Daily Archives: Tuesday 9 February 2010

For NZ politics wonks and tax geeks: income tax by bands

A lovely graph showing the income tax peaks in New Zealand. And whaddya know… it turns out that reported income peaks at $38,000 and $60,000, which by sheer coincidence are the thresholds at which higher rates cut in. (NB: the thresholds have been adjusted since this graph was created, but the problem remains.)

(Description: graph showing income peaks at $38,000 and $60,000.)

Here’s the instructive bit. The base year is 1999 (red dotted line), where there is no peak at $60,000. But after the 1999 income year, the top personal tax rate was lifted to 39%, cutting in at the $60,000 threshold. By 2002, there was a significant increase in the number of taxpayers who just happened to earn $60,000 (teal line). By 2005, there were even more (green line), and by 2007 (dark blue line), more again.

I lifted the graph from the 2008 Briefing to the Incoming Minister, which you can download from the IRD site, should you feel so inclined: PDF – 441kb. There’s a long discussion there as to how taxpayers manage to arrange their affairs in such a way as to earn income that just happens to fall under the $60,000 threshold.

While you’re having fun looking at graphs, you might also like to contemplate this one, lifted from the same source. It shows effective marginal tax rates, that is, the percentage tax rate you pay on each additional dollar of income. So for example, say you earn $80,000, you’ve got just one household income, and you have three children. Due to the interaction of tax rates and the Working for Families payments, then if your boss gives you a payrise of say, $5,000, then you will get to keep about $2,000 of that, because the effective tax rate on the $5,000 is 60%.

(Description: graph showing the effective tax rate on each additional dollar of income. For a sole income, three child family, the tax rate tracks through 16.3%, 101%, 22.3%, 54% and 60%, before dropping back to the highest official tax rate, 39%, at about $92,000 annual income.)

These are some of the policy issues that John Key’s government is attempting to deal with. It will be fascinating to see what comes out in his opening speech to parliament this afternoon.