The Dim-Post

March 29, 2012

Tax in New Zealand

Filed under: Politics — danylmc @ 9:00 am

Rob Salmond takes a look at New Zealand’s tax system and compares it to the rest of the OECD. His conclusion. Low income New Zealanders pay more tax than they would in almost any other OECD nation, and high income New Zealanders pay less tax than they would almost anywhere else.

(The neoliberal reply to this would be that the wealthy can invest their money far more productively than the government, so the current settings are more likely to drive economic growth. I think anyone making that argument should be forced to eat every news story ever written about the finance company debacle.)

I don’t think Rob’s work factors in Working For Families, which changes things a bit. Those on low incomes with no children – ie those who can easily move to Australia, taking their future tax streams with them – seem hardest hit by the current tax system.

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30 Comments »

  1. I remember when Salmond wrote his first post on this and Kiwiblog linked to it saying it was “very interesting” and that “at some stage I hope to have time to discuss it in more detail.” Guess he’s just been really busy eh.

    Comment by Hobbes — March 29, 2012 @ 9:03 am

  2. You know that the general consensus in econ is that GST isn’t regressive, right? Maybe it’s regressive relative to a progressive income tax, but it’s not regressive in an absolute case except where rich folks spend big parts of their income on holidays abroad where they’re not paying GST.

    Comment by Eric Crampton (@EricCrampton) — March 29, 2012 @ 9:24 am

  3. So the tax rates shown in the graphs bear no identifiable relationship to the net tax paid because of transfer payments such as WFF. What, exactly, is the point then? Comparing pre-transfer amounts of tax paid to amounts that don’t account for such payments is surely a meritless exercise.

    Comment by Daz — March 29, 2012 @ 9:31 am

  4. Or on residential property, which most rich people *do* spend a shitload of their money on.

    L

    Comment by Lew (@LewStoddart) — March 29, 2012 @ 9:33 am

  5. Rather than worry about the mewlings of the supporters of neo-liberalism (Eric Crampton doing so whilst drawing a nice taxpayer funded stipend at Canterbury University. Wow, another Chickenhawk Randian! Who would have thought?) I think we would all be better of spending our time discussing the challenge thrown down by the last two sentences:

    “…We need better solutions than this, less like a lolly scramble and more like an actual meal. That is the challenge for the opposition parties…”

    Obviously, revenue needs to be addressed. the recent (last Sunday) discussion on Chris Laidlaw’s show might make an interesting departure point, especially around things like a “Robin Hood” tax.

    [audio src="http://podcast.radionz.co.nz/ideas/ideas-20120325-1105-ideas_for_25_march_2012_-_taxation-048.mp3" /]

    Comment by Sanctuary — March 29, 2012 @ 9:47 am

  6. @Danyl: Thanks for the link. In answer to your question, elsewhere in the book I look as best I can at the impact of family assistance like WfF. The available data don’t a full-scale comparison, but for two child families New Zealanders pay very low relative **income** taxes at 67%, 100%, and 167% of the domestic average wage. It was not possible to factor in consumption taxes into the analysis, though.

    @Eric: I think you mischaracterize the econ consensus, certainly when we take the standard definition of regressivity, and the one I use in my post, which is with respect to income rather than spending. The TWG did a paper on this in 2009. Its section on distributional consequences starts: “GST, in common with other consumption taxes such as VAT, is widely perceived to be regressive.” They do go on to say that the **degree of regressivity** is sometimes overstated, but that is all. See their Figures 6 and 7 for illustrations of the regressivity. Perhaps you are thinking about the **lifetime** effects of consumption tax, which I think is not the best way to examine a current-day tax system. I address that in more detail in my book.

    Comment by rsalmond — March 29, 2012 @ 9:50 am

  7. I don’t think Rob’s work factors in Working For Families, which changes things “a bit” – understatement

    Comment by merv — March 29, 2012 @ 9:58 am

  8. “Those on low incomes with no children – ie those who can easily move to Australia, taking their future tax streams with them – seem hardest hit by the current tax system.”

    Single graduates with a student loan have an effective marginal tax rate of 33 percent. Add in indirect taxes and it’s close to 50 percent. Once interest is re-introduced, expect to see a larger diaspora, which is probably why the Nats aren’t going there in a hurry.

    One of the best ways to ruin a country is to kick out your middle classes. Uganda, Bangladesh and Fiji. Here, the long bleed continues.

    Rob, the old man tried to alleviate the regression with income support. That pact was broken by the Nats in the 90’s with the drastic welfare cuts. Clark tried to wind it back with WfF, but massive holes in the net remain.

