Written By: Guest post - Date published: 6:32 am, May 10th, 2011 - 81 comments

Categories: budget 2011, class war, kiwisaver, tax - Tags:

John Key has confirmed he intends to slash Kiwisaver to the bone by cutting the up to $1040 a year government contribution you get as a member. Of course, this is the savings budget according to National’s spin. They’re going to ‘encourage’ savings by taking that money from Kiwisaver and giving it to rich individual savers. It’s just more class war.

Word on the street is that National will use the money they pull out of Kiwisaver to make interest on deposits in banks and finance companies tax-free, at least up to the rate of inflation. It’s not clear whether they will cut the government Kiwisaver entirely or exactly how the tax-free interest will work but the details only change things by a matter of scale.

Let’s consider two scenarios:

Mary is a typical worker. She is on the median full-time wage of $40,000. Thanks to National’s previous cuts to Kiwisaver, she isn’t entitled to the full $1040 a year tax credit because 2% of her income is just $800 per year. With a kid to raise, rent to pay, and the cost of everything going up, her after-tax and after Kiwisaver weekly income of $625 doesn’t go far but she manages to put away $50 a week on top of her Kiwisaver – $2,500 a year.

With inflation at 4.5%, she gets $112.50 a year in interest tax-free. At her marginal income rate of 10.5%, her total tax saving per year is $12.

Mary loses $800 a year in Kiwisaver and gains $12 a year in tax-free interest. Net result: -$788 a year

Now consider John. He is in a high powered role that pay $405,000 a year. Let’s say he is also in Kiwisaver. The loss of those tax credits sets him back $1040. Fortunately, he doesn’t have much in the way of living costs: his employers supply the house (newly repainted), the chauffeur-driven car, there’s always some dinner he can go to, free holidays, and if he’s running late to something he can even call in a helicopter all paid for by the employers! So, his net weekly income of $5080 goes a long way. He manages to save half of it (got to have some treats) – $2500 a week or $130,000 a year.

With inflation at 4.5%, he gets $5850 a year in interest tax-free. At his marginal income rate of 33%, his total tax saving per year is $1930.

John loses $1040 a year in Kiwisaver and gains $1930 a year in tax-free interest. Net result +$890 a year

With each subsequent year’s lost Kiwisaver contributions and interest-free tax, the disparate wealth impacts of these changes on Mary and John grow further and further apart.

It’s almost as if the government has reached into Mary’s pocket, taken out hundreds of dollars a year and given it to a man on ten times her income who doesn’t need it.

A policy that takes $1040 a year out of $1.6 million Kiwis’ savings and gives it out in such a way that you have to have at least $70,000 in savings and be on the top tax rate to replace what you’ve lost seems like a policy tailor-made to take money from the many and give it to the few who need it least.

But that Nice Man, Mr Key wouldn’t do such a wicked thing, would he?

– Bright Red

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