NZ Tax cuts are coming: Time for calculators

Tax cuts are coming tomorrow, there is excitement in the air. First tax cut after a decade of effective tax rate increases (through fiscal drag). And what an interesting time for it, as we go through the largest financial crisis since the Great Depression.

Still don’t forget that there are tax cut calculators available here and here namely:

  • Infometrics: Simply type in your income and get your tax cut
  • Labour: Has disappeared – is now here (ht Agnitio)
  • NZIER: here, calculates the PPP adjusted income difference between Aus and NZ, and allows you to take into account WFF
  • Deloitte Tax Cut Calculator: Compares NZ and Aus tax cuts

Update: The Standard asks a good question “what are you going to do with your tax cut”. Me, I’m not aiming to change my level of consumption and so it will flow into my savings.

How does this fit in with Ricardian equivalence?

Warning, boring description of my optimal consumption allocation follows below the tab

Usually the answer would be that I expected the government to give me a tax cut, and so borrowed to fund consumption, but that wasn’t really the case over the long-term.

Tell you the truth, I expected the government to keep increasing the structural level of tax and spending, now that it appears that this level will be cut and my expectations of long term growth are unchanged, I now have a greater private income – which I will want to spend over time. However, I have felt this way since tax cuts were announced, so I have already increased the level of my consumption subject to these tax cuts – which in recent months has meant a higher short-term level of borrowing.

As a result, once the tax cut arrives it will look like I’m saving the whole thing, when actually my steady state level of consumption had already increased at the point when the tax cut was announced. This implies that the change in tax structure by the government has had a real economy impact – insofar as it has increased my level of consumption.

Now this raises the question – what will you do with your tax cut?

  • Kimble

    frame it

  • by more expensive sandwiches for lunch each week?

  • oh and Labour have just moved their tax cut calculator

    http://www.labour08.co.nz/calculator/

  • “frame it”

    So Dr Cullen has effectively given nominal currency real value for you – that is quite an impressive feat.

    “by more expensive sandwiches for lunch each week?”

    So were you credit constrained coming into the tax cut agnitio – or merely bounded rational? What is the reason for your decision?

  • “oh and Labour have just moved their tax cut calculator

    http://www.labour08.co.nz/calculator/

    Super duper – post updated

  • goonix

    Save it. And rejoice.

  • “Save it. And rejoice.”

    Ricardian equivalence, excellent.

  • nice sandwiches are a luxury good thus it is rational for me to increase my demand for them as my income increases:)

    So i guess budget constrained?

    how would bounded rationality stop me from buying expensive sandwhiches? something like “I know I would enjoy it but choose not to buy it?”

  • Ricardian equivalence mate.

    You knew the government was running unsustainable surpluses and so you must get a tax cut (or else you at least knew you were getting a tax cut when they announced it). As a result, you will smooth consumption by borrowing before the tax cut arrives and then using the tax cut to pay back debt once it turns up.

    As a result, you only changed your consumption behaviour because you were credit constrained, or bounded rational in your consumption choices (like everyone 🙂 ) – which one was it?

  • I’m going to learn towards both, being a heavy subscriber to life-cycle consumption theory I’m already coming up against my credit constarints!

    Can’t wait for the “higher future” income Merton has promised me to kick in so I can relax that budget constraint:)

  • “I’m going to learn towards both, being a heavy subscriber to life-cycle consumption theory I’m already coming up against my credit constarints!

    Can’t wait for the “higher future” income Merton has promised me to kick in so I can relax that budget constraint:)”

    Amen to that.

  • Although I meant to say Milton as in in Milton Friedmon, not Merton as in Robert Merton who is also a bad ass but more of a financial economist.

  • Miguel Sanchez

    I’m going to spend it on the price increases that many businesses are going to try to ram through over the next few months. Not that I’m bitter about it – if I owned a business I’d be trying to claw back some margin too.

  • “I’m going to spend it on the price increases that many businesses are going to try to ram through over the next few months. Not that I’m bitter about it – if I owned a business I’d be trying to claw back some margin too.”

    Don’t forget – you will increase your wage claims in order to account for the increase in prices. However, that will increase firms costs which will lead to further increases in prices. but then you will increase your wage claims to take account the increase in prices. Which will lead to an increase in prices. Which will lead to an increase in wages.

    There is actually an argument out there that tax cuts lower inflationary pressures during a wage price spiral by lowering peoples urge to demand wage increases – as their real income has already gone up with the tax cut. I don’t buy it, but who knows!