Raising NZ Incomes - 2025 Taskforce, First Report

Posted on 30 November 2009

The 2025 Taskforce issued their first report today on recommendations towards closing the income gap with Australia by 2025.

The report seeks to advise the Government of the necessary steps required to increase incomes to a level comparable with those in Australia by 2025 - a task that would require a substantial and sustained lift in NZ's productivity growth considering that Australian incomes are on average 35% higher than New Zealand incomes.

There is some good background reading and a number of recommendations in the report (35 of them). If you've got the time then the full report can be read here. In order to catch the essence of the recommendations from the point of view of a New Zealand salary or wage earner we've included a selective summary of the key points below, along with our comments:

Selective summary of 2025 Taskforce recommendations

(7) Ambitious welfare reform measures should be undertaken as a matter of priority to reduce the very large number of people of working age currently receiving welfare benefits.

If implemented this should increase the size of the working population and reduce the aggregate tax burden of welfare payments.

(8) Early steps should be taken to lower the actual and prospective costs (as a share of GDP) of New Zealand Superannuation.

Obviously this means that everyone should be putting away a larger percentage of their take-home pay into investments that will supplement their retirement income.

(9) Remaining KiwiSaver subsidies should be abolished.

Without the tax subsidies that are currently in place this will result in a lower net return on kiwisaver retirement investments - again meaning that each New Zealand taxpayer would need to make a greater commitment to private retirement savings.

(11.e) Market-based interest rates should be reintroduced for student loans.

This would have a dramatic effect on all student loan payers. At the minimum repayment threshold a salary of almost $40000/annum would be required just to meet the interest costs on a $30000 student loan. Recent graduates would therefore have a number of years of reduced cash-in-hand to look forward too, but at least they would have an incentive to pay back their loans sooner, and of course an incentive to move overseas in order to earn more.

(12) Average tax rates should be substantially reduced, as ambitious expenditure restraint permits. Cutting core Crown expenses to 29 percent of GDP would, for example, allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent.

A 20% personal tax rate would have to sound very appealing to the majority of salary earners in New Zealand. Indeed anyone with an income over $44000 would be better off under a fixed 20% tax rate, and if the current 12.5% lower tier tax rate was also retained then anyone earning over $14000/year would receive a higher net income.

A higher net income would obviously be required though, as everyone would be expected to meet higher direct costs for services such as health, education, roading and retirement under this scenario.

(13) Serious reforms should be undertaken to reduce the high effective marginal tax rates facing many middle income taxpayers with dependent children as a result of the abatement provisions of the Working for Families tax credit scheme.

By reducing or eliminating welfare such as working for families there would be a large reduction in the marginal tax rate of medium income familes (the effective marginal tax rate can be more than 50% once benefits are factored in), however this will have the effect of reducing net incomes of families unless a corresponding reduction in income taxes or general child allowance is also implemented.

(14) Reductions in average tax rates should be achieved by reducing income taxes, and doing so having regard both to the importance of administrative simplicity and minimisation of tax avoidance on the one hand, and to the evidence that taxes on capital income can be particularly detrimental to economic performance on the other.

In other words, the 2025 taskforce recommend lowering average taxes in order to boost productivity and incomes, but by doing so through a reduction in personal (salary) income taxes rather than through capital gains taxes.

In addition to the points summarised above, the report provides further recommendations in the contexts of regulatory changes, reducing Government spending, and privatisation of Government assets.