    Comment by zippygonzales — March 29, 2012 @ 10:05 am

  9. What about projections? With more and more jobs heading toward the minimum wage and having little prospect of career progression, the future isn’t bright. People either leave or they get used to working as little as possible to shield themselves from being – effectively – exploited. I know of several young people who would rather do nothing than work for the awful “managers” and proprietors they would have to tolerate for the minimum wage. Having seen these situations first hand….I can’t blame them. Better to earn nothing or very little than spend all your days aggravated beyond endurance….earning very little.

    Comment by Steve (@nza1) — March 29, 2012 @ 10:07 am

  10. Merv’s term “understatement” is an understatement in itself.
    Not factoring in Working for Families etc is like suggesting that we have a low rate of tax but only use PAYE rates in your calculations but do not include GST, excise tax petrol tax, etc.
    Without including WfF the survey is worse than worthless, it is creating a false impression.
    Many low income NZ families, rather than having a high tax rate, would have a negative tax rate when WfF is included.

    Comment by Bob — March 29, 2012 @ 10:20 am

  11. Bob, but when you start to including things on the spending side, where do you stop? Legitimate question. If you include WFF, why not pensions, student allowances, benefits? Why not ACC payouts? Bursary scholarships? Why not include redistributive non-income government spending?

    NZ has a rather flat taxation system. In the mid 2000s only the top 10% paid significantly more, and the bottom 10% significantly less than they would under a 25% flat tax. But on the spending side of the ledger, things are fairly flat too. Most social spending is universal rather than targeted, with the advantage that this reduces targeting costs and makes them very socially and politically strong. When trolls describe NZ as ‘socialist’ it’s this (rather than the absence of a market-based economy) they’re foaming about.

    Comment by George D — March 29, 2012 @ 10:42 am

  12. And people who don’t have dependent children aren’t affected by WfF. Let’s not forget about them.

    Comment by MeToo — March 29, 2012 @ 10:43 am

  13. How dare you continue to use facts to support your arguments?

    Comment by alex — March 29, 2012 @ 10:44 am

  14. Many low income NZ families, rather than having a high tax rate, would have a negative tax rate when WfF is included.

    Assuming a 2 child family, the net tax payer threshold is a touch north of 50k (a marginal difference whether it’s split between 1 or 2 earners).

    Comment by Gregor W — March 29, 2012 @ 10:58 am

  15. I wasn’t at all surprised about this and what concerns me the most is the punishable tax rates applicable to those on low incomes who have no children, especially if they are young, because it shows a political system (and both major parties are to blame on this) where too much attention is given to the middle class people with kids (a household earning $50,000 per annum with two children effectively pay no tax because of the Working For Families Scheme says Prime Minister Key) and there is next to nothing available in any possible area, it seems (low taxes across the board, tax incentives for working, tax cuts for working part of the year while being on a benefit for the majority of the year, an appropriately higher income to live on while studying at a tertiary education provider) for those on low incomes with no children.

    Comment by Daniel Lang — March 29, 2012 @ 4:18 pm

  16. An effective tax rate under 30% for those on low incomes seems fine to me. Goff’s Labour tried to give them more help by fiddling with tax settings and it got no traction. It’s probably easier to target them specifically through transfers, but if you want to afford that, the low rates on high incomes become the problem. We could push the top effective rate on all income (including capital gains) into the fifties, but who do we think we are, utilitarians?

    Comment by bradluen — March 29, 2012 @ 5:03 pm

  17. Salmond makes the mistake of not taking into account the fact that all income gets spent eventually or, if it doesn’t, well all the better for the rest of us.

    Comment by Swan — March 29, 2012 @ 9:05 pm

  18. >Salmond makes the mistake of not taking into account the fact that all income gets spent eventually or, if it doesn’t, well all the better for the rest of us.

    Both of those statements are false. A great deal of the income of the wealthy is not “spent”, it is invested. In NZ, a great deal of that investment is in property, for which there is no taxation on profits made, so the “rest of us” get nothing from that. Indeed, we lose from property inflation, which is the number one cost in most people’s lives, by a large margin.

    I do not have a problem with investment generally, but the claim that Salmond is making, that the system is regressive, is correct. It is regressive, and it is regressing.

    The overall outcome, a more unequal society, is ironically also counterproductive, even for the wealthy, because it means the total wealth in society is less. Business suffers because there is less money available locally, which hurts the capitalists too. The only real beneficiary of all of this is an ideology, one that values relative wealth far more than absolute wealth.

