How much can tax cuts do to alleviate the cost of living?

By RNZ’s Susan Edmunds

It is the centerpiece of National’s response to rising costs. But what do the numbers say?

National has repeatedly pointed to income tax cuts as its key response to the rising cost of living.

“Why is that commitment to tax relief so important?” Premier Christopher Luxon said earlier this month.

“Because those Kiwis struggling with the cost of living – what I call the tight middle – deserve support.”

The cost of living has increased a lot: between 21.5 and 24 percent since the beginning of 2020, depending on household income.

What impact might the tax cuts to be announced in Thursday’s Budget have on those types of increases?

The answer depends on a variety of factors.

Brad Olsen, chief executive of Infometrics, said households’ experiences with the tax cuts would depend on personal circumstances, in the same way the experience of inflation had varied.

“We’ve seen inflation peak and start to come down, at the same time we’ve had interest rates at a much higher level.

“If you are a household that rents, you will see much higher rental costs over time. The tax cuts will help do that. If you are a household that pays a mortgage, again it will go toward that.

“If you’re someone who owns a home, you get a lot of free money by not having to pay any of those housing costs, at least. It depends on what your household is spending money on.”

Bottom line: There is no single version of the inflation versus tax cuts story. Rather, it is more like two million different stories, one for each unique home in Aotearoa.

But to help illustrate how things might look for different people, let’s take a closer look at the sums of some imaginary households.

Lower income households

Statisticians divide households into five different income levels.

In the lowest group, imagine a single-parent household with income from a part-time job of $31,769. Official data suggests this household’s expenses could have risen $1,173 more than income since 2020. This is unlikely to be largely addressed by any tax cuts.

Before the election, National suggested a change that would be worth $112 a year for this household, but there may not be any cuts if National is forced to cut its plan.

Manu Johnson Peake, a Northland woman, works part-time and her husband is not currently working.

“I have always only rented, I work hard, I am known for my donations in the community. I don’t travel anymore, my focus is home, family and community.”

She has “always known” that New Zealand is more expensive than many other countries.

“But it’s so bad that people are leaving for Australia for a better life. It’s a struggle and I’m tired.”

What about a household with a little more income? In the second income group, let’s imagine a family of two adults and two children. In 2020, they lived on a single after-tax income of $54,000, and now they earn about $65,000 a year, in line with the average salary increase of 24 percent during that time.

The cost of living would have swallowed all that up. That $11,000 increase in wages would be completely negated by increases in their expenses, just to maintain the same standard of living.

With children at home, the Working for Families credit would help, and would have increased by about $2,100 over the same period, potentially offering some relief.

The kind of tax cut National was talking about before the election would probably mean around another $931 a year for this household.

Middle income households

This is where Luxon and Finance Minister Nicola Willis have promised the most relief.

Before last year’s general election, National said it wanted to move the income level at which the 30 per cent tax rate took effect from $70,000 to $78,100.

Middle-income earners could also benefit from the changes National has suggested to lower thresholds. The 10.5 percent income rate could apply to the first $15,600 of income, up from $14,000, and the 17.5 percent rate could apply to $53,500, down from $48,000.

A household with two adults earning more than $78,100 could qualify for $2,085 a year if those changes apply, or $1,861 a year if the lower tax bracket doesn’t increase, as some have suggested could be a possibility.

A household with two adults earning the minimum wage (equivalent to $48,152 a year) would qualify for a tax cut of $38 if the bottom bracket did not increase, and $262 if it did.

Households with higher incomes

Higher-income households have generally experienced higher inflation because they can spend more, so more of their income is exposed to rising costs. Higher interest rates have also hit homeowner households hard.

A single adult with a salary of $105,000 in 2020 would be considered among the top 20 percent of households. Her expenses increased by $13,000 between 2020 and 2024, but her salary would have increased by almost $17,000 during that same period. They could get an extra boost of about $931 a year from the tax cuts.

Economist Shamubeel Eaqub said the return of deductibility of interest on investment properties could have a greater impact for some higher-income households.

“Those households could be receiving a larger increase in their take-home pay.”

the washing

When Finance Minister Nicola Willis gave her pre-Budget speech earlier this month, it was revealed that 17 per cent of people would not qualify for a cut.

A spokesperson for Willis said some of those people would be beneficiaries, because the benefits are paid net of taxes, so changes to the personal income tax do not affect them.

“There are also other people who will not benefit from the tax package, simply because their income is too low for the tax relief we offer.”

Brad Olsen said people on lower incomes would probably only benefit if a tax-free threshold was introduced, like in Australia.

Most of the benefit from the tax cut will likely accrue to middle-income households, he said. There, too, the biggest impact of “fiscal drag” was being felt: inflation pushing people into higher tax brackets.

In 2011, the 33 percent tax rate had covered 27.3 percent of taxable income, but by 2022 it had risen to 42.7 percent.

National had also proposed changing the way the self-employment tax credit is applied and expanding the threshold to $70,000 instead of the current $48,000.

Its coalition partner, ACT, previously proposed scrapping the 10.5 per cent tax rate and introducing an additional tax credit for low-income people.

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