OnPoint by Keith Ng


Sneaky brackets

It reared its ugly head with ACT's “bracket racket” speech two weeks ago. Full marks for the rhyming, less for the making of sense. I counted a dozen statistics describing the same phenomenon, and all of them were increasingly useless derivatives of the same two numbers.

But contrary to Fran O'Sullivan's claim that Treasury has been muzzled, fiscal drag is not a secret. It's not a conspiracy. It's a part of the Government's fiscal strategy. Like, *literally* a part of the Government's fiscal strategy. It's on page 35 of the Fiscal Strategy Report that was part of the 2000 Budget. The forecasts that Treasury supposedly weren't allowed to make is on page 55 of the 2008 Fiscal Strategy Report. That's not to say that fiscal drag necessarily a good thing. It *is* kinda sneaky, but let's put it into context here: It's a left-wing government effectively raising taxes. Let's ease off on the shock-horror, eh?

So, what kind of perfect utopia would New Zealand look like, if only we were able to rid ourselves of Satan's fiscal drag? Here're something I prepared earlier. The graph below compares the current tax regime with an inflation-adjusted version of the 2000 tax regime, Labour's planned tax regime, National's assumed tax regime, and Australia's tax regime. It tracks the average tax rate – the tax rate that's paid on the whole income. The lower the line, the lower the proportion of tax paid. It does not take family assistance into account.

(Boring explanation about assumptions that you can skip: 1) The 2000 tax regime adjusted by inflation is what we would have if there was no bracket creep (i.e. If tax brackets were inflation adjusted). It takes tax brackets in 2000 and adjusts them by CPI to 2008 values. The rates remain unchanged. This does not adjust the brackets for real wage growth, but that's a different argument entirely. 2) Labour's tax cuts are taken at 2011 (when it is fully phased-in) values, then adjusted back to 2008 dollars with an assumed CPI growth of 2.8% per annum. 3) National's tax cuts are assumed to be the same as its proposals in 2005. That plan was to take effect in 2006, so the brackets have been adjusted by CPI growth between 2006 and 2008. 4) Australia's tax regime is taken at 2008-09 values, and converted by OECD 2007 PPP figures. The Google worksheet is here)

(Please, pretty please, click through to the big one or you'll go blind trying to read this graph.)

The single most noteworth feature is that the Labour and inflation-adjusted lines converge at around $47,000, and are virtually identical (with a 0.2% difference) from then on. Prior to that, the rates under the Labour tax regime is much lower. It means that the latest tax cuts are designed to nearly exactly cover the bracket creep for everyone who earns over $47,000.

Focusing solely on the shift in the top tax rate overlooks (*coughSundayStarTimesandDavidFarrarcough*) the obvious point that the new 12.5% rate is a big deal.

It's easy to assume, though, that the drop in the 12.5% bracket would have meant that everyone was better off, but the sneaky thing here was that the 21% bracket was shortened, so the 33% rate kicks in earlier. It's no coincidence that the two cancel each other out. The size of the total take at the bottom two brackets is the same as it was in 2000, if we adjusted it by inflation.

This means that the rejigging makes no difference to everyone who earns over $47,000, but it does make a different to everyone who makes less than that. For them, this is a genuine cut, above and beyond bracket creep. To put this into perspective, 71% of taxpayers have a taxable income of less than $50,000 per year (22% have a taxable income over $50,000, while another 7% of taxpayers have a taxable income of zero, so they don't count).

A warning, though - none of this takes Working for Families into account, which would obviously tilt the scales towards low-middle-income families. I'll do the fiscal stuff later. But here's the cheat-sheet:

* Fiscal drag is the increase in the average tax rate (*not* the amount of tax paid) caused by the tax system failing to keep up with wage increases.

* Fiscal drag is not a right-wing conspiracy. It is real. It is significant. It's a part of the Government's fiscal strategy.

* Fiscal drag means people pay a greater proportion of their income in tax. That does not mean that people are worse off, since income is rising, too.

* Labour's tax cuts will negate the fiscal drag of the last eight years for everyone earning over $47,000 per year (22% of tax payers). For those earning under $47,000 (71% of tax payers), it will be greater than the amount lost to fiscal drag.

(In partisan terms: “Labour's rightthinking tax cuts have obliterated the fiscal drag which threatened the ability of New Zealand worker to buy cheese, while redistributing to the workers more of their rightful dues. Labour is for tax cuts. Labour has always been for tax cuts.”

Or: “Labour's devious tax cuts have barely managed to keep the insidious fiscal drag in check, yet they continue to purchase votes from the underclass with the money of hard working New Zealanders. National will only use the money from hard working New Zealanders to purchase votes from hard working New Zealanders.”)

In the meantime, check out the New Zealand Political Stock Market. It's just a game – there's no real money involved (yet – there might be prizes in the future). The idea is that you trade “stocks” of political parties based on what you expect they'll get in the election.

The game aspect of it draws people in, and then commentators can use it as a kind of punditry-aggregator. It's robust because it's self-correcting. If party hacks try to rig results by trading their own party at a very high price and the opposition at a very low price, then people will simply snap up all the underpriced stock and sell them the overpriced one. The result will be a lot of play-money changing hands (away from the party hack), but little change in the price. It also takes advantage of the Delphi Effect – the idea is that large groups of people in general, beloved Public Address readers in particular, will make more accurate predictions than, say, Bill Ralston.

Just remember that it's about “who you expect will win”, rather than “who you want to win”. I'm pretty pleased to have been able to unload all my National stocks last week at $48/share (i.e. Betting that National would win less than 48% of party votes). I was hoping that the National would have taken more of a hit post-Budget (which would allow me to buy back the National stock at a cheaper price) but that hasn't really happened yet. Just stocked up on the Greens, at $6.20, as long-term investment, but I'm hesitant about Labour at $35.

The plan is to hook the Political Stock Market with commentary here on Public Address, and get you lovely folks to do some trading after reading about political events. Essentially, get your feed of information here, quantify your predictions there. Good luck!

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