tax wedges
February 7th, 2012 at 12:00 pm by David FarrarSimon Collins reports at NZ Herald:
A new book has found total tax rates on the incomes of rich New Zealanders are now the lowest in the developed world.
New Zealand’s top tax “wedge” of 33 per cent on incomes above $70,000 is lower than all 27 other high-income nations in the Organisation for Economic Co-operation and Development, after including social security and payroll taxes which do not exist in this country.
Rich New Zealanders also escape without paying any tax on capital gains that would be taxed in most other countries.
On the other hand, New Zealand has the world’s most comprehensive goods and services tax (GST), taxing 98 per cent of all potentially taxable consumer spending compared with a developed world average of 59 per cent.
New Zealand is one of only five high-income OECD nations that do not allow any exemptions for food – a key factor in our high food prices.
The book’s author, Professor Rob Salmond, a New Zealand-born political scientist at the University of Michigan, says New Zealand has a tax system of extremes.
I’m not sure I’d call the book new. I read it last year. It’s a good book with lots of interesting data.
At some stage I hope to have time to discuss it in more detail. I would make one point for now though. This is off memory though, but if I am wrong I am sure Rob Salmond will correct me.
The tax wedge includes social security and payroll taxes, and presumably this includes payroll taxes in Australia where the “tax” goes towards the individual’s retirement savings.
I believe there is a huge difference between taxes where your tax money goes to the Government to spend on whatever they decide, and between payroll deductions where the money is invested in your name, and still belongs to you.
UPDATE: Rob has clarified the OECD tax wedge does not include the superannuation deductions, which is good.
Incidentally I do support a capital gains tax. I believe the best tax system is broad based and low rates.
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- The problems with the current tax system
- Len’s Auckland taxes
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February 7th, 2012 at 12:09 pm
When will we see a Capital Gains Tax in NZ? all this talk about “catching the coattails” of Australia is premature if we fail to see the merit in such a revenue stream.
It’s perfect for a government strapped for cash.
Vote:February 7th, 2012 at 12:22 pm
When will we see a Capital Gains Tax in NZ?
If you do some trading in shares or property IRD will show you all about what we already have.
The Labour CGT was far from perfect for a government strapped for cash – the revenue stream (more like a trickle) wasn’t due until about 2018.
Vote:February 7th, 2012 at 12:26 pm
Investors are already taxed twice – once through the company tax rate, and then again on any dividend income you get. I dont see why we should also be adding a CGT tax.
We should be encouraging saving and investing in this country, not discouraging it.
Vote:February 7th, 2012 at 12:26 pm
mmm, wedges.
Wait, this isn’t the fast food thread. D’oh.
Vote:February 7th, 2012 at 12:30 pm
DPF – Commenting to correct you, as conditionally requested. The Australian tax wedge does not (repeat: not) include compulsory payments into superannuation schemes, as the OECD considers these a “compulsory non-tax payment” not “tax.” For more, see p50 and p55 of the book. -Cheers, Rob
Vote:February 7th, 2012 at 12:32 pm
The tax wedge is a common way to ignore exemptions and loopholes – it tends to focus on the headline rate, not the rate actually applied. Note that Mitt Romney, with his many millions in the US, pays something like 15% tax (can’t remember the exact amount, but definitely not 33%). Analysis like this leads to high headline taxes with lots of loopholes, often randomly distributed and significantly distorting investment decisions.
Vote:February 7th, 2012 at 12:34 pm
I see that it fails to note that our top tax rate cuts in at a much lower threshold than a number of other countries. I also note that it fails to point out that 27% of $150,000 (i.e. $40,500) is nearly 6 times higher than 15% of $46,800 (i.e. $7,020) – these are figures from the article.
It also fails to mention WFF rebates etc, which mean that the couple of 46,800 with a few kids probably pay no net income tax.
Hey – but the headline figures show that the rich pricks are robbing the poor people blind, so mission accomplished.
Inequality is the new
Vote:blackglobal warming.February 7th, 2012 at 12:37 pm
Pete George – “the revenue stream (more like a trickle) wasn’t due until about 2018″ – all the more reason for introducing it sooner than later. The full revenue stream will always be a few years out. Any other arguments against the CGT?
Vote:February 7th, 2012 at 12:39 pm
I think a simpler tax system with low rates (like New Zealand’s could be, if the rates weren’t as high as they are, and if business tax was simpler) is a far superior option to a complicated one with lots of loopholes, like Australia’s.
Vote:It used to take me about 30 minutes to do my tax return in New Zealand, including a rental property at one stage. In Australia it takes several hours, using the ATO etax tool, without a rental property. Yes I usually get $1000 or so back (sometimes more depending on what I can claim eg health expenses) but it’s a pain in the arse. They should just lower the tax rates and get rid of all the loopholes and exemptions.
