The Inflation Tax

Jordan Williams, Executive Director, Taxpayers’ Union

7 May 2023, 10.8k views*

Politicians have a sneaky trick they don’t want you know about and it’s making you poorer. It involves inflation, and it means your taxes increase every year and you probably don’t even know about it. So how does inflation tax work?

It is often said there’s no such thing as a free lunch, but for money-hungry, spending-addicted politicians, it’s more like a free banquet – And we pay for them to eat it.  This is the inflation tax of bracket creep.

Greedy politicians have a sneaky trick they don’t want you to know about, and it’s making you poorer. This trick involves inflation, and it means your taxes increase every year, and you probably don’t even know about it. 

You can be sure politicians know what’s going on, but why would they want to change it? They are able to get more and more of your money each and every year without needing to ever justify why it is necessary, and for the most part, they don’t even bother to let you know it’s happening. They get all the benefits of tax hikes without any of the political backlash, and frankly, it’s dishonest, and it’s time to call them out.

So how exactly does this inflation tax work?

When inflation occurs, the prices of goods and services increase, reducing the purchasing power of each dollar you earn. This means that if you receive a pay rise in line with inflation, you are not actually earning more income in terms of what you can buy, but you end up paying more in tax.

Because New Zealand has different marginal tax rates applying to different levels of income, with each illusionary pay rise, more and more of your income is pushed into the higher marginal rates. Sometimes you’re rocketed into a higher tax bracket altogether – despite not being any better off. You end up worse off – taking home a smaller proportion of your earnings – and the government knows it. But instead of fixing the problem, they choose to ignore it and tax you more by stealth.

Even when inflation is low, this stealth tax is still a significant drain on your wallet, and the effects build up and compound over time. 

Take, for example, a worker earning the average wage of $62,000 a year. The same worker in 2010, earning the same amount of real income as they are now, is paying an additional $1750 in tax per year than they were when the current tax brackets were introduced. No government legislated this tax increase, no select committee or tax experts debating its merits, no one campaigned on it so you couldn’t vote on it, and no one even told you it was happening. 

The good news is that the solution is actually really simple – and many countries we compare ourselves to already do it. All we have to do is adjust the level at which each income tax bracket is set for inflation each year. This is called indexation. 

We are already doing this for welfare payments or for superannuation payments. As the average wage, or the cost of living, goes up each year, benefits go up automatically. Why shouldn’t working Kiwis like you, have their incomes protected with tax adjustments as well?

If this had been done since 2010, our lowest tax bracket, for example,  would range from $0 to $18,000 rather than the $0 to $14,000 that it still is. 

This policy change would bring honesty and fairness into our tax system by ensuring that you only pay more tax if you are actually earning more money in real terms. In other words, unless you are actually able to buy more things with your income, you shouldn’t be paying more in tax. 

If politicians want to increase taxes, they should be open about it and put a bill forward in Parliament to be debated and voted on. This way, at least any tax increase is open and honest rather than letting inflation do the politicians’ dirty work for them.

Of course, if the politicians decided they want more of your money to spend, we would prefer that they cut back on some of the billions of dollars in wasteful spending rather than hiking taxes.

We believe that indexing tax brackets to inflation would encourage politicians to reduce wasteful spending because it raises the political cost of hiking taxes to pay for more spending. This way, any increases have to be announced, debated and voted on rather than continuously occurring by stealth. 

Inflation already hurts Kiwis with rising prices. There is no need to hit them with the second blow of higher taxes too. 

If this sounds sensible to you, and if you want politicians to be honest when they try to hike up your taxes, we hope you will join on us on our fight for no taxation without indexation.  

I’m Jordan Williams, Executive Director of the Taxpayers’ Union for The Common Room.

*Aggregated views across platforms


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