Myth no 3. High income earners pay an unfair share of tax
The facts: One of the major arguments of those advocating for a drop in the top marginal tax rate(s) in New Zealand is that the top 3% of tax payers pay roughly a quarter of the tax, and therefore carry an unfair share of the tax burden. Well, yes, the top 3% do pay roughly a quarter of all income tax, HOWEVER, it is also true to say that the top 3% of taxpayers get just below a fifth of all income.
Higher income earners pay a larger proportion of tax because they earn a higher proportion of the income. That it is higher than their direct share is a characteristic of our progressive tax system. Work undertaken by Keith Ng shows that in fact New Zealand’s tax system is less progressive than Australia’s (i.e. higher income earners in Australia pay more tax both proportionately and in absolute terms).
The following table provides the breakdown of what proportion of total income earned by taxpayers against what proportion of total tax they pay (sourced from Keith Ng).
| New Zealand | Australia | |
| Bottom 50% of taxpayers | ||
| Income | 17% | 25% |
| Tax | 12% | 12% |
| Top 3% of taxpayers | ||
| Income | 16% | 17% |
| Tax | 23% | 27% |
| Next 7% of taxpayers | ||
| Income | 16% | 14% |
| Tax | 19% | 17% |
| Next 40% of taxpayers | ||
| Income | 49% | 43% |
| Tax | 44% | 42% |
At the bottom end, New Zealand’s tax system is also far less progressive, as the first $6,000 of income in Australia is tax free (can’t remember seeing this recommendation for NZ in the Tax Working Group’s report…). On top of this, Australia’s bottom 50% have a bigger share of the total income, that is, income is more equitably distributed in Australia before tax is taken into account. On this basis, the incentives are actually stronger for low income earners to move to Australia – and its a good argument for increasing the minimum wage in NZ by more than 25c/hr.!
Mel – not relevant. Suggest you find a different post from Trevor and ask the question there. Stuart
Stuart these figures are a little ambiguous, how about you relate the stats to the income bracket you’re referring too. The top 3% of income earners does not include all those that are hit with the top rate of tax. My understanding from the 2008/2009 IRD figures was that the $70k to approx $90k proportionately pay the most tax – that is, they are punching above their weight especially since the very top income earners often structure their affairs so as to pay less. I just don’t know why you keep inferring $70-100k is ‘rich’ – everyone from various Business Round Table members to Gareth Morgan have said that inflation has caused ordinary income earners to drift into the higher tax brackets rather than their having to pay that rate as a true proportion of their wealth. However, at least Phil Goff has finally conceded that paying the top rate of tax does not mean that you’re rich, that the income tax thresholds need to change so that they better reflect today’s high cost of living.
First of all it is primarily Dr Cullen’s refusal to give tax cuts that has led to this. The sensible Peter Costello year after year delivered tax cuts, which increased the no tax threshold at the bottom end. Dr Cullen refused to do this.
Secondly talking gross tax is somewhat misleading as WFF and the likes means many of low income taxpayers in fact are net recipients of tax dollars. When you take that into account the top 10% of taxpayers are responsible for 76% of net personal taxation.
@ Self-employed: the figures are not ambiguous – they just fail to answer the particular question you are asking. What they do show, however, is that income inequality between Australia and New Zealand is stacked at the low-income end, exacerbated by the fact that there is no tax-free income level in NZ, and exacerbated even further by a detail not included here, that in Australia GST is 10% and does not apply to food.
Having let this state of affairs become entrenched, the fact is, if we took GST off food and allowed a tax-free amount at the bottom end, government revenue would drop considerably, since the bottom end includes a such large proportion of the population.
I have argued before on Chris Trotter’s blog that we do in fact lose a lot of our working class to Australia. What we need is a “get union membership up to Australian levels” movement – that might help.
