Roger Partridge: Why the inequality and tax debate is all wrong

Prime Minister Chris Hipkins has ruled out a wealth or capital gains tax. Photo / Mark Mitchell

OPINION

The early decades of the 21st century may be remembered as the great age of misinformation. From false assertions about the size of the 45th President’s inauguration crowd to science-free claims about nano-technology, 5G cellphone towers and Covid-19, fake news abounds.

We have our own mythical “facts” in New Zealand. And none are so entrenched as claims about income inequality and tax.

Let’s start with inequality. It is almost a given in daily discourse that income inequality is a bad thing. And for those who cannot resist measuring themselves against their wealthier neighbours that may be understandable, even if self-destructive. But, over the last century, market-based economies that reward individuals according to the value of their efforts have been remarkably successful in lifting the poor out of poverty.

What’s more, in a global marketplace that enables international success for entrepreneurs like Zuru’s Nick and Anna Mowbray, Rocket Lab’s Peter Beck or Animation Research’s Sir Ian Taylor, unequal outcomes are not just inevitable. They are to be applauded. Surely the more super-successful – and super-rich – Kiwis become, the better?

Yet, even if more inequality is a bad thing, has it “never been worse”, as Greens Party co-leader James Shaw claimed last week? Reading the news, you might think so.

But repeated studies have shown income inequality is either stable or has been trending downwards since 2015. Whether it is Statistics NZ or The Treasury, the results are the same. New Zealand simply does not have a problem with increasing inequality.

How can there be such a disconnect between the evidence and the political narrative? Research from the New Zealand Initiative provides a simple answer: housing costs. In The Inequality Paradox, the initiative showed that rising housing costs have had pernicious effects for low-income households. This is hardly a surprise. As house prices increase, housing costs consume an ever-greater proportion of household incomes, cancelling the benefit that would otherwise have come from rising incomes.

New Zealand does not have a growing income inequality problem. We have a housing affordability problem. That’s the public policy problem our politicians should be trying to solve.

The good news is that a decade’s-worth of research from the initiative reveals the solutions. We need a combination of planning law reform and better tools for funding and incentivising councils to provide the infrastructure for housing. That would boost the supply of land for housing and solve the housing affordability crisis.

But the initiative’s research also points to a second problem behind the false narrative about increasing inequality. The Kiwi households most affected by the high cost of housing are those with the lowest incomes. And low incomes are associated with low levels of education.

Unfortunately, levels of educational attainment by Kiwi school leavers are in long-term decline. At the same time, educational outcomes in New Zealand are among the most unequal in the world. Solve these problems and we will lift the incomes of the least well-off, insulating them from the effects of higher housing costs.

Addressing the twin problems of housing affordability and educational attainment is critical to solving the country’s poverty problem. Not a mistaken obsession about increasing inequality.

The other side of the false narrative about inequality is misinformation about tax. Revenue Minister David Parker’s investigation this year into the tax paid by the very wealthy has left an impression that they are not paying their fair share. Announcing the results of the investigation, the minister also asserted that New Zealand is a comparatively low-tax nation. In combination, these claims create a picture of a country with a tax deficit favouring the well-off.

But Parker’s second claim can be dismissed quickly. It is plain wrong. Of 59 countries with a population of at least two million and a GDP-per-capita above US$15,000, 38 had lower tax-to-GDP ratios than New Zealand. Outside Europe, only Canada had a higher ratio. Contrary to the minister’s claim, New Zealand is a relatively highly taxed nation.

Revenue Minister David Parker. Photo / NZME

Turning to the tax paid by wealthy taxpayers, the starting point for evaluating whether the rich are paying a fair share of tax should surely be to ask, just how much tax are they paying?

The figures Parker was most keen to promote was the effective tax rate paid by the wealthy if unrealised capital gains were added to their taxable incomes. This produced a notional figure of just 8.9 per cent – a lower average tax rate than the 20 per cent reportedly paid by the average taxpayer.

But the comparison is misleading. First, it did not compare apples with apples. That is because the unrealised capital gains of the average taxpayer were not included in the 20 per cent figure.

More importantly, there’s the problem that unrealised gains can easily disappear. Especially when they have been fuelled by money printing by the Reserve Bank. Just look at the collapse in house prices over the last 12 months. Is it really fair to assess the paper gains of the very wealthy as if they are real?

Aside from this issue, the 8.9 per cent needs a bit of unpacking. It may not seem like a very high percentage, but it translates into a lot of actual tax. Indeed, Parker’s investigation discloses that, on average, the high-wealth households in the study each paid $2.5 million in tax in 2021. This is more than 150 times more than the tax paid by the median taxpayer.

That might not be enough for the revenue minister, but to most Kiwis it may seem a fair contribution to state spending.

Of course, Parker’s study focused on just a small group of the wealthiest taxpayers. But looking beyond this small group, figures disclosed by the Inland Revenue Department reveal that the income tax system is still highly progressive. So much so that the top 3 per cent of income earners in 2020 paid a whopping 26 per cent of the income tax collected.

By contrast, the Government’s 2019 Tax Working Group report reveals that the bottom 50 per cent of income earners, on average, paid no net income tax once transfer payments like Working for Families were taken into account.

These figures hardly bear out the revenue minister’s claim that the well-off are not paying their fair share.

Like inequality, tax is a highly politicised topic. But the politics should operate on facts, not false narratives. Misinformation simply prevents proper diagnosis. Kiwis face housing and education problems, not issues of increasing income inequality or under-taxation.

Having sensibly ruled out a wealth or capital gains tax, perhaps the Government will get on and address the country’s real problems.

- Roger Partridge is chairman and a co-founder of the New Zealand Initiative.