I’m not sure why a tax free threshold would involve lower compliance costs than a low tax bracket. Ultimately, IRD has to try and find out if people are within that bracket to start with, and firms need to adjust payments based on a lower bracket.

Having less brackets would reduce compliance costs – but I’m not sure a tax free one is any different to a low tax one for compliance costs.

Very quickly – last I was on a benefit (quite some time ago) it seemed to be taxed too. This may have changed, or my recollection may have been wrong, but if it is still the case then the TFT would be of benefit to beneficiaries. Agreed that it would only be a small one though.

My personal problem with it (being a leftie and all) is that it gives money to people who don’t need it. My own suggestion was to implement the TFT but to accompany it with an increased top marginal tax rate.

This adds another tax bracket, makes the tax system much less flat, much more “progressive”, increase *marginal* tax rates above the threshold, and rewards low-income people for small amounts of low-value work.

If we want to give $3.4 billion back (or however much) by far the most effective measure would be to reduce the corporate tax rate by 3%.
The next most effective measure would be to *cap* individual taxation
– say offering a 100% rebate for every dollar of tax paid over $50,000 for an individual. That is, the marginal rate for income of $150,000 would be 0%.

This would have a number of highly beneficial macroeconomic effects: increasing savings and investment, encouraging high-value participants to return to NZ (or not to leave in the first place), and has a positive outcome for fiscal drag (assuming that threshold is *not* indexed).

Interesting empirical evidence on the negative income tax (which is the G.M.I by another name) in the US, I think this supports Matt’s point re participation.

Generally, isn’t the main reason for supporting broad-based flat rate tax systems is that you get the lowest marginal rates over the widest range? Whereas a tax-free threshold has very little impact on anyone’s marginal rate – if you’re working you’re probably earning more than $9,500 (14 hours a week at the minimum wage). Admittedly the average rate is important too, it’s possible that if part-time, low-income workers had a really elastic labour supply the tax-free threshold might be an efficient policy in some cases in terms of raising participation.

My opinion (where I also assume that the purpose of the benefit is to give people a minimum income) is here:

http://tvhe.wordpress.com/2008/02/01/interest-free-student-loans-and-compulsory-schooling-is-there-a-better-way/