Sorry, am I missing something? Isn’t a fifth less than a third? So if the top tax-payers are earning a fifth of the $, but paying a 1/3rd of the tax then aren’t they paying more than their fair share? Looking at your figures, seems to me that the 40% that earn 49% of the income but only pay 44% of the tax could be paying more. Bludgers!
Sorry..make that a ‘Isn’t a fifth less than a quarter”? Stuart, did you go to maths class at school?
Olwyn that’s the whole point – no one ever answers this question because no one, especially not anyone in the Labour party, wants to accept that they have allowed an “ordinary hardworking” group of New Zealanders take hit after hit to their personal income. As for Unions – I agree, but primarily only where the lower income earners are concerned as they need someone to take up the battles on their behalf. Australia – it’s not just the lower incomes. We have a huge problem retaining people that are professionally trained because they owe a heap on student loans (e.g. doctors, dentists etc where they can be anyway from about $60k to at least $100k – perhaps even more) so they go overseas to escape our high taxes & try & earn more next income elsewhere so that they can pay the debt off. Labour can skirt around this issue all they like with various distractingly fancy figures, but bottom line this is something that has happened in droves on their watch. I wonder if this was part of the reason Stuart Nash took off after uni to Japan to work for a year…..!
sorry stuart was off topic but trev’s now fixed it. M
@ self employed. Never have i referred to those earning $70-100k as ‘rich’. In fact, I think I commented in one post that I actually don’t know how to define ‘rich’ anymore because it is so relative at the margins. Sure, a $500k salary is ‘rich’, however, an $80k salary in Woodville with no mortgage and no kids allows for a pretty good lifestyle, however, the same salary with an Akld mortgage and 3 kids does not.! I certainly do not begrudge those who have worked hard and done well (however, you certainly won’t find be applauding the likes of Bryers, Hotchin, Watson, Petricevic etc), however, as I have previously said, I have no time for those who do earn a decent salary and who then, for example, structure their affairs to allow them to claim working for families. That’s simply not fair. What I am interested in is maximising social equity for all kiwis.
@David – there is a survey published by the Social Dev Min that shows that WFF is responsibile for cutting the number of children in hardship from 26% in 2004 to 19% in 2008. While 19% is still too high, I have no problem at all paying the top tax rate in the knowledge that my taxes are helping those families for whom raising children is a financial struggle.
@ Dobbie. Here’s an interesting stat: the average wage is around $48.6k, but 76% of kiwis earn under the average wage. The CEO of telecom, who is on a base salary of around $1.75m, pays a significant amount of tax, but still takes home more money in a year than a lot of kiwi families earn in a life time. My point is that some very high salary earners can distort the figures re income versus tax paid.
@ Self Employed: I did not mean to suggest that your question was a non-starter, only that it was not the question being addressed in this instance. As you yourself pointed out, Phil Goff has said that the top rate is in need of adjustment. People are not only escaping our high taxes, they are also escaping our low wages and high cost of living.
@ David Farrar: WFF etc effectively subsidise low wages – if people were better paid they would not need such subsidies. In fact they might be better served by a tax-free threshold, perhaps adjusted according to whether they are supporting a family or not, or by Gareth Morgan’s radical plan, since improved financial circumstances in a given year would then not land them in debt.
Stuart Nash says: “I think I commented in one post that I actually don’t know how to define ‘rich’ anymore”
And I think we also don’t know how to define ‘poor’ or ‘poverty’ either.
We need some clear agreement on what are the essentials of life and use these in our definitions. Using measures such as x% of the average wage means nothing in absolute terms. The knock on effect, of course, is that then claims like ‘cutting the number of children in hardship from 26% in 2004 to 19% in 2008′ become meaningless.
I stand by what I’ve commented before – most people have no issue with giving a hand to those who are in genuine need. But if ‘need’ is defined in a way that provides for things they themselves can’t afford or consider extravagant then that support withers away. Remember that advert for WWF where it showed the money being used to provide the family with cell phones so they could text to one another across the lounge?! Not the way to engage the support of those who are actually paying for this benefit!
