Peter Nicholl
Most articles that describe the New Zealand tax system regard it as fair and progressive.
Until recently, I had accepted that as a ‘fair’ description. Now I am not sure. Inland Revenue recently put out a report that showed the wealthiest 300 families in the country own a massive share of the country’s wealth. The amount of tax they paid as a proportion of their total income was only 8.9 per cent. That is lower than the rate someone earning a few thousand dollars a year pays.
When the huge increases in the unrealised capital gains these families made in recent years are deducted, the tax rate they paid rose to 30 per cent. That doesn’t look so bad – but it is the tax rate that most individuals start to pay when their annual income reaches $48,000. That’s closer to a flat rate tax system than a progressive system.
The Inland Revenue report has reignited the debate about whether New Zealand should have a capital gains tax. I think it is inevitable that we will need to follow most other OECD countries and introduce some form of capital gains tax because relying on income tax and GST won’t raise the level of income necessary to fund the services New Zealanders expect their governments to provide. A carefully designed capital gains taxwould also make our tax system fairer and more progressive.
But there are some other elements in our tax system that make it more regressive than it needs to be, and which should be relatively easy to fix. One is the often-mentioned phenomenon of bracket creep. The current tax brackets were introduced in 2010 and haven’t changed over the last 13 years. Prior to 2010 the tax brackets were changed quite often. It seemed to be the normal thing to do. Over the last 13 years, our average per capita GDP has risen about 45 per cent, so many people on relatively low levels of income have moved into a higher tax bracket.
This is regressive.
New Zealand is also one of the few countries that taxes income from the first dollar earned. In the United States the first $9950 of income is exempt from income tax. In Australia the first $18,200 of income is exempt from income tax. This makes our tax system much more regressive than the Australian system.
The third regressive element is the way GST is levied. We are proud of the fact that our system is simple and efficient compared with many other countries as we apply the same GST rate to everything and exempt almost nothing.
While that is simple and efficient, it is also regressive as the poor spend a much higher proportion of their income on necessities such as food and housing. One way to make our tax system fairer and less regressive would be to exempt things like food from GST.
Until some of these things are done, I think we need to stop describing the NZ tax system as a fair and progressive one. It has some unfair and regressive elements in it that could be easily fixed.
