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Bracket creep the big worry

NEW ZEALANDERS are paying about $350 million more in income tax than they should be because pay rises to meet inflation are pushing them into higher tax brackets.
Most of it is coming from so-called middle-income earners.
This extra tax income for the Government through the inflationary impact called fiscal drag was like legalised theft, leading tax accountant John Shewan said.
Nearly twice as many New Zealanders are now paying the top, 39 cent rate of personal taxation as the Government said it would catch when promoting the higher rate before the 1999 election.
There should be a mandatory requirement for governments to adjust rates every three years to compensate taxpayers, PricewaterhouseCoopers tax expert Mr Shewan said.
Fiscal drag catches taxpayers in all the bands - with inflation-matching salary rises pushing them into the 33 cent in the dollar tax rate at $38,000, and from 33 cents to 39 cents at $60,000.
The formal tax rate up to $38,000 is 19.5 cents, although low-income rebates mean the effective rate for most people is 21 cents.
Based on June 2004 year projections in the 2003 Budget, Mr Shewan said an extra $120 million .or so was being raised through fiscal drag.
An extra $225 million or so is being raised by the Government through middle-income earners being pushed from a tax rate of 21 cents to 33 cents.
Another impact is that if wage rises are only in line with inflation, the after-tax rise will be less than inflation. Consumers also pay goods and services tax, and the Government has brought in or increased "clip-on" tax, affecting cigarettes, alcohol, and road users, with Kyoto greenhouse gas emissions and electricity taxes as well.
Inflation in New Zealand during the nearly four years of the Labour government is about 8 per cent.
The party went into the 1999 election advocating a 39 cents top personal tax rate kicking in at a salary of $60,000.
Its pledge card said there would be "no rise in income tax for the 95 percent of taxpayers earning under $60,000 a year".
More than 270,000 people, 17 per cent of all full-time workers earning above the minimum wage of $17,000, are paying the top marginal rate.
National Party finance spokesman Don Brash said that although there had been some increases in real incomes, the Government's miscalculation on those numbers strengthened the argument for cutting the top rate.
The only way to have only the top 5 per cent of earners paying the top rate would be to lift the top personal tax threshold to $80,000, he said.
Mr Shewan believes a threshold in the $66,000 to $70,000 range would be a closer figure. The threshold for the 33 cent rate should be increased from $38,000 to about $43,000.
"A lot of people the Government did not intend to be in the 39 cent rate are now in it," he said.
"My understanding is that about 270,000 New Zealanders now spend about 40 percent of their day working for the Crown. This is like legalised theft and taxation by stealth."
Finance Minister Michael Cullen has indicated that next year's Budget will target low income earners. He has given no indication of threshold figures, but if he targets incomes of $25,000 and below, then this disadvantages middle-income earners immediately above that level who are affected by fiscal drag but not compensated.
While fiscal drag was not a great public issue, more people were moaning about being in the top tax bracket, Mr Shewan said.
"Really, $60,000 is not a dramatically good salary. An indication of this is that MPs get double this after allowances."