Thursday, May 22, 2008

Who benefits from Labour's tax cuts?

Do Labour's tax cuts really favour the poor over the rich? I spent much of this afternoon sitting down crunching numbers, and the answer is "not really". OTOH, given the chosen mechanism - lowering the bottom rate and some bracket adjustments to reflect shifts in income over the past few years, this is probably about as good as it gets. Anyway, here's the benefit to various groups of the first phase as calculated from Treasury's Who pays tax... and how much? data:

(Methodology: the lack of proper income distribution data forced me to do this backwards. The total cost of the package was calculated from Treasury's detailed model data (it came out to $2,053.615 million per year). The benefit to each group but the lowest was calculated using the number of taxpayers in that group and the annual benefit of lower changes; where a threshold change fell within a group, its effect was calculated from the detailed model data. The benefit to those in the 0 - $20,000 category was calculated by subtraction. 2007/08 data was used because there is no detailed model data for 08/09 yet).

So, it's nowhere near as grossly inequitable as the BRT's proposal, which cost about the same but funnelled 92% of the benefits into the pockets of those earning $60,000 a year and over, but it still disproportionately benefits the wealthy. But as mentioned above, it is probably about the best that could be managed given the methods chosen.

Interestingly, dividing the cost equally among all 3.2 million taxpayers could have produced a social dividend of $635 a year - more than most of the population get under the current scheme, without the disproportionate benefits to the rich. Cullen would have been better off by pursuing egalitarian distribution.