An important tax principle established

Michael Cullen has set a platform for personal tax: at least this year’s levels. His promise to raise bracket thresholds in 2008 and every three years thereafter — but not cut rates — embeds the huge rise in tax over the past five years.

And the platform will likely rise. Cullen is to raise thresholds by 2 per cent a year, the midpoint of the Reserve Bank’s target. But since inflation has almost invariably run above the midpoint and since wages run faster than inflation, the thresholds will continue to fall behind and most taxpayers will year by year pay a higher cut of their income in tax.

Just four years ago (let alone six) average earnings were $35,800, far below the $38,000 33c threshold. Now they are $41,330. Already 11 per cent of taxpayers are in the 39c bracket, more than twice the 5 per cent Labour promised in 1999 and rising.

But Cullen has done something bold: he has set a principle of regularly linking thresholds to inflation that a future government would abandon at its peril. The argument in future will not be whether but how much, how often and by what benchmark. We can thank United Future’s Gordon Copeland’s Beehive campaigning in part for that.

The political question is whether Cullen has taken enough sting out of widening grumbles about tax, even among Labour’s core vote. Answer: maybe, depending how much those people get from the Working for Families handout system, now working its way into household budgets. In any case wages are a powerful sweetener.

John Key will go better — a lot. But to do that he must cut government spending — a lot. Labour will play on that to frighten the old and less-well-off: get ready to get sick of hearing “gone by lunchtime” and reminders of the 1990s when voters thought spending was too low.

And the economy? Cullen has done a raft of small good things for business. It’s not enough to get the liftoff in productivity growth he needs for a rousing third term. But, hey, this is election year.