The newly elected Government plans to increase income tax rates for people earning above $180K from 33% to 39%. Although this move is expected to directly affect just 2% of the population, adverse psychological effects may be experienced by general taxpayers. The policy could be put into effect at the start of April next year, but this date remains unconfirmed.
According to Greg Thompson, National Director of Business Advisory and Tax Services at Grant Thornton New Zealand, the psychological impact can blunt people’s motivation to work hard, especially for sole traders and entrepreneurs who might think they are overworking only to pay more tax.
He added that proper advice could steer taxpayers off this misconception, saying that businesses should focus on ways to generate different income plans and actions as a whole.
Back in 2010, when the Government dropped the tax rate to 33%, much of the business community saw this reduction as an important step toward fairness, which is a key element of a successful taxation system. Conversely, the recent declaration could prompt many businesses to respond negatively, whether they will be affected or not.
To smooth over tensions and maintain confidence across all sectors of society, the government needs to adequately and convincingly explain why this tax hike is needed – and in particular why everyone, including high earners, will find themselves in a better position as a result of the new tax structure. Though everybody wants to reduce their tax payments, government must continue making the case that the benefits of a balanced and well-functioning society outweigh the simple advantages of smaller tax payments