Tax-free band at the bottom
What is it?
Instead of requiring people to pay tax on every cent they earn, the first portion of their earnings – say, $5000 or $10,000 – would not be taxed. This is the case in countries like the UK and Australia.
What is the problem that this change would seek to address?
New Zealand’s tax system asks a lot of its poorest earners, by taxing every cent of income and by GST. In contrast, the absence of a capital gains tax or wealth taxes means relatively little is asked of the highest earners. A tax-free band would help rebalance this situation.
What are the advantages?
The tax contribution required from the poorest New Zealanders would be diminished. This would probably be politically popular and administratively simple.
What are the disadvantages?
It is very expensive: just making the first $5000 of income tax free, for instance, has been estimated to cost $1.7 billion. In addition, the tax break goes to all earners, including those at the top. Increasing benefits would be a more targeted way to help the poorest New Zealanders.
Was this helpful?