Mary Holm is a financial advisor who answers questions on personal finance in Saturday’s Herald. Here’s her response on why she thinks tax brackets should be adjusted annually.
Creepy tax brackets
Q: Your advocacy of regular adjustment of tax brackets for inflation is spot on. This would remove the Government’s temptation to let inflation increase income tax revenue without being accused of “putting up taxes”.
In the US federal tax system, which has seven brackets as opposed to our five, the brackets are adjusted for inflation annually. For example in 2023, a rate of 12 per cent applied to income between $11,001 and $44,725. For 2024 this has been adjusted for inflation of 5.4 per cent, to $11,601 to $47,150.
I see no good reason to adjust the figures to the nearest thousand dollars, except perhaps to satisfy the strong instinct some of us seem to have to round figures up or down.
A: You’re referring to a paragraph in the April 13 column, in which I said, “By the way, tax rates on wages and salaries are not adjusted for inflation either. The cutoff points between the rates — for example, the $48,000 of annual taxable income, above which the tax rate changes from 17.5 per cent to 30 per cent — should be regularly inflation-adjusted.”
New Zealand’s tax rates were last set in 2010 – apart from some more recent changes to just the top bracket. And since 2010, wages have risen 64 per cent, averaging 3.7 per cent a year, according to the Reserve Bank’s inflation calculator.
As people’s wages have risen, they have moved into higher tax brackets. But a big component of their pay rises has just helped them keep pace with inflation. This is sometimes called bracket creep.
Our tax brackets will change on July 1. In our example above, the $48,000 cutoff point will rise to $53,500. With the changes, taxes for everyone with taxable income over $14,000 – not just from wages but also interest, rent and so on – will decrease. But not enough to make up for bracket creep since 2010.
And at this stage, there are no plans for annual inflation adjustments, as happens in the US as well as in 11 out of 27 European OECD countries, according to Tax Foundation Europe. Also, Germany adjusts at least every two years. And in some countries there’s no need, as they tax all income at the same flat rate.
In a recent New Zealand poll on NZ tax rates, “67 per cent of respondents supported inflation adjustments, while just 13 per cent were opposed. The remainder were unsure,” says the Taxpayers’ Union, which commissioned the poll. “There was majority support across every demographic (gender, age, area, economic status, and preferred political party) with the exception of Te Pāti Māori voters, where there was still a plurality of support.”
It would be great if the Government introduced annual adjustments. The trouble is, more money for us means less in government coffers. Still, it seems only fair. Surprise us, Government!
Your last sentence refers to my comment two weeks ago that inflation adjustment should not be to “some amount like $51,342.78! The nearest $1000 would be good.”
In your US example, it seems they round to the nearest $25. But even that makes it harder to follow. We want our tax system to be as easy to grasp as possible, not just for the likes of you and me but for people who just don’t like numbers.
The new tax rates from July are 10.5 per cent up to $15,600, 17.5 per cent from there to $53,500, 30 per cent from there to $78,100, 33 per cent from there to $180,000, and 39 per cent after that.
While our current brackets are rounded to the nearest $1000, the new ones are rounded to the nearest $100. Please let’s not go any further than that. People who lose a smidgeon from rounding one year will gain from it the next year.
P.S. In this column, you will often see that I suffer from your “strong instinct some of us seem to have to round figures up or down.” Research shows rounded numbers are much easier to absorb over your Saturday morning coffee. In situations where precise numbers are important, I use them. Otherwise, clear communication wins!
OPINION: How to balance debt repayment and investment growth in NZ.
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