The tax rise nobody announced
New Zealand’s personal income tax thresholds sat frozen from April 2021 to July 2024 while inflation ran at its highest rate in a generation. The New Zealand Initiative calculates that roughly 406,000 workers were pushed into higher tax brackets during that period, generating approximately $1.3 billion in additional tax revenue for the government. No bill was introduced. No debate was held. Inflation did the work that no politician wanted to be seen doing.
The mechanism is simple but effective. New Zealand’s progressive tax schedule charges 10.5% on income up to $14,000, 17.5% up to $48,000, 30% up to $70,000, 33% up to $180,000, and 39% above that. When wages rise to keep pace with inflation but the thresholds don’t move, workers cross into higher brackets without any real gain in purchasing power. As Associate Professor Jonathan Barrett of Victoria University of Wellington illustrates, an employee earning $48,000 who receives a 5% pay rise suddenly faces a 30% marginal rate on the additional income. The raise looks generous on paper. The tax system quietly eats the difference.
Median earners now sit where the top 10% used to
The 2021-2024 episode was severe, but it was not new. Dr Eric Crampton, chief economist at the New Zealand Initiative, has traced the long-run drift using IRD data. In 2003/04, the 39% rate hit roughly the top 10% of wage earners. By 2007/08, workers at the 64th income percentile had drifted into the 33% bracket purely through inflation. After National reset thresholds between 2008 and 2011, the 30% rate applied from the 68th percentile. By 2020/21, it applied from the 50th percentile: the median earner.
Crampton’s sharpest observation cuts to the political incentive: “A suspicious person might even worry that, if the government can earn a lot of money by letting the Reserve Bank ignore inflation, it might not be too vigilant about whether the Bank is fulfilling the terms of its Remit.”
The revenue numbers confirm the scale. Deloitte’s analysis shows government tax revenue rose from $97.4 billion in 2021 to $107.9 billion in 2022, with bracket creep a material contributor. IRD’s own statistics show total individual taxable income reached $268.0 billion in the 2024 tax year, a 10.1% increase on 2023.
The July 2024 fix was partial and temporary
New thresholds came into effect on 31 July 2024, and the government presented them as a tax cut. It was more accurately a partial refund. Three years of stealth extraction had already transferred $1.3 billion. The reset did not come with the one measure that would prevent a repeat: automatic indexation.
The NZ Initiative has proposed adjusting thresholds automatically whenever accumulated inflation would warrant bumping a bracket by $1,000. Helen Clark’s government actually legislated indexation in 2005, but it never came into force. The current government has made no commitment to automatic indexation either.
This matters because the conditions for a new round are already forming. Infometrics chief forecaster Gareth Kiernan warns that inflation is forecast to hit 4.8% this quarter, driven by rising fuel prices. Without indexation, any inflation above zero begins the creep again from day one.
Three ways this hits business directly
First, wage pressure without satisfaction. When employers lift nominal pay to match inflation, bracket creep absorbs part of the gain. Staff receive a pay rise that costs real money but delivers less real benefit than the headline number suggests. No HR strategy can fix a structural tax problem.
Second, consumer demand erosion. Bracket creep reduces real household disposable income without appearing in any official announcement. With Infometrics forecasting household spending growth of just 0.8%, retailers and hospitality operators are already feeling a drag that the political debate refuses to name.
Third, an unequal burden on PAYE workers. As Barrett notes, employees have little scope for reducing their taxable income compared to contractors and business owners who can structure their affairs to avoid crossing thresholds. The same nominal pay rise costs different amounts in tax depending on employment structure.
A template, not an accident
IRD’s own Long-Term Insights Briefing is explicit: taxes will need to rise. In that context, bracket creep is not a bug. It is a politically convenient feature that raises revenue without a vote, without a press release, and without a Minister defending a tax increase. The NZ Initiative calls it “a stealthy and dishonest form of taxation.”
Until automatic indexation is legislated, every government of every stripe retains the option to let inflation do the heavy lifting. The 2021-2024 episode extracted $1.3 billion. With inflation forecast to stay elevated and no indexation mechanism in place, the next round is not a question of if but when.
Sources
- NZ Initiative: Bracket creep is a stealthy and dishonest form of taxation
- Newsroom: How inflation is giving you a hidden tax hike – and the government pockets the proceeds (2022-05-09)
- RNZ: Feeling that fiscal drag? Why you could be worse off even if your pay has gone up
- RNZ: Households will feel the brunt – Infometrics warns of economic hit
- Deloitte NZ: Inflation and personal tax bracket creep – a bigger picture
- IRD: Individuals total taxable income statistics
- IRD Annual Report 2024-25
- NZ Herald: Inland Revenue says taxes will need to rise