    NZers have for a long time maintained a conceit that relative wealth is not much important to them, that NZ is a classless society. This is a dream from a time that has passed, and it was not even true then, although it was perhaps more true of NZ than other places. But this no longer the case. Now, it’s just a coping fantasy by which the lucky justify ignoring the suffering of the unlucky.

    Comment by Ben Wilson — March 30, 2012 @ 10:04 am

  19. Steve #9: “With more and more jobs heading toward the minimum wage and having little prospect of career progression, the future isn’t bright. People either leave or they get used to working as little as possible to shield themselves from being – effectively – exploited. ”

    Or worse still, they’ll scapegoat those below them for their financial insecurity. It’s one of the more obvious signs of societal de-evolution and the il-liberalisation of democratic societies, and in the case of Weimar Germany it got cranked up to 11.

    Comment by deepred — March 30, 2012 @ 10:22 am

  20. And is there any point in living in a zero-tax society, if bodyguards and razor-wire contractors eat all the One-Percenters’ “hard-earned gains”?

    Comment by deepred — March 30, 2012 @ 10:26 am

  21. @rsalmond I did indeed mean in the lifecycle sense; that’s the only way of looking at it that makes any sense to me.

    Comment by Eric Crampton (@EricCrampton) — March 30, 2012 @ 1:52 pm

  22. Ben Wilson @ 18 “A great deal of the income of the wealthy is not “spent”, it is invested. In NZ, a great deal of that investment is in property…”

    I don’t know that many rich people, but they certainly don’t invest much in property other than their own dwelling. Not residential anyway, which is what I think your comment refers to. I do know quite a few residential property investors. Apart from 2 accountants, the rest are tradesmen or pseudo-trademen (i.e. haven’t actually trained formally in the trade). These blokes are pulling themselves up by their boot straps.
    An idea of the thinking involved in property investment: my builder aquantence described what life was like on a residential building site: there are seldom cranes, so all the lifting is done by him and his assistants. Thus residential construction is a young person’s job. So to set himself up for when he is no longer able to build lift stuff, he has built up a portfolio of residential property that he can maintain without much outside assistance. Over the years he has had to avoid any urge to do any development work (constructing and selling houses on his own account) because once you are tainted by development, then all your gains (and all of your costs!) are taxable, even on your investment properties: the law does not recognise “investment” as a separate activity from “development” or “speculation” in any one taxpayer or even associated persons. So you cannot develop properties with one company and invest in property with your trust or other company: they are “tainted” through association with your development activity.
    Maybe someone has done some empirical study that will prove me wrong, but in my years of experience, few of NZ’s wealthy invest in property. (Unless “wealthy” simply means “folk whose salary is higher than mine”?)

    Comment by Clunking Fist — March 30, 2012 @ 1:59 pm

  23. @rsalmond: It’s interesting to read the two pages following the bit from the Tax Working Group that you cite. After the statement quoted, they explicitly say we should not judge the regressivity or progressivity of the GST against current income; instead we need a lifecycle approach that’s best approximated by weighing GST paid against actual current expenditures where, it turns out, GST incidence is pretty flat across income cohorts. I know that you’ll argue against this in your book, but it is a little cheeky to cite TWG against me on this point.

    Comment by Eric Crampton (@EricCrampton) — March 30, 2012 @ 2:02 pm

  24. “20.And is there any point in living in a zero-tax society, if bodyguards and razor-wire contractors eat all the One-Percenters’ “hard-earned gains”? – Comment by deepred — March 30, 2012 @ 10:26 am”

    That’s what we call “trickle-down”.

    Comment by Clunking Fist — March 30, 2012 @ 2:36 pm

  25. The problem with a lifecycle view is that it assumes consistent taxation over the lifecycle.

    If instead we assume a democratic society and occasional demographic bulges (say, to match reality better), we see the lifecycle view as a way to conceal intergenerational transfers. When the bulge is just starting to vote housebuying, childbirthing and university are critical priorities for the state and are subsidised. blah blah then 40 years later it’s all about taxing everything to provide for the retired folk. Oddly, those are the same people who benefited from the young adult subsidies earlier. But if you take the settings at any one point and assume them consistent over a lifetime they look perfectly fair and reasonable.

