Low Range

14.17. One of the first questions of detail to settle in any analysis of the income tax scale is the level of the initial step. At present this step, at 1 per cent, is effectively abolished, except in a few cases, by the exemption of the first $1,040 of taxable income, so that up to this level there is a marginal (and average) rate of zero. After the shading-in arrangements already described, a marginal rate of 7 per cent resumes at $1,061 where the average rate is 1.3 per cent. As noted, in the United Kingdom system the initial marginal rate now stands at 33 per cent. The contrast is striking.

14.18. The most important advantage of an initial step of some magnitude is not that it raises much tax from the taxpayers whose total income is confined within this step; it is rather that a sizeable minimum average rate is thereby struck for all higher incomes. Without a significant rate on the lower steps, much higher marginal rates than otherwise must be imposed further up the income scale if substantial revenue is to be raised from the later income brackets with their greater numbers.

14.19. On the other hand, it may seem quite wrong and vertically inequitable to impose any significant income tax on very low incomes, and this points to a near-zero rate on such incomes, whatever the unwelcome implications for marginal rates higher up. In discussion of tax matters it is often suggested that this dilemma can be escaped

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by one or other of two devices. First, a universal personal allowance can be provided, as a deduction from taxable income, tax only being paid on what remains: as indicated in a footnote to Table 14.A, the United Kingdom, the United States and Canada provide for a universal personal allowance. Or, secondly, a non-reimbursable tax rebate can be given cancelling out the tax that would otherwise be paid at these levels: New Zealand has recently introduced a rebate along these lines. But these are in fact exactly equivalent to making the first step a zero-rate one; and they mostly serve to conceal the abrupt rise in the effective marginal rate when, at the point of exhaustion of the allowance or the rebate, the marginal rate of the tax scale begins to be effective. Universal tax allowances or non-reimbursable tax rebates are merely techniques for altering the actual progressivity of the tax scale. It seems altogether simpler and less confusing to determine the progressivity of the income tax on its merits in the one obvious place: in the scale. The issue of the amount of tax to be levied on low incomes should not be obscured by artificialities.

14.20. It seems essential to the Committee that decisions about the level of the first step, and the general shape of the rate scale for low income earners, should be made in the light of some clear understanding of the kinds of people it is who have these very low taxable incomes. That information is currently not available. But it is reasonable to suppose that they are persons who are realising capital or receiving exempt incomes from social services benefits or scholarships, or have been working part-time or for only part of the year. And many others may be a statistical illusion arising from a person with more than one job preferring to appear as two persons to the Commissioner. At a time when the minimum wage is over $4,000 a year, it is clear that few could in fact survive on these lower incomes if the latter were a true measure of available resources for essential consumption.

14.21. The Committee would not recommend any increase in the exemption limit above the present figure of $1,040. Moreover, it sees considerable merit in an initial marginal step rather higher than at present and extending further up the income scale. The initial step might be set at 20 per cent. In view of the fact that a marginal rate of 20 per cent now applies on increments of taxable incomes between $3,000 and $4,000, this would mean a first step extending up to a taxable income of $4,000. (The band of taxable income above $1,040 over which there must be shading-in would, of course, have to be rather wider than at present.)

14.22. An increase in the height and width of the initial marginal step in the manner suggested would in itself involve a substantial increase in tax revenue, since the higher marginal rates on initial income would apply to all taxpayers. It would be important to ensure that additional revenue was used, as far as possible, to protect the living standards of specific categories of taxpayers in the low range and at the bottom end of the intermediate range, notably those with families or dependent on social service benefits. This will be especially necessary if, in line with what was recommended in the previous chapter, social service benefits, including child endowment, are made taxable.

14.23. In paragraph 12.6 the Committee has recommended that the dependent spouse allowance be converted to a rebate, which might be set at $300. However, if an initial marginal rate of 20 per cent is introduced, as is proposed here, the spouse rebate will need to be of the order of $600 to ensure that a married person on a taxable income of $4,000 pays no more tax than at present.

14.24. The proposals in paragraphs 14.21–14.23 are addressed to the more immediate future. The Committee has indicated, however, that as a long-run objective it favours placing less reliance on personal income tax. It might therefore be possible to

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visualise an initial marginal rate on taxable incomes up to $4,000, fixed in the first instance at 20 per cent, being in time gradually reduced. Indeed, there would be considerable merit, if a simpler tax system is to be achieved, in at some stage zero-rating the initial marginal step, so that persons on low incomes pay no income tax at all and persons on high incomes are exempt from tax on the initial increments of income. It would then of course be necessary, as has been indicated earlier, to rely exclusively on taxable grants to assist low-income families.