Finance Minister Grant Robertson admits that a tax-free zone on low income - like Australia has - would help with the rising cost of living.
But Robertson says it would be expensive and the Government made a commitment at the election not to make "major tax changes this term".
Income in New Zealand is taxed in 'brackets'. Each dollar you earn up to $14,000 is taxed at 10.5 percent and then each dollar between $14,000 and $48,000 is taxed at 17.5 percent.
The third bracket is $48,000 to $70,000, taxed at 30 percent. The next is $70,000 to $180,000, taxed at 33 percent. And finally, each dollar above $180,000 is taxed at 39 percent.
This illustrates the 'progressive' tax system. For example, if you earn $70,001, your entire salary isn't taxed at 33 percent - only the $1 is.
In Australia, no tax is applied to income earned up to AU$18,200 (NZ$19,570).
Robertson, during an appearance at the Auckland Business Chamber on Wednesday, was asked if the Government would consider a tax-free zone on income earned up to $40,000, to help with the rising cost of living.
It comes as Kiwis grapple with three-decade high 6 percent inflation. The cost of living is tipped to rise even more due to Russia's invasion of Ukraine and supply constraints.
"An income tax-free zone up to $40,000 would cost something in the order of $30 billion a year so that's why that can't happen," Robertson said.
"Obviously there are plenty of calls on the Government's revenue and what we spend it on and so you would need, probably, to offset a tax-free zone with something else in the tax system.
"Certainly, if you were to make tax changes, that would be the most progressive you could make, because people on the lowest incomes would benefit the most from it. But the idea that you could do it up to $40,000 is completely unaffordable.
"The Australians have one and other countries do but we made some commitments around not making major tax changes this term. But I do understand the point that's being made."
The Government's Tax Working Group, led by the late former Labour Party Finance Minister Sir Michael Cullen, investigated the prospect of a tax-free zone on income and the findings were published in 2019.
It found that while a tax-free threshold could increase the net income of many low-income households, "much of the increase would also flow through to higher-income households".
National leader Christopher Luxon faces a similar issue with his proposed income tax bracket increases to help with the rising cost of living, because high earners would end up getting more than those on low incomes.
The Tax Working Group concluded: "Transfers such as tax credits and benefit payments are likely to be a better means of delivering assistance to people on low incomes."
Robertson said that's what the Government is focussed on. Increases to the benefit, minimum wage and Family Tax Credits will come in April, followed by the Winter Energy Payment in May.
The Government also slashed 25 cents per litre off petrol taxes and halved public transport costs for an initial three months after Russia's invasion of Ukraine caused fuel prices to soar.
"We've taken the decision to target those groups to address those cost of living issues," Robertson said. "The approach advocated there would be another way of doing it but that would have to be a system-wide change."
What about removing GST?
Te Pāti Māori have been calling on the Government to cut goods and service tax (GST) from kai to help with the rising cost of living.
Removing GST on fruit and vegetables was also a key plank of Labour's 2011 election campaign but it was later scrapped and Prime Minister Jacinda Ardern confirmed in 2017 that her party had no plans to pursue it again.
Robertson said it would be too complex.
"GST is a comprehensive tax which makes it very easy to administer and people in the room who've been in other countries with more exemptions will know it becomes an absolute boondoggle to get through.
"If you do it off fresh fruit and vegetables, or even staple products, then you get into an argument of what's the difference between beetroot and canned beetroot, and if you want to make a real impact on the lowest income people you wouldn't cut the tax off fresh beetroot - that's not what people on low incomes buy.
"Then you'd have to go back to GST off everything and then you get to that being such a significant part of the Government's overall tax-take that you would be cutting services all over the shop."
But there's no doubt low-income earners are under pressure. According to ASB Bank senior economist Mark Smith, higher consumer prices and debt servicing costs could raise household weekly outgoings by an average of around $150 per week over 2022.
On top of that, the Reserve Bank has been creeping up interest rates to cool down the housing market - a fire it started after dropping the official cash rate (OCR) to record lows to keep money flowing during the COVID-19 pandemic.
The most recent 25-basis-point OCR hike would cost the average mortgage holder an extra $825 a year, or $16 a week, according to Reserve Bank Governor Adrian Orr.
Robertson acknowledged it's a difficult time.
"We've got strong demand in the New Zealand economy and I absolutely acknowledge that's one of the factors that is driving this because it's banging into those global supply constraints.
"The Reserve Bank continues to forecast inflation getting back to their 1 to 3 percent band towards the end of next year or through next year into 2023, so it will last for a period of time but it will also peak.
"I think it is worth noting that from a fiscal point of view - the stuff I look after - we obviously need to look at that and be careful and balanced in our spending but we also in our system have a Reserve Bank whose job it is to get inflation to that band.
"That has its own impacts on households and businesses but that is the system we have to manage price stability.
"I have no doubt this will be a challenge."
