Chairperson, Tax Justice Aotearoa (TJA)

Note: this article draws heavily from a blog by Max Rashbrooke for the Better Taxes for a Better Future campaign, which was run by a coalition of organisations led by TJA. To find out more about Tax Justice Aotearoa go to our Website. And to find out more about the Better Taxes Campaign, including having access to its great resources about tax, go to that Website.

Tax is important. No one much likes paying it but it is essential to our wellbeing, both collective and individual. It provides the collective goods, like healthcare and education, that underpin our individual successes. It ensures - or should ensure - that everyone has the means to live well. But the New Zealand tax system doesn't do that nearly as well as it might.

Although poverty and inequality had been falling in the years immediately prior to the last election, Aotearoa New Zealand still lives with the legacy of having had, between 1985 and 2005, the biggest increase in income inequality in the Organisation for Economic Cooperation and Development (OECD). Whereas someone in the richest 10% had typically earned 5-6 times as much as someone in the poorest 10%, they came to earn closer to nine times as much over that period.

With income (and wealth) more concentrated at the top, there is less to go around for others. In the core OECD, New Zealand has the seventh highest rate of child poverty, defined as children living in households with less than half the typical income. On that measure, one child in seven lives in poverty. In the best-performing countries, like the Czech Republic and Denmark, that figure is just one in 20. What's worse is that the design of the New Zealand tax system, compared to those of other developed countries, actually makes things worse. In theory the system is progressive: as you earn more, you pay a higher rate.

Poor Pay Unusually Large Amount Of Tax

But our system still requires poorer New Zealanders to pay an unusually large amount of tax. Goods and services tax (GST) is levied on virtually everything they buy, and overall makes up an exceptionally large proportion of the country's tax take. New Zealand also levies tax on every dollar people earn. Many other countries have a tax-free band at the bottom. In Australia, you don't pay tax till you earn over A$18,200; in the UK, the figure is £12,570.

At the other end of the scale, New Zealand's tax system does not require a very large contribution from its wealthiest citizens - at least compared to what would be asked of them in other developed countries. This results partly from the Rogernomics tax-cutting drive in the 1980s and 1990s, and can be seen in at least three areas: low-income tax rates, gaps in the income tax system, and the absence of taxes on wealth.

No Capital Gains Tax

New Zealand's top marginal income tax rate, 39%, is low by developed-world standards. The top rate is over 50% in many Scandinavian countries (Sweden, Denmark, Finland) and Japan; over 45% in many European countries (Netherlands, Belgium, France, Ireland); and over 40% in Anglophone countries like the UK and Australia. The top rate in New Zealand was over 60% for the half-century between the mid-1930s and the mid-1980s. New Zealand does not levy taxes on income taken as capital gains in any comprehensive way. We are one of the few countries in the OECD without a capital gains tax. As 70% of capital gains go to the wealthiest 20%, the latter often pay very low tax rates.

For instance, if someone earns $1m in salary and pays $300,000 in taxes, that's a 30% tax rate. But if they also earn $2m in untaxed capital gains, their income is $3m and their taxes are still $300,000, so they are only paying 10% tax overall. In fact, if (accrued) capital gains are counted as income, New Zealand's wealthiest adults (those worth over $50m) pay on average just 9% of their income in tax, less than a minimum-wage worker (10.5%) or the average person (22%) That was the finding of Inland Revenue's High-Wealth Individuals Research Project in 2023: multi-millionaires pay a lower effective tax rate than people working on supermarket checkouts.

NZ Lags In Taxing Wealthy

In addition, many countries levy taxes on gifts or inheritances, recognising that they are an irregular form of income (on the economic definition that income is any increase in savings plus consumption, over a given period of time). The US and the UK both have estate taxes, albeit they only affect the wealthiest few percent. Ireland has a lifetime capital acquisition tax, in which the first €300,000 of gifts received in a lifetime are tax-free, but gifts over that amount are taxed. New Zealand had an estate tax for a century or so, but abolished it in 1991.

In addition to taxing income more thoroughly, many countries also tax wealth in some form. Some levy annual net worth taxes (Switzerland, Norway, Spain, Argentina, Colombia) on the wealthiest individuals. These taxes are usually levied at something like 1% of net worth. Switzerland's generates revenue of around 1% of gross domestic product (GDP). Nearly all developed countries tax some more specific form of wealth, whether it be land, residential property or property in general. In the late 19th Century, New Zealand had taxes on both property and land; today, local body rates are the nearest equivalent.

NZ Tax Insufficient Across The Board

But the problem is not just that New Zealand's tax system asks too much of the poor and not enough of the rich. It is also just insufficient across the board. New Zealand's total tax take is around 32% of GDP, below the OECD average. Even setting aside Scandinavian societies with exceptionally large tax takes (over 45% of GDP in some cases), many European countries generate high revenues. Austria raises 42% of GDP in tax, the Netherlands 40%, and Germany 38%.

Such countries get greater tax contributions from those who earn very high incomes, receive capital gains, or enjoy substantial property and other forms of wealth. Those revenues are then used to fund high-quality public services. In short, New Zealand needs more tax, more fairly generated, if it is to fulfil its role of ensuring that everyone has what they need to thrive in this land of ours.

Watchdog - 167 December 2024