Prime Minister Chris Hipkins says tax thresholds will eventually need to be adjusted, but not now

The Prime Minister says there will eventually need to be adjustments to tax thresholds due to wage inflation, but he doesn't believe now is the right time to make such a change.

He also believes the tax system currently doesn't "always incentivise hard work". However, he says the steps to fixing that issue are complex.

It followed a speech to the Employers and Manufacturers Association in Auckland on Thursday during which Chris Hipkins announced the Government wouldn't introduce a capital gains tax, a wealth tax or a cyclone levy in the upcoming "no-frills" Budget.

"A key message of this Budget is restraint. In a cost of living crisis, now is not the time to be asking Kiwis to pay more [through] a levy for cyclone repair costs," Hipkins said.

However, nothing has been ruled out for Labour's tax policy for the election.

IRD research out on Wednesday showed the richest New Zealanders are paying an effective tax rate less than half of that of middle New Zealand. Revenue Minister David Parker said that revealed an "unfairness" in the system.

Hipkins said New Zealanders who are working hard should be able to get ahead, but there is "evidence that our system doesn't always incentivise hard work".

"The solutions to that are more complicated. The research [...] suggests there is some unfairness in our tax system," Hipkins said.

Asked why he isn't doing anything about it, Hipkins said the Government was honouring Labour's pledge from the 2020 election not to introduce any new taxes outside of the new 39 percent tax threshold on income above $180,000.

"I think it is important that when you are looking at potential changes to the tax system that you have a mandate from the public for any changes you want to make. If we were going to make any changes, they would be outlined in our manifesto."

He said that manifesto would be released "well ahead of the next election", which is on October 14.

Prime Minister Chris Hipkins.
Prime Minister Chris Hipkins. Photo credit: Newshub.

Hipkins said he wants to make sure the tax system is fair for people who make the majority of their living through salaries and wages.

"We will continue as a Labour Party and as a Labour Government to work to ensure the tax system and the economic system is a fair one for wage and salary earners," he said.

Later, Hipkins was asked if he believed the current tax thresholds are fit for purpose in the current wage environment.

"I do want to acknowledge that over time there will need to be adjustments to tax income thresholds as the overall incomes of New Zealanders rise," he said.

"I am not outlining any specific plan about that today, but I do acknowledge that from time to time there does need to be adjustment to those thresholds."

Hipkins has previously said he isn't interested in ruling in or ruling out measures, but he said he is "certainly not ruling out changes to income tax thresholds in the future".

"But now is not the right time to do that when we have a high inflationary environment because we know that tax changes like that, that put more money back into the economy, can also lead to any additional value that people get to get through a tax being quickly eroded by inflation."

New Zealand has a progressive tax system. Any income up to $14,000 is taxed at 10.5 percent, additional income between $14,000 and $48,000 is taxed at 17.5 percent, additional income between $48,000 and $70,000 is at 30 percent, and extra income between $70,000 and $180,000 is at 33 percent.

After the 2020 election, the Government also introduced a new tax rate of 39 percent for income above $180,000.

However, due to inflation and wage growth, there have been concerns that people are shifting into higher tax brackets and paying more tax despite not being better off in real terms.

Indexing tax thresholds to inflation is a National Party policy but its policy has received some criticism for benefitting those on higher incomes more than the lowest earners.

National's finance spokesperson Nicola Willis on Thursday said Labour should be offering tax relief in the Budget. 

"This will be the sixth budget from Labour without any adjustment to tax brackets. This is despite rocketing inflation and the Government finding billions to fund consultants, light rail, and bureaucratic restructures."

A tax-free threshold is also an idea that's been bandied about in the past. A Newshub-Reid Research poll late last year found overwhelming support for it with the public

Shortly after being elected leader of the Labour Party in January, Hipkins told AM, "we should always look at how we can make the tax system fairer". 

The Prime Minister has also previously made the point that while costs are going up for ordinary Kiwis, inflation also has an impact on Government expenses. Adjusting tax thresholds could lead to less tax revenue for the Government to then spend.

"It costs more to educate a child now than it did five years ago, it costs more for us to provide the health services we provided five years ago," Hipkins said in February.

"We have to make sure we are continuing to deliver the public services New Zealanders want as well. That has an impact on us and we have to get that revenue from somewhere in order to be able to provide those public services."

National leader Christopher Luxon on Thursday said it was "unacceptable" for Hipkins to leave the door open to introducing new taxes after the election. He said this creates "uncertainty".

"He should be like every other Prime Minister, including Jacinda Ardern, who said, 'Look we are ruling it out while I am Prime Minister'. That is what I haven't heard from him today."

The Green Party said it was clear more Green MPs were needed to "get a government that will rebalance the tax system and provide everyone with what they need to live a good life". 

“It is time to be bold and rewrite the rules to make sure the wealthiest people in New Zealand pay their fair share. People can see clearly that what is stopping this from happening is a majority government," said co-leader Marama Davidson.

"It's not good enough for politicians to rely on tired and disproven arguments about restraining spending. It shows a lack of vision for building the fair and inclusive Aotearoa we need. The political choice is clear: we can have a more equal society with better public services if the Government acts sensibly on tax."

The Greens have been calling for either a wealth tax or a capital gains tax to address the issue. On Thursday, French economist Thomas Piketty - who the Revenue Minister is a big fan of - agreed New Zealand needed to do more to tax the wealthy.