Some Kiwis are about to face a tax rate of 128%. What do we do about this?

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Summary: When lower income families start to earn more, they often face the withdrawal of various kinds of state benefits and entitlements, the effect being the same as facing very high tax rates. This week, experts have warned that, in a few years’ time, a small number of families could even lose more than a dollar for every dollar they earn. This perverse situation is just one instance of problems with what are known as clawbacks or abatement rates. There are no easy answers to this situation. But we can start to sketch out some paths for reform.

A tax shock

Most well-off New Zealanders would be shocked at the prospect of 80% or 90% tax rates. Even though they are not actually unknown in New Zealand history – during World War II, the top tax rate was around 80% – they would now be regarded as almost confiscatory.

Those people might be alarmed, then, to discover that such tax rates still exist in New Zealand – just much further down the scale.

They are known as effective marginal tax rates (EMTRs), and largely affect working families who gradually lose government-provided benefits, tax credits and other entitlements as they move up the income spectrum. As these entitlements are clawed back, or ‘abated’ in the jargon, families are effectively taxed at a high rate: they lose a large portion of their income to the Inland Revenue, just as they would with conventional taxes.