly to stimulate some thought, conversation and debate in this area. I’m certainly not the smartest person when it comes to this subject, so I hope that people smarter than me will read this, offer their feedback and perhaps put this suggestion in front of policy makers who can use it to better help our country.
Sudhir
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