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Home / New Zealand / Politics

Thomas Coughlan: New tax not coming today - but don’t rule out tomorrow

Thomas Coughlan
By Thomas Coughlan
Political Editor·NZ Herald·
25 Apr, 2023 05:00 PM7 mins to read

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New Zealand's tax settings are pretty good for the super-wealthy. Photo / NZME

New Zealand's tax settings are pretty good for the super-wealthy. Photo / NZME

Thomas Coughlan
Opinion by Thomas Coughlan
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people's stories and explaining the way things like transport and finance touch our lives.
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OPINION

It’s been a decade since then-Prime Minister John Key excoriated then-Labour leader Phil Goff with the demand: “Show me the money.”

That line sank the policy Goff was trying to sell: a Capital Gains Tax to drag the books into surplus (the first of three such sinkings), and sent Labour’s already flailing 2011 campaign to the bottom.

Today, David Parker, one of the Labour spokespeople who designed that policy, will have his own “show me the money” moment, when he releases an IRD report on the amount of tax paid by roughly 400 of New Zealand’s wealthiest people.

Accompanying that report will be a Treasury report which will estimate the amount of tax paid by ordinary people.

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It doesn’t take a rocket scientist (or a tax specialist) to work out the likely conclusion: ordinary people pay a rather large proportion of their incomes in tax through things like income tax and GST. Rich people pay large sums of tax, but these sums work out to be a small share of their total income.

We already have an early version of the report’s findings. A 2020 paper from IRD and Treasury that sparked this whole research project used a back-of-the-envelope calculation to conclude the wealthiest Kiwis paid an effective tax rate of 12 per cent on their incomes, and 42 per cent of those Kiwis paid less than 10 per cent of their incomes in tax.

This compares unfavourably to the relatively high effective tax rates of ordinary, hard-working, bread-and-butter Kiwis who this year will endure the triennial courting of our politicians.

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These Kiwis, earning median incomes of $55,000-$60,000, will find themselves paying an effective tax rate of 16-18 per cent on their incomes - and 15 per cent more in GST whenever they try to spend whatever’s left.

We already have a fairly good idea why this is the case. Most of us earn nearly all our income through ordinary wages and salaries, which are taxable from the very first dollar (taxed at 10.5 per cent - in Australia, thanks for asking, you get the first $18,200 tax-free).

The uber-wealthy, by contrast, earn large parts of their incomes through appreciating asset values and commercial activities, which are lightly taxed or not taxed at all.

It’s a problem, and one that’s probably getting worse. Current tax settings don’t just allow some people’s incomes to incur less tax than others, they encourage people to structure their affairs in ways that incur less tax. Wealthy people have both the means and motive to exploit these settings to the max.

Parker’s research has hung over politics like Chekhov’s gun since he got $5 million to pay for it in the 2021 Budget.

Named after the Russian playwright Anton Chekhov, the principle of the gun says that if a gun is introduced at any point in a play, it has to go off before the curtain comes down.

Politics often works along similar principles. If the Government is spending money on esoteric tax research, surely there’s a reason for it - a revival of the Capital Gains Tax?

Perhaps the answer to this is not coming today (or Thursday, when Prime Minister Chris Hipkins will deliver the first of the Government’s pre-Budget speeches).

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What’s more likely in the near-term is the introduction of Parker’s tax principles legislation, launched last year, but since forgotten, which will require the Government to spell out whether new tax legislation meets or fails to meet certain principles.

In practice, this will mean when governments put through annual revenue bills, they’ll be forced to tell the electorate that the tax system is pretty unfair on working people and pretty good to owners of capital.

That legislation won’t be a new tax that would address this imbalance, but it might help make the case for one in future.

It’s worth remembering why this research was commissioned in the first place.

Treasury and IRD’s data on who pays how much tax is incredibly poor.

By definition, the totemic wealthiest 1 per cent of New Zealanders is a small number of people. IRD used data like the Household Economic Survey to examine how much tax is paid across different household wealth levels, but the wealthiest person in that survey was only worth $20m - a sum too small to make them the wealthiest Lotto winner, or even the wealthiest Member of Parliament.

In the past, the IRD has fixed this by using the likes of the NBR’s rich list to gauge people’s wealth and taxation. The data was poor and relied excessively on reckons.

This new study is better, though still imperfect. The sample size of 400 people is robust, but already, business circles are chattering with stories of people who were excluded and who should have been included and vice versa.

The two obvious questions that will follow from the report are: is the level of tax paid by the wealthy fair - and if not, whether it’s desirable or possible to fix that?

The fairness question is a fairly old one: people on lower incomes pay a higher proportion of their income in tax, but a relatively low proportion of total tax take. In 2019, people earning under $50,000 comprised 66 per cent of earners, but just 19 per cent of income tax paid.

By contrast, the 9 per cent of taxpayers lucky enough to earn more than $100,000 paid 32 per cent of income tax.

If you consider Working for Families tax credits as an adjustment to people’s level of tax, low earners get more back from the tax system than they put in.

Revenue Minister David Parker's research has hung over politics like Chekhov’s gun.
Revenue Minister David Parker's research has hung over politics like Chekhov’s gun.

The tax system is designed to be progressive - the more you earn, the more your share of income gets taxed. Today’s report is likely to prove this to be incorrect; poor people may pay larger shares of their income than the rich, but it will still be true that the relatively small shares of income paid in tax by the wealthy will amount to large nominal sums.

The fairness of this will be in the eye of the beholder.

Whether it’s possible to fix this is an even more difficult question.

The obvious and logical fix is a proper Capital Gains Tax, including on things like the family home.

This isn’t as easy as it’s made out to be, as it would have to consider issues such as the treatment of gains accrued over multiple years but realised in one year. Not that questions like this really matter today, because it’s political rather than practical grounds that make things like a CGT unlikely for now.

The bigger question is how fair to make the tax system so that it stands up to the scrutiny of the public it’s meant to serve while attracting and retaining capital in the country. Policymakers may decide current tax settings are as fair as they’re likely to be without repelling investment offshore.

Current :unfair” tax settings may be economically desirable, but questions of fairness can’t be dodged forever. Bracket creep continues to push low earners into higher and higher tax brackets. Someone on a median income faces getting nearly $10,000 taxed at 30 per cent, something inconceivable when the brackets were set a decade ago.

The Government is addicted to this unfairness. Unable to meaningfully cut spending or raise meaningful taxes on the urich, it’s ordinary income earners who are forced to carry an increasing revenue burden.

That will certainly change someday - although probably not soon. The exciting thing about Chekhov’s gun isn’t wondering whether it will be fired, but not knowing precisely when.

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