New Zealand's tax brackets "absolutely" need to change, says tax specialist Terry Baucher.
"They haven't been adjusted for 10 years, the Government is raking in a lot of extra tax on the quiet without people realising what is going on," Mr Baucher said on TVNZ1's Breakfast this morning.
Since 2008, New Zealand's highest personal income tax bracket has been applied to earnings over $70,000, with some experts saying that does not reflect high earnings.
"The problem with fiscal drag, where brackets aren't adjusted for inflation, is that it pulls people into higher tax brackets as average earnings rise. People start paying a lot more suddenly," Mr Baucher said.
Mr Baucher said all of New Zealand's tax brackets needed to rise. He said on an inflationary basis the top bracket should be nearer to $80,000.
However, it was the middle brackets, which see a large jump from 17.5 per cent on income between $14,001 – $48,000, up to 30 per cent on $48,001 – $70,000, that also caused issues.
"That's the bracket that's putting a lot of squeeze on there. The Government is building up a big problem for itself, at one stage it will have to deal with this."
Mr Baucher agreed with the notion that the tax system structure was fostering inequality in New Zealand.
"We are running surpluses, so this is the time where you could adjust it."
The Tax Working Group looked at advice from IRD on decreasing income tax rates, or increasing income tax thresholds and inflation indexing income tax brackets.
In the 2017 Budget, the previous National Government planned to increase the bottom three tax brackets, rising the 10.5 per cent bracket from $14,000 to $22,000, the 17.5 per cent bracket of $14,001-$48,000 to $22,001-$52,000 and the 30 per cent from $48,001-$70,000 to $52,001-$70,000.
This plan was reversed by the current Government and reallocated through the families package.