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Can you please outline a scenario example showing how this would work?

Can you please outline a scenario example showing how this would work?

To help us understand how this will affect us as individuals ... especially since you're saying 80% of people would be better off, can you please give some scenarios showing what the tax would be using current tax rules vs these proposed tax rules? e.g. Dad earns $70K, Mum earns $20K, they own their family home worth $600K, mortgage $400K. Second example - Dad earns $90K, Mum doesn't work, they own family home $600K, mortgage $300K, plus a rental worth $400K, mortgage $300K. Third example - Couple, both earning: Husband $80K, Wife $90K. Own a home worth $1m, mortgage $400K.

Official response from submitted

Giving an exact response is hard because we don't know the exact numbers the government will choose

Add up the value of all your assets, take off your debt. That’s your equity. Of course the government might say don’t include anything worth less than $10,000, or $20,000 - who knows? 

Now you need to guess an effective tax rate that will be charged every year. I’d guess anywhere between 0.5% and 1.5%. But remember that will be ultimately. Who knows how many years a government would choose to phase in this change in the tax base? They don’t want to collapse house prices, the aim is to take the sting out of house price inflation. And who knows whether they grant an exemption - that could be anything from no exemptions (like GST) to a minimum value of say $200,000 - or even the value of an average house. These are all choices for the government to make.

Thirdly you need to estimate what happens to your tax rates - remember all revenue raised is returned through tax cuts. Also remember the more exemptions they  grant, the less tax is collected, the smaller any cuts must be. And of course a government might decide to spend all the proceeds cutting the top tax rate, another government might decide to cut the bottom rate only, a third government might just cut all rates equally.

Hopefully by now you can see that how it effects you in particular is impossible to know unless all these factors are known. These are political choices. If they do it properly as I would - and remember we have no aspiration to be the actual government - then they’d collect enough to cut tax rates by a third. So it is a fundamental change in the way tax is collected - wage earners at long last get the tax relief that is only fair, and asset owners are flushed out from the bushes. But hey, that’s your choice. 

I always ask people whether they think this enormous rise in inequality that has occurred since Ruth Richardson did her thing is in any way fair? If they don’t care we don’t need to talk on this any further. But if they think its unfair then I’m suggesting what the best (in terms of both economics and fairness) way to address is as I’ve outlined. Do it with no exceptions, cut income tax rates by 1/3rd and 80% of people will be better off. It’s a no brainer. The only issue is how many of the 20% (or those who aspire to be) care enough to support it. Your call.

I have to say it does amuse me to see people saying they’ll only support making NZ fair again if they are directly better off themselves. Makes them sort of prostitutes doesn’t it?

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    • Oliver Krollmann
      commented 2016-12-12 22:52:31 +1300
      You’re welcome, Josh. Please note that my example math might be off or even wrong, for example Gareth mentions a direct equity tax of 0.5% to 1.5% in his response, whereas I was assuming an annual return rate which would then be taxed according to the current income tax brackets. There are lots of variables and different approaches to this.
    • Josh Moore
      commented 2016-12-12 16:16:02 +1300
      Thanks for your replies Gareth and Oliver. Gareth I think you read something into my question that wasn’t there – I never said I would only support the policy if I was personally better off. I just said I wanted to understand the numbers at an individual level, as no specific examples had been given, except a very scary “extra $350,000” that was quoted as your expected increased tax bill. I love the complete fresh thinking you’ve brought to the income tax debate, but since it is so fresh I’ve been struggling to understand how the figures would actually work. I’m more likely to support a policy if I’ve clearly understood how it plays out and how the numbers actually work. Oliver, thanks for your detailed example breakdown. That helps me understand much more clearly how potential income tax cuts can offset the proposed new tax assessment, as proposed by the policy.
    • Gareth Morgan
      responded with submitted 2016-12-12 09:29:20 +1300
    • Kate Tyson
      tagged this with i have the same question 2016-12-10 19:32:34 +1300
    • Oliver Krollmann
      commented 2016-12-10 18:05:05 +1300
      Here’s how I understand it (please note that I’m not a TOP member or in any way involved in TOP policy #1):
      I’m assuming that in all three examples dad and mum each own 50% of the house, and that the annual return is 2.5%, which is a bit higher than current government bond rates. I’m also using current tax rates, which don’t include any tax cuts in other income areas yet.
      Example 1: Equity is $600K – $400K = $200K, return is $200K x 2.5% = $5,000, $2,500 of which would be taxed at 33% (because dad already earns $70K) and the other $2,500 at 17.5% (because mum already earns $20K). The annual tax would be ($2,500 × 33%) + ($2,500 × 17.5%) = $825 + $437.50 = $1,262.50. So for this family to be not worse off they would have to receive a tax cut of at least that amount on their wages. This would be the case if the tax rate for the income bracket between $48K and $70K was lowered from 30% to 24%. Dad would pay 6% less tax on his last $22,000 of wages, amounting to $1,320. Or a 1.5% tax rate cut across all brackets would do it, too, saving dad and mum together $1,350 of taxes on their combined income of $90K.
      Example 2: Let’s assume the rental is rented out and performs better than 2.5% annual return. Dad and mum are already paying taxes on their rental income, so it’s of no concern (again ignoring any possible tax cuts they might receive in that area). Equity of the family home is $300K, return is $7,500, tax rate for dad is 33% and for mum 10.5%, tax to pay is $1.631,25. If the rental was sitting empty because dad and mum are speculating or property-banking, just increase the equity by $100K (rental value minus mortgage), which increases the total tax to $2,175.
      Example 3: Equity is $600K, return is $15,000, tax rate for both is 33%, tax to pay is $4,950. It is possible that these guys might be in the 20% who have to pay more tax because the tax cuts on their wages might not fully compensate the new tax – but that remains to be seen. If tax rates were lowered just 3% across all brackets even these guys would still be better off, because they would save $5,100 of income tax on their combined income of $170K.
      My math might be totally wrong, though – but that’s how I understand it. I’d love to see examples from the TOP people how they arrived at their 80/20 distribution and what tax rates and cuts, annual returns, and property values they’ve been using in their models.
    • Tristan Kiddie
      commented 2016-12-10 14:23:06 +1300
      Keen to hear the response on this one. Good question Josh Moore.
    • Tristan Kiddie
      tagged this with i have the same question 2016-12-10 14:23:05 +1300
    • Josh Moore
      published this page in Ask a question about policy #1 2016-12-10 11:20:05 +1300