Thursday, December 22, 2005

100% marginal income tax rate

New blogger Who Cares is coming up with some excellent stuff. Read his analysis and proposed solutions here related to the article on Gareth Morgan’s site about someone with an income of $32000 paying an effective marginal rate of income tax of 100% if they increase their salary to $35128, given Labour’s “Working for Families” package. This, of course, is what happens when you start welfare for the middle classes. It isn’t just assistance for the very poor, it becomes part of most families’ day to day income - but it penalises those who improve their lot at the margins. It is outrageous that the mainstream media haven’t cottoned onto this, even MORE outrageous that Peter Dunne, the leader of the so called family friendly United Future party is supporting this.

However I disagree with some of Who Cares’ solutions. The simplest way out is to cut income tax and abolish Working for Families, a good first step would be to eliminate the top two tax brackets of 39 and 33%, leaving the lower rate of 21% to be cut to 15% as a flat rate. Negative income tax is one option as a transition to replace welfare advocated even by some libertarians, and economist Milton Friedman, but should be no more than that. However, I wouldn’t increase GST, in fact I’d cut it back to 10% immediately before eliminating it altogether.

Regardless of the way forward, the fact remains is that Labour has increased the size of the welfare state by making middle income families dependent on handouts instead of tax cuts – so instead of getting your own money back, you get money back through a bureaucratic process. This is what Labour, the Greens, United Future and NZ First are giving you - more dependency!

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