Introduction of an Independent Earner Tax Credit
The changes to personal tax also include the introduction of an independent earner tax credit (IETC) from 1 April 2009 that will deliver $10 per week to individuals that earn income of between $24,000 and $44,000 and do not receive a benefit, WfF tax credits or New Zealand superannuation. The IETC will be abated at 13 cents for every dollar of income earned over $44,000. The amount of the IETC will increase to $15 per week from 1 April 2010. For salary and wage earners the IETC will be delivered each pay period by way of a reduction in PAYE tax that the employer withholds.
The IETC is preferred because it increases incentives for participation in the workforce by targeting a specific group within society. This group is represented by those earning below the full-time minimum wage of just below $25,000 per annum. By encouraging increased labour participation - there are positive flow-on effects for growth. Another key benefit from the targeted feature of the mechanism is that it helps minimise the associated fiscal cost, which less targeted options do not.
Overall, the preferred option involves lowering MTRs and ATRs. This will help enhance New Zealand's growth prospects by providing an improvement in labour productivity, labour participation, and labour migration, as well as reducing the magnitude of the existing tax base sustainability issues arising through rate disparities. Although there may be a regressive element for those earning slightly under the $24,000 threshold relative to those earning slightly above it, this is considered to be outweighed by the overall economic benefits arising from increased participation. Further, the IETC will improve incentives for those earning below $24,000 to move toward full-time work by reducing the ATRs that apply between $24,000 and $50,000 for those eligible for the IETC, and by providing an incentive to meet the $24,000 minimum threshold income for the IETC. As this threshold is below the full-time income of someone earning the statutory minimum hourly wage, all full-time workers should earn enough income to meet the minimum income threshold of the IETC.