I know which system I prefer.
February 7th, 2012 at 12:40 pm
Sounds like we’re actually doing a good job: taxing consumption and not saving (and the fruits thereof). The fact that everyone else is barmy doesn’t seem to have infected us (even if some people seem to happily go along with the ‘but everyone else is doing it’ argument).
Vote:February 7th, 2012 at 12:42 pm
“New Zealand is one of only five high-income OECD nations that do not allow any exemptions for food – a key factor in our high food prices.”
Vote:Bullshit!
The reason for the perceived “high” food prices in this country is because of a lack of competition between the supermarkets. I was talking t a market gardener a few weeks ago and as he puts it he gets ~$1.30 /kg for his red onions about 10% on his 8-9 month investment. The supermarket sells the same onions for over $4.00/kg or 300% + over a few days.
The media do their “Market Research” in supermarkets, try some of the local fruit shops and you’ll see the difference.
Milk is the same, see if you can find out how much the supermarkets get their milk for – worlds best kept secret but you can bet it’s well under $1.00 per liter.
February 7th, 2012 at 12:48 pm
@ MikeG
Yes, there are plenty of downsides to a CGT: they complicate compliance dramatically, they are administratively a pain, they distort financial decisions, and they produce a negative impact on saving through taxing people on their investments. In all systems which have CGT there are a myriad of convoluted exemptions and special statuses, supported by alternative tax arrangements (such as, in the US and UK, complicated and time-consuming pension arrangements). The sort of revenue raised by such a tax tends to be minimal (in the UK I remember it used to raise around £5bn per annum against a gross tax take of £450bn at the time) and tends to create more compliance costs and distortion than is every really expected or warranted. Better we leave that one alone.
Vote:February 7th, 2012 at 12:51 pm
Mark, NZ dividends carry tax imputation credits to the extent that the original company profits were taxed. So if (for example) a company pays 30% tax, then your dividend has a 30% imputation credit attached. Thus your liability for tax on dividends (from NZ companies) is only the difference between the imputation credit and your top personal rate.
As has been pointed out elsewhere, the USA does not operate an imputation system, so to reduce the double-taxation of company profits Dividends are only taxed at 15%, as are capital gains. Hence the apparently low tax rates for wealthy people who’s income is largely from investments.
And as others have pointed out, if our top rate is the lowest, it cuts in much earlier, and the deductions available are miniscule. For example in the USA most mortgage interest payments are deductible, along with a slew of others. In Australia though I note that the 37% rate cuts in at $80K ($A), and the 45% rate at $180K. And there’s medicare at around 1.5%; not sure about the availability of deductions though.
We all know Governments want money, primarily to spend in buying votes, but what’s the moral justification for taking by force so much of anyone’s earnings ?
Vote:February 7th, 2012 at 12:53 pm
I don’t think there should be a capital gains tax. If there is one, it should be on everything, but I don’t think it is right for everyone’s house to be taxed.
A Capital Gains Tax won’t take inflation into account – you buy your asset with money, which is (usually) worth less when you sell the asset. That is, even if the asset doesn’t appreciate in actual value, you are still taxed since the unit of measure is worth less. This encourages bad government policy, since high inflation actually increases tax revenue.
What exactly do you want to achieve with a CGT? If it is another revenue stream, it is a pretty bad one. You’d be better off raising GST – this would encourage people to save more rather than spend, which is a better option for the economy as a whole. If it is to prevent house price increases, that won’t work either, you just have to look at Australia. If it is to “purify the tax system by stopping people from making money on speculation” we already have income tax laws covering that.
Vote:February 7th, 2012 at 12:58 pm
Beat me to it RN!
Vote:February 7th, 2012 at 1:04 pm
Tricky to judge tax rates, you need to include exemptions ( tax breaks for mortgages for instance ) & sales tax & state taxes, not to mention cost of medical care / insurance.
The simplest example of how wrong the headline number would be is the fact Romney pays 15%.
Vote:February 7th, 2012 at 1:41 pm
Except for the fact that there are imputation credits.
Also, why is it that you think that if a company makes a profit, and is taxed on that profit, and then gives out dividends which are also taxed, then if that same company retains that income instead of giving out dividends and the shareholders benefit from an increased sale price instead, the overall tax should be less?
Vote:February 7th, 2012 at 1:51 pm
Graeme – I think the question should be “why does the government take so much money off us?” not on “why is the tax paid higher if a company acts one way and not another?”
Vote:I actually thought that the tax paid on dividends was the company tax – there is no extra dividend tax that I am aware of? In which case either the company pays the tax and the profit stays in the company, or the company pays tax and gives a dividend that has already had tax paid on it to their shareholders.
