Guest Post: The tax system is already way too “fair”

A guest post by Mark Keating:

The current political and public debate about tax policy is being dressed up as a need to achieve “equity” by ensuring the rich pay their fair share.

The Prime stated boldly that “parts of New Zealand’s tax system are unfair” – although she refused to be drawn on what changes or new taxes Labour would like to introduce to address that alleged unfairness.

The of Revenue started the whole debate last month by proposing is to enact a Tax Principles Act setting out the foundations of our tax system.  In doing so he argued that more financial information about high wealth individuals must be gathered by IRD to ensure the tax system is working fairly.

The picked up that ball and ran with it.  Its Revenue spokesman stated:

“Our tax system is unfair and it needs urgent attention.”

“The most straightforward solution is to introduce a capital gains tax or a wealth tax on individuals’ net wealth over $1 million – not including mortgages and other debt. would only apply to the wealthiest six percent of New Zealanders,” she said.

So it seems the political Left are doubling down on the traditional “eat the rich” approach to taxation and want to soak them even more to ensure the tax system reflects their version of “fairness”.

But what’s missing from the present debate is the facts about how much tax is already paid the wealthiest Kiwis. I have waited in vain for some journalist to drop other shoe … but apparently such facts would only get in the way of the prevailing narrative that the rich are currently undertaxed and should pay more.

Yet such hard date is not hard to find if you want to.  For example, Treasury helpfully publish statistics on Who pays income tax… and how much? (treasury.govt.nz)

Those figures record that in 2020 (the last year for which figures are available) the top 5% of income earners (some 196,000 individuals – the very people that the are targeting) paid a total of $11.31billion in income tax (out of total income tax of $36.85billion paid by the 3.85million individual taxpayers). 

So the top 5% already pay 31% of all tax paid by individual taxpayers. By contrast, the bottom 74% of income earners (2.84m individuals) pay only $10.95billion, which represents only 29.7% of all tax paid by individuals. 

means the top 5% are already paying more tax than the bottom three-quarters of taxpayers combined. 

And those statistics were gathered by Treasury before last year’s increase in the top personal tax rate on income from 33% up to 39%.  Presumably the statistics for the 2022 year will be even more skewed against the top 2% of taxpayers earning over $180,000, who already pay $8.6billion or 24% of the total tax paid by all individual taxpayers. 

None of sounds very fair – but presumably not in the way Miss Adern or Mr Parker mean.

Likewise, a common allegation is that “the rich” should pay even more but instead hide their wealth in companies and trusts, which pay a lower rate of tax (28% and 33% respectively).

But that myth is exploded by statistics kept and published by IRD on the tax payments by the very wealthiest New Zealanders.  Just in March year IRD released a Discussion Document floating novel proposals to impose new taxes on the wealthy (Dividend integrity and personal services income attribution – a Government discussion document (March 2022) (ird.govt.nz)

That Document included the following details regarding the tax of the very wealthiest 350 Kiwis, who already have an entire unit of IRD dedicated to monitoring their full compliance with all tax obligations.  It explained:

Inland Revenue analysed existing data it holds on 350 high wealth individuals (individuals and families with more than $50 million in net assets) and found that they used or controlled 8,468 companies and 1,867 trusts.  For 2018, these 350 individuals paid $26 million in tax, while their companies and trusts paid $639 million and $102 million respectively.

While IRD still quibble that so much of their income is generated through companies and trusts so don’t pay the new 39% tax rate, it overlooks the simple maths that those richest 350 individuals and families already pay a combined $767million in taxes (an average of $2.2m each)!

Yet it appears from the current debate that even that fleecing is not enough for the Government and its political allies.    That approach ignores the reality of our current tax system.  To paraphrase the famous words of Sir Winston Churchill: Never has so much been paid to so many by so few.

Mark Keating is a Tax Barrister working in Auckland

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