National's Tax Policy: Simplified
Unpacking the policy details and what they mean for the election
The National Party’s newly announced "Back Pocket Boost" tax relief plan, targeting New Zealand's 'squeezed middle', promises to provide much-needed financial relief for average earners. The plan signals a shift in focus towards increasing after-tax pay for middle-income earners, a demographic that has been grappling with rising costs of living under the current government.
What will this mean for taxpayers?
The proposed tax relief plan pledges to increase the average household income by up to $250 a fortnight for families with children, and up to $100 a fortnight for child-free households. Full-time minimum-wage workers without children will see a $20 boost to their fortnightly incomes. Needless to say the relief will be welcome for those struggling to keep up with the price of food, petrol, childcare and mortgage payments.
The tax relief will take the form of adjustments to tax brackets, increases in tax credits, tax rebates for childcare costs, and increases to Working for Families payments. In addition, National promises to remove current and planned petrol taxes and reduce taxes on rental properties, which have driven higher rents.
The National Party also proposes to restore interest deductibility for rental properties, roll back Labour's extension of the brightline test, and remove new taxes on digital services. These changes are designed to reduce pressure on rents and ensure fairness in the tax system.
How will it be paid for?
The question on most people's minds, however, is how the National Party plans to finance this ambitious tax relief plan. They've assured voters that the plan will be self-funding, and will not require borrowing. This will be achieved through a combination of reprioritising government spending and implementing targeted new revenue measures.
The National Party proposes to cut back on government spending on back-office functions and consultants.
The four new revenue measures proposed in the National Party's tax relief plan are:
Scrapping the foreign buyer ban and introducing a 15% foreign buyer tax on the purchase of houses worth over $2 million by people who do not hold a resident class visa in New Zealand.
Ending the commercial building depreciation tax break.
Closing a tax loophole for offshore online casino gambling operators serving New Zealand customers. These operators will be required to register and report their earnings for tax purposes.
Moving to user-pays immigration levies, excluding tourist visas. This would mean the cost of processing visa applications is recovered through fees charged to applicants.
What’s the political effect likely to be?
The National Party's tax relief plan is a strategic maneuver designed to address key concerns of the average New Zealand voter: the rising cost of living and the need for tax relief. By targeting the 'squeezed middle', the party is appealing to a middle earners and other core voting demographics that are likely to decide the election.
The plan to cut back on government spending would ordinarily raise concerns about possible impacts on public services, but this has been defused somewhat by cutbacks of a similar nature announced by the Labour government.
The introduction of the 15% foreign buyer tax is particularly clever. It allows the National Party to repeal the foreign buyer ban - which some consider a deterrent to beneficial foreign investment - while still ensuring that New Zealanders derive a direct benefit from property purchases by non-residents. This move can be seen as a response to criticisms about protecting New Zealand's interests and housing market.
It will annoy some free-marketeers who say it does not go far enough. Even they, however, will be somewhat mollified by the fact that it’s an improvement on the current situation.
Closing the online casino tax loophole and moving to user-pays immigration levies also serve a dual purpose. They not only generate additional revenue but also address concerns about fairness in the tax system and the costs of immigration services.
Finally, the party’s decision to keep fuel prices down by removing the Auckland Regional Fuel Tax and not increasing fuel taxes in their first term should appeal to many voters struggling with the rising cost of living.
Where the policy will be tested
However, the question of credibility always boils down to the numbers. Can the proposed measures generate the required revenue to fund the tax relief program without increasing the national debt? No doubt Labour and its media surrogates will be combing through every line trying to find things to pounce on.
As with all plans, National’s blueprint depends on a number of assumptions. The foreign buyer tax, for example, is predicated on continued strong demand from non-residents for New Zealand property. If this demand wanes, the tax revenue could fall short of projections. Similarly, the revenue from closing the online gambling tax loophole depends on successful enforcement and compliance by offshore operators, which can be challenging.
While there is certainly potential for savings in terms of ballooning consultant costs, the projected savings from these cuts may also be optimistic. It never pays to bet against the ability of the public sector to increase costs by trying to save them.
The policy also assumes that the proposed tax cuts will not lead to increased inflation. However, in theory increasing disposable income can lead to increased demand for goods and services, which could potentially drive up prices. There are just lots of moving parts here.
Lastly, the policy does not appear to account for potential economic shocks or downturns, which could impact government revenues and the feasibility of the proposed tax cuts. Events happen, unfortunately, and usually not according to government schedules.
On the whole, the Nats have done a good job
That being said, the policy has been reviewed by an external agency - Castalia Advisors - who found that the tax plan is based on "reasonable assumptions" about future government revenues and expenditures. They are good operators and the external validation lends some credibility to the plan.
What we have is a serious strategy to provide tax relief to middle-income earners, the credibility of the maths behind it relies heavily on certain assumptions about future economic conditions, spending cuts, and the successful implementation of new revenue measures. But it is a plan that is possible and plausible provided it can be executed with careful management.
In short, National candidates should be able leverage this plan to address voters' concerns about the rising cost of living. In response to potential criticisms about the fiscal responsibility of tax cuts, they can point to the policy's multiple revenue-raising measures. If communicated effectively, the document can provide a strong foundation for National on the campaign trail.
IMPORTANT POST SCRIPT:
The document does not mention the annual indexation of tax rates, which was previously promised by the National Party. Instead, it proposes a shift in the income tax brackets to compensate for inflation and expanding tax credits to reach more modest income earners, which seems to be a one-off adjustment.
However, it does mention that the impact of inflation on average tax rates will be assessed at least once every three years, with a view to making further adjustments to tax thresholds if they are deemed affordable and responsible. This suggests a less frequent adjustment compared to the previously promised annual indexation.
The omission here is cause for disappointment.
This policy, previously promised by National, was an important safeguard against "bracket creep," where inflation pushes earners into higher tax brackets without any increase in their real income. It is of note that indexation is staunchly opposed by the ACT Party, with whom National will need to form a coalition on current polling.
The decision to move away from this commitment, even in favour of less frequent tax threshold adjustments, is a step back from a key principle of fairness in taxation. The change will not significantly impact the party's popularity, given the complexity of tax issues and the range of other attractive measures in the plan. However, it is nonetheless a notable departure from a policy that would have ensured ongoing protection for taxpayers against the erosion of their real incomes due to inflation.