February 7th, 2012 at 2:08 pm
Sure. But we could lower the tax on the one way so that it was lower overall.
Dividends are just one form of income and are taxes as income (not through PAYE, but through income tax generally). Tax paid by companies is imputed to the owners of the companies to offset income tax liability.
Vote:February 7th, 2012 at 2:55 pm
Mark @12.36
Incorrect, we have the Imputation System that avoids double taxation, and this benefits Shareholders, note also the passive investor rate means that the paying company also gives you an RWT credit of between 3 & 5 % ( depending on Imputation rate of 30% or 28%).
Note also that we are one of the few countries in the world to have this.
Also note that our tax system is extremely simple compared to other countries
Vote:February 7th, 2012 at 3:02 pm
# Mark (338) Says:
February 7th, 2012 at 12:26 pm
Investors are already taxed twice – once through the company tax rate,
An investor and a company are not the same thing. If a company owes me money and has nothing to give I can’t normally go after the investor to reclaim that loss. Bit strange if they are the same thing as you imply.
and then again on any dividend income you get. I dont see why we should also be adding a CGT tax.
We should be encouraging saving and investing in this country, not discouraging it.
Extending your argument to absurd conclusions, we should put all the tax on the poor to discourage being poor and put no tax on the rich to encourage people to be rich. We can then change the name of our nation to Republicanistan where everyone is rich (or soon to be rich) and no one pays any tax because tax is socialism and is therefore evil.
Vote:February 7th, 2012 at 3:18 pm
Weihana
It does happen, especially when Shareholders, lets say two or three of them have a falling out and decides to appoint a receiver for his current account balance
Vote:February 7th, 2012 at 3:41 pm
Mark (338) Says:
February 7th, 2012 at 12:26 pm
Investors are already taxed twice – once through the company tax rate, and then again on any dividend income you get. I dont see why we should also be adding a CGT tax.
We should be encouraging saving and investing in this country, not discouraging it.
Mark – No they are not taxed twice. Imputation credits deal with that
Vote:February 7th, 2012 at 5:14 pm
I’m with DPF, lets get everybody paying their fair share of tax. That would have to include beneficiaries and renters paying council rates, Farmers on huge incomes paying the right (far more) rate of tax and that way we can lower tax for nearly all the productive people of NZ.
Will bludgers have to pay more?……yes, but who gives a fuck.
Vote:February 7th, 2012 at 5:18 pm
Seems there are a lot of very clever people posting on tax in this forum but the overriding factor is very few of you tend to agreed on what is what when it comes to taxation . So if the highly informed and highly intelligent can not agree on the perfect system and a fair set of rules what chance does the common man have to understand the ins and outs of the taxation system? Our taxation system is a dogs breakfast, this of course is designed to be so. Why, to many vested interests both politically and professionally, God forbid we actually implement a simple system that is understood by all which of course is entirely possible.
Vote:February 7th, 2012 at 5:38 pm
top tax rates are an incredibly misleading way of representing tax paid by high earners. I lived in Holland before coming to NZ and despite paying a top tax rate in the 60th percentile i.e. 60% + of ever guilder earnt above X, actually paid a lower tax rate overall than when I came here because of a variety of exceptions and a gradated tax system. I was also paid more; about twice as much.
Vote:February 7th, 2012 at 6:41 pm
Nothings about to change because IRD reported to the regurgitated Minister of Davy Crocket Hats that they need in excess of 1 BILLION dollars to replace their creaking mainframe and it could be 1.5 billion. Untill that is done the old system id sifficult to change because there are so many cross trnasactions and why’s and wherefores that its a nightmare to change.
Vote:Apparently that’s why nothing changes. I guess one can understand the rpoblem.
We could of course just volutarily pat tax, refuse all other payments and the Govt. could stop spending everyone else’s money.
Will they Nah.
February 7th, 2012 at 11:42 pm
Viking2: dunno how they calculate $1 billion, Australia did it for quite a bit less, and their tax system is more complicated.
Vote:February 8th, 2012 at 12:43 am
Yeah, $1 billion? FFS just get MYOB.
Vote:February 8th, 2012 at 8:05 am
Simon Collins has been very selective with what he puts in the article. The couple on $46800 pay $155 in tax but will receive $210 in tax credit for WFF. They pay $340 in rent on which there is no GST so presuming the remaining $615 per week they earn is spent and GST paid they are contributing $80 per week. If you deduct the $55 per week they get in WFF above their tax laibility their net contribution to society is only $25 per week or less than 3% of their income. And then that hard working couple who share a business and both work in it Collins has put all the income to the man wheras in fact his wife has contributed to that income, the $150000 is shared between two workers not one.
Vote: