New Zealanders on average incomes are paying a larger share of their earnings in tax than at any point since 1984, not because tax rates changed but because wage increases have pushed them into higher brackets while thresholds stayed fixed.
New Zealanders on average incomes are paying a larger share of their earnings in tax than at any point in at least four decades — and it is happening by default, not by design. The mechanism is called fiscal drag, or bracket creep, and it is quietly extracting more from households without any explicit policy change.
The numbers are stark. Someone on the average wage would have been paying about 17 percent of their income in tax in 2010 and 2011, compared to 22 percent now. That makes the current tax burden the highest since at least 1984.
The reason is straightforward: when tax thresholds are not adjusted for inflation, pay increases that simply keep pace with rising prices can push a taxpayer into a higher marginal rate. They are not materially wealthier in real terms, but they pay more tax on that income. The effect compounds over time, particularly when thresholds stay fixed for years.
What the thresholds would look like if adjusted for inflation
A joint report from Inland Revenue and Treasury published in December last year illustrated the gap between where thresholds are now and where they would be if they had moved with inflation since 2010. Under an inflation-adjusted structure, the bottom 10.5 percent rate would apply to income up to $19,323, rather than the current $15,600. The 30 percent rate would kick in at $66,249 instead of $53,500. People earning between $70,000 and $90,000 experienced the biggest impact, because inflation shifted more of their income into the 30 percent bracket.
The revenue cost of doing nothing
The IRD and Treasury paper estimated that without the tax changes introduced in Budget 2024, fiscal drag from inflation would have increased tax revenue by approximately 1.6 percentage points of GDP. The actual effect was closer to one percentage point of GDP after those changes — meaning the adjustments partially offset the drag but did not eliminate it.
In the year to March 2024 alone, almost $800 million in additional revenue was collected from people in the $70,000 to $80,000 income band as a result of fiscal drag. People earning $80,000 to $90,000 paid almost as much in additional tax for the same reason.
The median worker's tax bill doubled
Tax specialist Robyn Walker at Deloitte said fiscal drag has been a persistent problem in New Zealand because of the long gaps between personal tax rate changes. The data supports that. In the year ended June 2011, the median full-time wage and salary worker earned $48,024 and paid $7,427 in personal income tax. By the year ended June 2023, the median full-time worker earned $73,417 and paid $15,148 — roughly double the tax on roughly 50 percent more income.
Australia's opposition has recently proposed indexing tax bands to inflation, a policy that would cost the Australian government an estimated A$22 billion and deliver workers around A$1000 extra per year after four years. New Zealand has no equivalent proposal on the table.
What this means for households
Fiscal drag does not appear as a line item on a payslip, and there is no protest to sign. It operates silently through the tax system, meaning workers take home less of their pay increase than they might expect — not because their employer paid less, but because the Government collected more as a proportion.
The practical implication is that wage growth does not automatically translate into proportionally higher after-tax income. When inflation is running at a certain level, and thresholds are fixed, the interaction between those two forces determines how much extra tax is paid. For many New Zealand households, that gap has been widening for years.
This article is for general information only and is not personalised financial advice. Seek advice from a licensed financial adviser (registered on the FSPR) for guidance specific to your situation.