NZ income tax rate second lowest among developed nations

The OECD's 2017 'Taxing Wages' report shows New Zealand's average tax wedge was 17.9 per cent last year.

New Zealand workers pay the second smallest portion of their income to the government among developed nations and less than half the average ratio of their Organisation for Economic Cooperation and Development peers.

The OECD's 2017 'Taxing Wages' report shows New Zealand's average tax wedge - a percentage of the total tax on wages paid by employees and employers minus family benefits - was 17.9 per cent last year, second only to Chile's 7 per cent across the 35 developed nations and less than half the 36 per cent average. Neighbour Australia was the fifth lowest at 28.6 per cent, while Belgium's workers paid the biggest share of their income to the government at 54 per cent.

New Zealand's tax wedge edged up 0.3 of a percentage point, whereas the OECD average dipped almost 0.1 of a percentage point, extending a three-year run where tax reform in developed economies has been lowering income tax.

Local tax settings are set to rear their head in the upcoming general election in September, with the National-led government keeping tax cuts in the mix as the country's growing population has provided a larger tax base, delivering bigger-than-expected surpluses and providing more room for Finance Minister Steven Joyce to change the settings.

The government lowered personal and company tax rates in 2010 while hiking consumption tax in an effort to reward more savings while discouraging consumer spending as it contended with the global credit crunch and a domestic recession. Five years later it hiked benefits and Working for Family tax credits as the public's unease over income inequality grew.

Between 2010 and 2016, the government's tax take rose 39 per cent, with company tax and GST both increasing about 53 per cent over that time, outpacing a 29 per cent gain in income tax. Over the same period, nominal gross domestic product grew 28 per cent.

The OECD report shows New Zealand's tax wedge was the lowest among developed countries for one-earner families with two children at 6.2 per cent, pipping Chile's 7 per cent rate and almost a quarter of the 26.6 per cent OECD average. That was despite New Zealand reporting the biggest increase in the tax wedge for that group, rising 1.2 percentage points.

The report showed New Zealand one-income families with two children at two-thirds of the average wage had a -13 per cent tax wedge as a result of tax credits, behind Canada and Ireland at -28.7 per cent and -31.4 per cent respectively.

New Zealand's single earners at 167 per cent of the average wage with no children faced a 23.6 per cent tax wedge, below the OECD average of 30.8 per cent and the sixth lowest among the developed nations.

The OECD report used a forward-looking approach to measure New Zealand's tax wedge because of the March tax year