Wednesday, May 28, 2008

Fiscal drag is part of the Government's fiscal strategy

Keith Ng has done a good post on the budget, analysing the Governments tax cuts. Go and read it. In short, if you`re earning more than $47,000, you've just had a pledge that your overpayment - or is that an interest free force d loan to the Government - is to be repaid back to you but over three years. This, in an attempt to win your vote this year. Here's the cheat sheet:

* Fiscal drag is the increase in the average tax rate (*not* the amount of tax paid) caused by the tax system failing to keep up with wage increases.

* Fiscal drag is not a right-wing conspiracy. It is real. It is significant. It's a part of the Government's fiscal strategy.

* Fiscal drag means people pay a greater proportion of their income in tax. That does not mean that people are worse off, since income is rising, too.

* Labour's tax cuts will negate the fiscal drag of the last eight years for everyone earning over $47,000 per year (22% of tax payers). For those earning under $47,000 (71% of tax payers), it will be greater than the amount lost to fiscal drag.

It is noted that WFF payment is not included in this analysis. If you're earning a more than $47,000, you've just paid for your tax cut. Congratulations, you don't really get a tax cut at all.




Blogger Steve Withers said...

Fiscal drag is an artifact of any income tax system with tax rates based on specified dollar amounts of income. National benefited from it just as much as Labour - or any other government would. Trying to portray this as a left / right issue is incorrect and misleading. The answer would be to index tax brackets to rises in wage rates. But that is seen as inflationary. So NO government of ANY stripe does it.

May 27, 2008 at 11:34 AM  

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