A simple, competitive income tax system

Recently, the Minister of Finance said cutting taxes ‘isn’t a good use of resources.’ His choice of words says a lot. He believes your money is a government resource even before it’s taxed. The result of this obsession with dividing, instead of creating, wealth is a gradual decline of our country’s living standards.

ACT’s Real Change Budget would dramatically simplify the income tax system so that it once again rewards success. It takes New Zealand from five tax rates on income down to two. It reduces the incentive for tax avoidance and sends a message that if you work hard and do well, you get to keep more of your own money.

The thresholds would change as follows:

By 2023/24, the tax burden on the average New Zealander will be $1,236 per year lower under ACT than Labour. We will have delivered a tax cut for every earner.

In order to ensure that every earner would receive a tax cut, ACT would also create a new Low and Middle Income Tax Offset (LMITO), starting in fiscal year 2022/23. This tax offset would be worth $800 per annum for all earners earning between $12,000 and $48,000. It would gradually grow at a rate of 8% from $0 per year for taxpayers earning $2,000 to the full $800 for taxpayers earning $12,000. At incomes above $48,000, the offset would abate at a rate of 8%, reaching $0 at an income of $58,000.

Providing a Carbon Tax Refund

ACT is proposing to give the approximately $1 billion a year collected through the Emissions Trading Scheme back to Kiwi families to help with the cost of living.

The Government is planning to take $4.37 billion from consumers by selling carbon credits to businesses over the next four years. It has announced this ETS revenue will go exclusively into a $4.5 billion climate slush fund.

ACT would return the tax revenue collected from the ETS to them in the form of a Carbon Tax Refund. Based on the latest forecasts, that would mean the following payments to each New Zealander:

The Carbon Tax Refund would take each year’s revenue from ETS auctions and divide it by the population. Every adult would receive a reduction in their tax bill by that amount, plus their dependent children’s share. For people whose tax bill was lower than this credit, any remaining amount would be paid directly to them by Inland Revenue.

The Government’s climate slush fund will not reduce emissions by one gram because the amount of allowable emissions in New Zealand is already capped by the ETS. ACT’s plan will guide people towards lowering their emissions because if they spend money on carbon-heavy things, their money goes back into the ETS. If they take low carbon options, they avoid ETS charges.

This policy would be good for New Zealand’s long term commitment to climate change. If the ETS gives people a carbon dividend, it is far more likely to be politically sustained over the decades as carbon prices inevitably rise, but the best way to benefit is to take the money and use less carbon.

ACT’s Carbon Tax Refund would offset much of the impact on the cost of living due to the ETS. But it would retain the incentive to reduce emissions, because, for instance, the ETS tax would remain on every litre of petrol purchased.

Reversing the rental tax

Labour's denial of interest deductibility is divisive and unfair. ACT will repeal it. It is about blaming Mum and Dad investors and it will do nothing to improve housing affordability. This change will reduce the number of rentals, push rents up, and make it harder for Kiwis to save for their first home. Our focus must be on easier planning rules and smarter infrastructure funding. Only that will address house affordability for the next generation.

Abolishing the bright-line test

Labour's extension of National’s bright-line test has created a capital gains tax by stealth. When National introduced the bright-line test in 2015, David Seymour said:

“…this tax is the acorn of a capital gains tax. It is a measure that will grow from 2 years to 5 to 10 to 15 years. You watch: it will eventually apply to a wider range of homes. It is the acorn that the National Party has planted that will grow into a full-blown capital gains tax.”

The pre-2015 law would have seen tax paid on income from property speculation. The bright-line test was unnecessary but has been allowed to grow into a CGT.

It makes it harder for houses to go to those who value them most and makes it more difficult for people to plan their lives. ACT would abolish not just the Government’s increases to the test, but the test itself.