A new book has found total tax rates on the incomes of rich New Zealanders are now the lowest in the developed world.
New Zealand's top tax "wedge" of 33 per cent on incomes above $70,000 is lower than all 27 other high-income nations in the Organisation for Economic Co-operation and Development, after including social security and payroll taxes which do not exist in this country.
Rich New Zealanders also escape without paying any tax on capital gains that would be taxed in most other countries.
On the other hand, New Zealand has the world's most comprehensive goods and services tax (GST), taxing 98 per cent of all potentially taxable consumer spending compared with a developed world average of 59 per cent.
New Zealand is one of only five high-income OECD nations that do not allow any exemptions for food - a key factor in our high food prices.
The book's author, Professor Rob Salmond, a New Zealand-born political scientist at the University of Michigan, says New Zealand has a tax system of extremes.
"We charge less tax than any comparable country on high incomes, dividends and capital gains," he says.
"Our GST, however, is bigger than most, both as a proportion of taxes and as a proportion of the economy as a whole."
A structural shift in the tax and welfare system has been a major driver of the widening gap between rich and poor in Auckland. Suburbs whose average incomes were bunched together, mostly within 10 per cent of each other in 1986, now have average incomes that vary up to three-fold.
The top income tax rate on the rich was halved in two steps between 1986 and 1988 from 66 per cent to 33 per cent.
The bottom income tax rate has been roughly halved too, from 20 per cent to 10.5 per cent. But that cut has been effectively outweighed at low incomes by GST, which came in at 10 per cent in October 1986 and has been raised in two steps since then to 15 per cent.
St Heliers couple Nigel and Anita Smith earned $150,000 last year from their graphic design business - almost three times the average earnings of $1013 a week ($52,675 a year).
If Nigel had earned the same proportion of average earnings and paid personal income tax on it in 1986, he would have earned $59,950 and paid 48 per cent of that in income tax.
If he took the whole $150,000 as personal income today, income tax would take only 27 per cent of it.
If the whole income was declared as business profit instead, the tax rate would have dropped similarly, from 45 per cent to 28 per cent.
Papakura couple Craig and Carla Bradley, who earn about $46,800 a year from three jobs, have also seen their income tax almost halved from 29 per cent of the equivalent ratio of average earnings in 1986 to 15 per cent today.
But GST hits the Bradleys much more heavily. A Statistics NZ survey found that couples earning around $50,000 between them spend on average 76 per cent of their gross incomes on items attracting GST, whereas couples earning around $150,000 spend only about 41 per cent of their income on such items. (The rest goes on income tax, savings, mortgages, overseas trips and other items not subject to GST).
Dr Salmond says the result is that the total tax rate, combining income tax and GST, actually falls slightly from about 29 per cent on those with the lowest incomes to about 24 per cent on those like the Bradleys on around $50,000, then rises slowly to about 34 per cent around $150,000.
* Rob Salmond, The New NZ Tax System, Institute of Policy Studies, Wellington, 2011.
Yesterday: The widening gap
Today: Tax and benefits
Saturday: What can we do?