Wealthy pay more tax than you think - report

Childless renters are actually among the most hard done by when it comes taxation. Photo / stock

Wealthy people pay more tax than you think, and childless renters are actually among the most hard done by when it comes taxation, according to a new report.

The research did find, however, that parts of New Zealand’s tax system, notably the lack of a comprehensive capital gains tax, had an impact on reducing the level of tax paid by the very wealthy because it encouraged investment in areas of the economy that were very lightly taxed.

Robin Oliver, OliverShaw principal, who commissioned the report noted that these were the effect of deliberate policy choices and were therefore unlikely to change.

The report will be compared with research commissioned by the Government into the level of tax paid by New Zealand’s ultra-wealthy, which is slated for release this month.

Both research projects look at people’s economic income, rather than just their ordinary taxable income, which would be mainly salary and wages.

That means going beyond the simple income they earn from salaries and wages, and including income from investment in shares and companies and the rising values of their incomes. The report also looks at the effect of other parts of the tax system on people’s tax rates, like Working for Families.

“The key conclusion of the report is: Average effective tax rates increase as the net real economic incomes of households increase,” Oliver said.

The report used an OECD methodology to look at the effective tax rates paid by low, medium and high-income earners.

The report found that people within the same income group would pay different effective tax levels depending on their circumstances.

A single employed person with no dependent children living in rental accommodation has an average effective tax rate of 24 per cent at $48,000 of income. This is despite income up to $48,000 being taxed at 17.5 per cent.

The difference comes from the fact the person is paying rent, but not enjoying the tax-free capital gains of their accommodation.

Someone in the same income band, but who has children, would have a low to negative tax rate because of the amount of Working for Families tax credits they receive.

The report said that high-wealth individuals would logically move some of their income into areas that were lightly taxed or not taxed at all like property.

It found that at the highest end of the scale, wealthy people were paying higher effective tax rates than people on lower incomes.

High-wealth households potentially face average effective tax rates ranging from 35 per cent for net real economic incomes of $500,000 to 37.6 per cent for incomes of around $1.4 million.

This research will be compared with IRD’s research into the level of tax paid by New Zealand’s ultra wealthy, which is expected to be released next week.

A paper from 2020 said 40 per cent of New Zealand’s wealthiest paid effective tax rates of less than 10 per cent.