How what you don't see can tax you nonetheless

This is a taxing government. Not a wildly taxing government but one which puts your taxes up nonetheless.

This is both overt and covert.

The overt tax increases have been in excise taxes, on alcohol, tobacco and petrol — and, of course, the extra 6c income tax in 2000 on “the rich”, the over-$60,000s.

Also important are the covert tax increases.

One sort is the compulsory levy, for ACC, for example. “A levy is a tax,” former Labour leader and Prime Minister Mike Moore used to say and opposition parties have been vocal on that point this month.

A second sort is the rising average tax rate you pay as your income goes up, once it is over $38,000.

This is bracket creep, or fiscal drag. It operates in stealth.

The most obvious change occurs when earnings rise through one of the thresholds. If, for example, your taxable earnings go from $59,500 to $60,500, the top $500 will be taxed at the 39c top rate.

At a rough guess 8-10 per cent of taxpayers are now paying some of their tax at 39c. In 1999 the Labour party promised only 5 per cent would. Opposition parties have been vocal on that, too, this month.

Nevertheless, over-$60,000s are a minority Labour can probably safely ignore. Far more relevant is the average income-earner. And the average earner, including overtime, has in the past year climbed through the $38,000 threshold at which the 33c rate cuts in — to $38,664 in February. Below $38,000 the rate is 19.5c.

Moreover, once you are above $38,000, you go on paying proportionately more tax each time your earnings rise. That is because a higher proportion of your total income will be in a higher bracket.

For example, if your taxable earnings go from $39,000 to $40,000, the proportion of your income in the 33c tax bracket doubles from 2.6 per cent to 5.0 per cent. The proportion of your income you pay in tax rises from 19.8 per cent to 20.2 per cent.

It’s not dramatic. Year-on-year, you hardly notice it. In any case, you get more money in the hand after tax, so life gets better. At least, the government banks on you feeling that way.

But after you allow for inflation, you may well be losing ground. That is ACT’s argument. Now it applies not just to the “rich” but to average-earners.

Moreover, over time this fiscal drag from bracket creep mounts up. Since Michael Cullen took office it has been a significant ingredient in his amazing Budget surpluses: bouncing economy, bouncing incomes, bouncing taxes.

Now hear the other side of the story. The infrastructure is inadequate, there are shortfalls in the health service, tertiary education is underfed. The tradeoff for higher taxes is more spent on government services.

Polls suggest most people back the tradeoff and the Clark government’s emphasis on social services. Yes, many do think they are overtaxed and/or the government is not spending effectively or wisely. But if the polls are to be believed, most broadly approve the government’s tax-spend approach.

But even if you do approve, wouldn’t you prefer to be told each year you are to be taxed more? Wouldn’t you prefer to make an explicit choice to trade off your private money for social services?

ACT and National think so but they are impotent opposition parties. More important, United Future thinks so.

United Future’s deputy leader and finance speaker Gordon Copeland has quite a tax agenda. Notably, he wants:

* the company tax rate cut from 33c to 30c;

* tax rebates and rate reductions for long-term savings;

* income-splitting so each member of a couple with children pays tax on half the couple’s total income, which would be a boon for single-income or lopsided-income families; and

* income tax thresholds indexed to inflation.

None of this is acceptable to the government or the Greens, who abhor cuts.

But indexing thresholds so they go up automatically in line with prices is not a cut. If the $38,000 threshold had moved up in line with inflation over the past year, the average earner would still be below the threshold.

Not indexing the threshold is in effect a real rate rise. If thresholds were indexed, Cullen would have explicitly to raise the rates if he wanted more income tax.

Indexation to inflation would not completely stop bracket creep because incomes on average rise faster than prices over time. But it would greatly reduce it.

Australian Treasurer, Peter Costello, has moved partway down this track, with a small cut in his Budget in May and a stated intention to adjust thresholds in future to compensate for inflation.

And in this country excise taxes are indexed now — upwards. Moreover, in his Budget Cullen did a one-off inflation adjustment of qualifying income thresholds for the family assistance tax credits for low-income people. Earlier this month he told a select committee he is considering indexing family assistance.

What if United Future were to make threshold indexation a key to support for Labour after 2005? That would strike a blow for transparency and honest government.