Homeowners feeling the squeeze of high rates bills can take some comfort from a recent IRD report which confirms what they already know – Kiwi households pay a lot in rates compared to other countries.
Every country in the OECD, a group of mostly wealthy countries we tend to compare ourselves to, pays a form of “recurrent tax on immovable property”, the IRD says, using the tax argot for “rates” or land taxes.
But New Zealand’s rates are almost double the OECD average for this kind of tax. In 2021, councils raised 1.9% of GDP through rates, compared with an OECD average of 1%. However, it could be worse – Canadians pay about 3% of GDP in recurrent taxes on land.
The figures come from a paper published by the IRD which is seeking public feedback on the topic of its next long-term insights briefing, a document the department publishes every three years on a topic it thinks is important for the long-term sustainability of the tax system.
The topic the IRD is considering for the next of these documents is a challenging one: what sort of structure the tax system might need to take to be suitable for the future “given long-term fiscal pressures and current tensions in our system”.
The report says it does not assume more revenue will be needed over the long term. However, fiscal pressures give rise to a “risk” that “revenue may need to be higher in the future to meet future expenditure”.
The report’s authors think there is merit to ensuring the tax system as “flexibility” to “adapt to changing revenue needs over time”.
That topic, which is decided independently of ministers, is a fairly bold one which cuts across some of the most contentious topics in our politics: how much money do we need – and more controversially, who should we tax to get it?
The paper looks at the types of long-term issues New Zealand’s tax system might face, and the type of tax system we currently have. Once completed, the long-term insights briefing will offer some advice on what might need to be done to make the tax system suitable for those changes.
Revenue Minister Simon Watts is keeping an open mind. He told the Herald it was “really important that we do keep one eye on the future – particularly on the broader sustainability of the tax system”. Labour will be reading the report closely too. The party is moving towards running on a capital gains or wealth tax at the next election.
The big challenge to New Zealand is the population is ageing and the economy isn’t growing as fast as it once did. That means more people drawing down on expensive public services like superannuation and healthcare, but with fewer people paying for them.
Currently, the average median New Zealander is 38 years old, but by 2073 the average age is expected to be over 47 years old. Partly as a result of ageing, the number of years someone can expect to spend in poor health – which is very costly to the health system – has increased by 1.7 years for females and 2.2 years for males between 1990 and 2017, according to figures from the Ministry of Health.
The labour force is projected to grow, which will help shoulder some of this cost, but at a slower rate. The labour force is expected to grow from 2.9 million people in 2020 to around 3.7 million in the early 2070s. The age structure of the labour force is expected to change, with the proportion of over-65s working nearly doubling from 6% to 11%, while the proportion of under-45s is expected to decline from 57% to 50%.
Economic growth is also expected to slow. For the OECD, growth in real GDP is projected to decline from 1.75% per annum in 2019 to 1.25% a year by 2045, although this is mainly due to slowing population growth – real GDP per capita growth is expected to remain stable at about 1% to 1.25% a year.
The report notes in many ways, New Zealand’s tax system is similar to other OECD countries in that over time, the amount of revenue taxed by the government has increased.
The amount of revenue paid by New Zealanders in tax to central and local government grew from 24.5% of GDP to 34.6% on an unadjusted basis between 1965 and 2021. Over the same period, the OECD average grew from 24.9% to 34.2%.
New Zealand raises 90% of core Crown revenue from three forms of tax: income tax on people, on companies, and GST. This might make the tax system less resilient in the long run if one of those three legs loses its ability to raise significant amounts of revenue; if, for example, fewer people pay income tax as the population ages, or New Zealand needs to drop the corporate tax rate should it become globally uncompetitive.
GST does a lot of the heavy lifting in the tax system, allowing the tax burden on individuals to proportionally reduce – although this can come at the cost of low-income households, which pay a greater burden of their income in GST.
In 1979, income tax on individuals constituted 65.1% of central government revenue. By 1995, that had fallen to just 51.4% in 1995, partly thanks to the introduction of GST. After the Key-English tax cuts it fell even further, to 48.8% in 2011, before rising again to 51.6% in 2023. GST went in the opposite direction. Pre-GST consumption taxes raised just 9% of central government revenue in 1979, but raise 25% now.
The tax system does a passable job at reducing inequality, but IRD, citing Treasury, reckons the heavy lifting in inequality terms is done by supports paid for by taxes, rather than the tax system itself.
A Gini coefficient study – which looks at inequality on a scale from 0 to 100, with 0 being more equal and 100 being less equal – reckons the tax and spend system reduces inequality in New Zealand.
A Treasury study reckoned someone’s initial market income Gini was 45.6, roughly halfway between perfect equality and extreme inequality, but after adjusting for taxation and government support, that final income Gini is a far more equal 28.
The paper concludes this meant New Zealand’s tax and spend system did about as much to blunt inequality as Australia’s, although international comparisons of Ginis can be fraught.
The report notes a couple of areas where New Zealand is “unusual” in OECD terms. The first is one politicians have spent decades arguing about: capital gains tax.
“New Zealand is unusual among OECD countries in not having a general tax on income from capital gains,” the report said. It noted that in Australia, the CGT introduced in 1985 raises about 1% of GDP. If a similar CGT were introduced here to raise a similar amount of revenue, it would tax $4 billion a year.
Over half of OECD countries levy taxes on estates, inheritances and gifts. These have tended to raise about 0.1% of GDP each year since 2000, except for in 2021, during the pandemic, when revenue doubled to 0.2% of GDP on average.
New Zealand abolished estate duty in the 1990s and gift duty in 2011. Neither raised significant amounts of revenue and do not appear to be making a comeback.
IRD is taking submissions on its idea until October 4. The briefing will be published some time after that.
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
