Taxing questions
Are Kiwis really doing it tougher?
Global comparisons are difficult, but New Zealand’s middle-income earners appear to be hit hard, writes Susan Edmunds.
New Zealanders often like to complain that they’d be better off in another country. Underpaid and overtaxed, the refrain sometimes goes, we are doing it tougher than those in other parts of the world. But are we?
Stuff set out to compare how much of their income a median wage-earner would pay in tax around the world. This does not include taxes that are paid after the money is received, such as GST.
Bear in mind, too, that each country delivers a different system in return for that tax – some citizens have to pay for healthcare out of their after-tax income, for example, while others do not.
The comparison found that a worker in New York earning the median wage would take home about 77 per cent of their pay.
In the United Kingdom, it was close to 80 per cent.
There, the median income earner would pay zero tax on their first £12,500 (NZ$25,100) and then 20 per cent on the rest of their income up to their total £28,677 a year.
In Australia, it was 80 per cent, although that includes a 9.5 per cent deduction set aside for superannuation savings, and in Hong Kong, 88 per cent.
Hong Kong only applies a tax rate of 2 per cent on the first NZ$10,000 of earnings – rising to 17 per cent for income above the equivalent of NZ$40,000.
In New Zealand, it was 82.57 per cent.
The Tax Working Group said in its Future of Tax submissions background paper that New Zealand had a broad-based, lowrate tax system that raised relatively high amounts of revenue with relatively low rates.
‘‘New Zealand has one of the lowest top personal tax rates, but the proportion of income tax to GDP is high. New Zealand’s company tax rate is relatively high, and the proportion of company tax revenue to GDP is high. New Zealand’s GST rate is relatively low, but the proportion of GST revenue to GDP is high.’’
What gives a clearer idea of the tax burden is a comparison of the total tax take.
According to the OECD, New Zealand has a total tax take equivalent to 30.69 per cent of gross domestic product (GDP), compared to 28.5 per cent for Australia, 28.4 per cent for Korea, 24.33 per cent for the United States and 33.54 per cent for the United Kingdom.
The OECD average is 34.26 per cent but that includes outliers such as France at 46 per cent and Denmark and Belgium at 45 per cent. Mexico is at 16.13 per cent.
Iceland peaked at over 50 per cent in 2016.
‘‘In broad terms, there tends to be a correlation between the development of an economy and the extent of its social security system, or how redistributive its tax system is,’’ Infometrics chief forecaster Gareth Kiernan said.
‘‘Of course, a country can be relatively undeveloped and still have high tax relative to GDP – it’s just that the revenue might be spent on other things rather than social security.
‘‘Once a country has decided on an appropriate level of taxation, the choice in funding must be made between income taxes, consumption taxes, and other taxes. Of course, within income taxes, decisions must also be made about how progressive the system is going to be – the risk being that tax rates that are too high will discourage work and/or encourage evasion.
‘‘Consumption taxes are much less easy to avoid, particularly when they are as simple as New Zealand’s GST. Nevertheless, the decision of many countries to
exclude some necessities such as some food items from being taxed hints at efforts to use consumption taxes as a blunt form of targeted tax or redistribution as well.’’
He said New Zealand was less ‘‘redistributive’’ than economies such as Norway but more than the United States.
The country’s fiscal position meant it could levy less tax than those with heavy debt, such as Greece. ‘‘The mix of income versus consumption taxes varies from country to country but the trend in taxes over the last 40 years or so has been towards broadening the tax base, relying less on income tax and/or trade taxes and more on consumption taxes.’’
ACT leader David Seymour said the picture would also be skewed by transfers such as Working for Families, which New Zealand used for redistribution instead of altering tax rates.
Tax expert Terry Baucher said GST made a significant difference and it was going to become an important issue for other jurisdictions. ‘‘We’ve been ahead of the pack all along.’’
He said it would be hard now to introduce a tax that included food but that had been implemented at the beginning, and the rate increased over time from 10 per cent to 15 per cent.
Other countries were implementing sales taxes at rates more like 20 per cent, he said. ‘‘We are an outlier there.’’
Baucher said the tax issue that New Zealand needed to address was the middle tax rate.
The first $14,000 of a New Zealander’s income is taxed at 10.5 per cent, then income between $14,000 and $48,000 is taxed at 17 per cent, between $48,000 and $70,000 it’s taxed at 30 per cent and earnings over that level are taxed at 33 per cent.
Baucher said it could be argued that 33 per cent as a top tax rate was too low by international
standards but the 30 per cent rate was too high, particularly relative to bands below and above, he said.
There was a significant impact on people who started to earn above $48,000 but then only a limited impact on those who earned beyond $70,000. The $48,000 bracket applied to people who were earning less than the median and the average wage.
A future Government that changed the brackets would probably talk about it being a tax cut, he said, but it would just be an inflation adjustment. ‘‘In 1892 the commission of Inland Revenue said it was not going to insist on the filing of returns for income under £300. To put that in context, that’s the equivalent of $61,585 today.’’
‘‘We’ve been ahead of the pack all along [on GST].’’
Terry Baucher Tax commentator