Roger Kerr: Tax numbers favour Australia

Roger Kerr

In a recent speech, Finance Minister Michael Cullen declared that it was a "myth" that taxes are high in New Zealand and that "if anyone tells you that Australians pay less tax, your best response is: baloney".

He is wrong.

The ratio of government spending to GDP is the best measure of the overall tax burden. Deficits and surpluses tend to balance out over time, and most of what governments spend must be raised in tax.

On this basis, overall tax burdens are lower in Australia. The OECD's December 2004 Economic Outlook forecast that spending by governments at all levels would total 35.8 per cent of GDP in Australia and 38.7 per cent in New Zealand in 2005.

An alternative measure is overall taxation. On this basis, accounting firm Staples Rodway calculated that Tax Freedom Day came 7 days earlier in Australia than in New Zealand this year, meaning that the tax burden is 5 per cent higher in New Zealand.

These approaches avoid the problems of comparing the different features of the two tax systems, including different bases and rates for income tax and GST. In particular, looking at statutory income tax rates alone - Australia's two top personal tax rates are 42 per cent and 47 per cent, compared with rates of 33 per cent and 39 per cent in New Zealand - can be misleading.

Nevertheless, a proper analysis even of personal income tax alone tells the same story.

Dr Cullen focused on income tax comparisons to make an argument that a New Zealander earning either the average New Zealand wage, $41,400, or 1.5 times the average wage, $62,100, would pay less tax than someone earning an equivalent income in Australia. However, his analysis confuses apples with oranges, uses an inappropriate exchange rate and rests on misleading examples.

So where does Dr Cullen's "baloney" argument come from? The answer may be from ex-CTU economist and his former economic adviser Peter Harris.

According to its website, the Public Service Association commissioned Harris in May 2005 to explore the "myth" of the exploding public sector.

Using the July 2006 Australian tax scale, Harris calculated that a New Zealand taxpayer on $41,400 would pay 20.6 per cent of that income in income tax, whereas on the equivalent Australian wage of A$39,000 (implying a higher exchange rate of NZ$1=A$0.942) Australian income tax would be 19.4 per cent, increased to 20.9 per cent if the Australian Medicare levy were included.

Dr Cullen omitted the 19.4 per cent figure and claimed taxes were higher in Australia at 20.9 per cent compared to 20.6 per cent.

This is an apples and oranges comparison. At an income of NZ$41,400, the ACC levy in New Zealand is 1.2 per cent and the Medicare levy in Australia on the equivalent income is 1.5 per cent. Exclude the Medicare levy, use a more appropriate exchange rate and the gap at NZ$41,400 is 1.5 percentage points in favour of Australia.

Include the Medicare and ACC levies and the gap is 1.2 percentage points. When these levies are included, the disparity for low-income New Zealanders is greater because there is no Medicare levy in Australia at lower incomes.

A comparison at the $62,100 level produces a similar result.

Other complicating factors could be analysed, but the picture is clear. Whether you look at a government expenditure measure, an overall tax burden calculation, or an income tax comparison for the vast majority of taxpayers, New Zealanders are more highly taxed than Australians for the same level of income.

* Roger Kerr is the executive director of the New Zealand Business Roundtable.