Auckland, 18 April 2023 — New
independent research shows that high-wealth individuals pay
more tax on average and represent a higher proportion of the
total tax take than may previously have been
thought.
It has been strongly suggested that, in
practice, New Zealand’s income tax regime is not as fair
as statutory tax rates would suggest*. However no reliable
data exists to support this claim. Leading tax consultancy
OliverShaw commissioned Australasian consulting firm, Sapere
Research Group, to prepare a report on the effective rates
of tax that New Zealand’s tax and benefit systems impose
on the incomes of its residents. The 263-page report adopted
the standard modelling methodologies used in the OECD Taxing
Wages study to review the income and tax of illustrative
households to calculate the average effective tax rates paid
by low, medium and high-income earners in New
Zealand.
Key findings
- The
rich pay most of the tax collected in New Zealand and the
richer a person is, the more tax they are likely to
pay. - Effective tax rates are generally less than the
statutory rates. - Average effective tax rates
increase as the net real economic incomes of households
increase. - As a result of deliberate government
policies, households of single employees renting face some
of the highest average effective tax rates, and some of the
highest marginal tax rates apply to some of the lowest
income earners.
“One of the questions asked is
whether the very wealthy pay taxes at the same or higher
rate than middle income earners,” says OliverShaw
Principal, Robin Oliver. “This research shows clearly
that, whether you consider taxable income or other measures,
such as economic income, the answer is: ‘Yes, they do.’
The key conclusion of the Report is: “Average
effective tax rates increase as the net real economic
incomes of households
increase.”
“However, when it comes to
considering whom to tax, on what basis and at what rate,
trade-offs have to be made between taxing all income at the
same rate and other policy concerns such as providing
assistance to lower income families and encouraging
investment. Tax rules are the product of policy conclusions
as to what is reasonable, workable, efficient and
equitable.”
In order to standardise the data the
Sapere Report, following the OECD model, takes into account
Working for Families and other benefits, as you cannot
sensibly consider average effective tax rates (AETR) without
doing so.
“Apparent inequities with the existing tax
and benefit system are easy to identify,” says Oliver.
“These occur when lower income earners pay tax at a higher
effective marginal rate than higher income earners – for
example when people on benefits have their benefits
drastically abated once they start working and earning even
a modest wage. They also occur when people who earn the same
income are taxed at vastly different effective rates, as
happens with the widely supported Working for Families tax
credit. Inequities are usually the result of deliberate and
considered government policy: Working for Families creates
inequities because governments have decided to give more
assistance to people with families to support, who need it
most.
“The problem begins with a lack of agreement
on what constitutes income,” says Oliver. “Is it taxable
income as defined in the Income Tax Act? Does it include
KiwiSaver earnings? Does it include monetary benefits
received from the government? Does it include services that
the government funds – healthcare and education – which
are delivered to citizens? Does it include the appreciation
in value of the family home – value that will be realised
only on the sale of that home? Does it include the part of
interest that merely compensates the loss of value resulting
from inflation? Does it include investment in education that
is expected to lead to higher future income? .
“The
problem is compounded because those who earn most also have
most discretion about how they earn. Wealthier individuals
generally derive a greater share of their income from
sources other than wages and are encouraged to take
advantage of the different tax rates payable on income from
companies, trusts, property and PIEs. Thus, increasing the
top marginal income tax rate will likely have only a modest
effect on their effective tax rate. This apparent anomaly is
unsurprising. In taking advantage of different tax rates
high, income earners are behaving in ways that economists
advising government predicted, in the process meeting those
policy objectives which governments favour highly – saving
for retirement, protecting assets, investing in businesses,
creating jobs, developing commercial and residential
property
“The Sapere report provides a model for
considering economic income which addresses some of the
challenges faced in collecting hard, reliable data and
considering the equity and efficiency implications of
potential changes in the way income is taxed. The report
makes clear that, to achieve equity, consideration of the
redistributive function of the income tax system must take
into account both taxation and the redistribution of funds
by way of concessions, benefits and government-funded
services.”
*“Until we have a more accurate
picture about how much tax the very wealthy pay, relative to
their full “economic income”, we can’t honestly say
that our tax system is fair.” Hon David Parker: “Shining
a light on unfairness in our tax system” 26
April 2022
For more information, or to download
or share a copy of the Sapere Report, visit www.wereonthemoney.co.nz
About
OliverShaw
OliverShaw is a specialist tax
advisory practice founded in 2011 by Robin Oliver MNZM LLB
MA and Mike Shaw CA, recognised experts in tax policy, tax
economics and tax advice. Both have previously worked as
senior partners at big four accounting firms, and Robin
served as Deputy Commissioner of Policy at IRD for 16 years.
OliverShaw has acted as advisors to the Corporate Taxpayer
Group, the Financial Services Council, local bodies, NZX
listed corporates, high wealth individuals and highly
innovative start up
organisations.
© Scoop Media
