Tax cuts are coming tomorrow, there is excitement in the air. First tax cut after a decade of effective tax rate increases (through fiscal drag). And what an interesting time for it, as we go through the largest financial crisis since the Great Depression.

Still don’t forget that there are tax cut calculators available here and here namely:

• Infometrics: Simply type in your income and get your tax cut
• Labour: Has disappeared – is now here (ht Agnitio)
• NZIER: here, calculates the PPP adjusted income difference between Aus and NZ, and allows you to take into account WFF
• Deloitte Tax Cut Calculator: Compares NZ and Aus tax cuts

Update: The Standard asks a good question “what are you going to do with your tax cut”. Me, I’m not aiming to change my level of consumption and so it will flow into my savings.

How does this fit in with Ricardian equivalence?

Warning, boring description of my optimal consumption allocation follows below the tab

Usually the answer would be that I expected the government to give me a tax cut, and so borrowed to fund consumption, but that wasn’t really the case over the long-term.

Tell you the truth, I expected the government to keep increasing the structural level of tax and spending, now that it appears that this level will be cut and my expectations of long term growth are unchanged, I now have a greater private income – which I will want to spend over time. However, I have felt this way since tax cuts were announced, so I have already increased the level of my consumption subject to these tax cuts – which in recent months has meant a higher short-term level of borrowing.

As a result, once the tax cut arrives it will look like I’m saving the whole thing, when actually my steady state level of consumption had already increased at the point when the tax cut was announced. This implies that the change in tax structure by the government has had a real economy impact – insofar as it has increased my level of consumption.

Now this raises the question – what will you do with your tax cut?