    Comment by MozInOz — March 30, 2012 @ 8:48 pm

  26. Bernard Hickey brings a tanker of petrol and a flamethrower to the tax debate http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10795790

    Comment by TerryB — April 1, 2012 @ 12:39 pm

  27. ” Political activism has drawn the University of California into an academic death spiral. Too many professors believe their job is to “advance social justice” rather than teach the subject they were hired to teach. Groupthink has replaced lively debate. Institutions that were designed to stir intellectual curiosity aren’t challenging young minds. They’re churning out “ignorance.”

    So argues a new report, “A Crisis of Competence: The Corrupting Effect of Political Activism in the University of California,” from the conservative California Association of Scholars.

    As for University of California administrators, “A Crisis of Competence” concludes, “far from performing their role as the university’s quality control mechanism, (they) now routinely function as the enablers, protectors, and even apologists for the politicized university and its degraded scholarly and educational standards.” ”

    http://townhall.com/columnists/debrajsaunders/2012/04/01/ucs_leftist_echo_chamber_drowns_out_diverse_voices/page/full/

    Comment by Redbaiter — April 2, 2012 @ 6:00 am

  28. What’s that you say? Radicalsim? At Universities? In California? The devil you say.

    Comment by Pascal's bookie — April 2, 2012 @ 7:44 am

  29. My God … Redbaiter’s cracked it! His linking to a bunch of Californian RWNJ’s bemoaning the fact that their colleagues have different political beliefs to them is a definitive rebuttal of a University of Michigan academic’s empirical study of the effect of tax policy in New Zealand.

    The links are there, people! They are! Just open your eyes … and remember to put on your tinfoil hats, or else they’ll be able to read your thoughts once you see the truth and come for you in their black helicopters to take you to the underground camps on Skull Island where the lizard communists will probe you.

    Comment by Andrew Geddis — April 2, 2012 @ 9:10 am

  30. The rhetoric promoting a non-existent or minuscule public service has over the last 30 years been shown to be wrong headed at best and strategically insane at worst.

    Time to re-design the public service to employ 100% of graduates, and 60% of unemployed. Public service must be re-defined as providing services to the public, with a healthy dose of ongoing career and skills development for all employees. Four effects would very rapidly become self evident:
    1) the money go round would go faster to the benefit of most businesses in New Zealand: increased incomes = increased spending.
    2) the overall skill level and employability of the presently unemployed, and unemployed will go up (increasing quickly over time)
    3) employers outside of the public service will be forced to raise wages to attract the higher skilled public servants to jump ship (funded in part via higher earnings due to higher spending.)
    4) the Government will be startled to discover that it is more viable to had zero unemployment and a substantial public service due to the following
    a) a “public servant” paid a moderate wage to be moderately productive in terms of service outputs; and moderately productive in terms of upskilling, work experience and social participation (including paying taxes, retail spending and constructive activity) is much more an economic benefit than a 10% unemployed, 40% underemployed workforce.
    b) a large public sector workforce generating taxes and likewise not draining the public purse in maintaining the ambulance at the bottom of the social/policing/health cliff costs less than maintaining an extremely efficient Public service supporting an underemployed population engaged in social dysfunctional activities such as drug use and criminal behaviour out of boredom or for survival or as an aneasthetic.
    c) business will prosper because the meritorious career progression and ongoing workplace tertiary level training in the public service would enable local headhunting. Highly skilled postgraduates would have local Public service jobs as career stepping stones, no need to go of shore.
    d) Public-Private initiatives would be able to develop to explore frontier technologies and export opportunities without the business risk associated with workforce costs, or blue skies research.
    e) Illiteracy would be eventually abolished in NZ, eliminating the adverse social effects of having 25% of students who annually leave school having failed to active a basic minimum standard education (under current Government policy).
    f) a living wage and more importantly life stage/career progression would replace the last 3 decades in which the economy has suffered due to half the workforce having life and career stalled by Government policy and indifference.
    g) the government would obtain a more accurate impression of the NZ economy and population dynamics than is presently possibly under the present model in which a highly efficient public service is hard strapped to provide a basic delivery of social services and even more highly challenged to provide quality advice to politicians.

    One way in which the government could constructively employ, for example, some of the currently underemployed Post-Graduate community (with high skills with no where to go but offshore) is to employ those highly skilled individuals en-masse as ambassadors to the world: send them all on paid OE’s, fund them to gain experience in their respective fields off shore as exemplars of what NZ has to offer. Bonding them to work at trade shows and as facilitators between NZ based institutions and businesses and potential offshore partners. If only 20% bring business and R&D investment back to NZ the nation would be ahead of where it is now.

    Comment by Court Jester — April 24, 2012 @ 10:13 pm


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