The problem is that those with associated agendas often can’t resist the temptation to meld the worthy and well supported aim of aleviating poverty to the more debateable and less supported one of promoting social engineering based upon the redistribution of wealth.
“because they earn a higher proportion of the income.”
This is perhaps where the interpretation of inequity lies. If you are proportionally paying more tax because you earn more, then you should proportionally have greater access to state services that you are funding. But we cannot have this can we, it is simply unfair that person that has paid $10k in tax in year should get bumped to the back of the health care line because we have person that paid $50k tax in the year. I think this is Labours biggest problem when they go head hunting high income earners or “rich” people.
The big problem here is that those folk who decry the inevitable result of progressive taxation – namely that the richest X% always pay more than X% of the taxes – never say what they mean by “unfair.”
If unfair means that the proportions of people and dollars paid are not the same, then the person is actually against progressive taxation in general. In fact that position calls for regressive taxation. Alternatively they might think that the proportion of income and the proportion of taxes should be the same. That would imply a flat tax, I’m pretty sure. If poeple want to argue for flat taxes or regressive taxes, OK. But I would rather they were brave enough to be up front about that, rather than sitting around railing against vague unfairnesses.
Another cut at this would be to see whether the richest X% lose heaps more of their economic welfare than the average. If they do, that might be unfair. That would a good application of textbook microeconomics to tax questions. But you don’t hear a lot about this alternative fro those on the right. Possibly that is because that even the $2 million+ that Paul Reynolds pays in tax doesn’t really affect his ability to live a very happy life where he gets to do pretty much whatever he wants. So the cost to his overall utility function is negligible.
Instead, people seem to fall back on the old “I don’t know what fair would be, but it sure ain’t this” line. It is a pretty unsatisfying argument. Then they pick the most egregious reading / manipulation of the stats they can find to try and back it up. David Farrar’s comment here is a good example. (Note that David is happy to count income taxes and welfare spending in his concept of “net tax”, but is not apparently wanting to count the indirect benefits of corporate welfare and tax breaks (including imputation credits) – which go mainly to the wealthy, nor the impact of consumption taxes – which fall disproportionately on the poor. Go figure.)
So here is my question to those who think the wealthy are taxed too much: What, specifically, do you think is the best analytical criterion for judging “fairness” in taxation rates?
Lest I be accused of failing by my own critique, I think it would be interesting to look at a system where we ask people to give up the same proportion of their economic welfare in gross taxation across all income brackets above some tax-free minimum, and then to adopt welfare policies on the basis of need and net benefit to the community. That way everyone loses the same amount of what matters to them most – utility, and we get public policy based of actual community outcomes and not on the politics of either envy or reverse-envy.
Following Rob, if fair means that there is a tax free level of income, then one way of setting it would be to have it roughly the same as a welfare benefit for a single person; a bonus would be that everyone would then have an interest in that base level of support being adequate.
The rationale would be that the government, at a minimum, shouldn’t tax people before they at least feed, clothe and house themselves, as no reasonable person would willingly give money away before they had done that. The test of fairness would then include the question, “at what level of income is it completely unreasonable to take someone’s money?”
Looking at tax through this view, not as an absolute amount or a proportional amount, but as a proportion of income above subsistence, it is actually very high for those on $24,000 and below, if GST on necessities like food is accounted for this is exacerbated.
Possibly some of our problems moving people out of poverty are related to this, the same arguments some make about the top rates of tax impeding them also apply at the bottom end of the scale. Although they can get services worth much more than what they put in, those services often have bureaucracy attached and the situation is catch up when something has gone wrong, it is not the same as having cash in hand. The big opportunity may even come from a contact you meet at the pub.
@ Rob: fairness in my view relates purely to the proportion of tax that one is paying compared to other taxpayer groups. It is unfair that the Labour government allowed “ordinary hardworking New Zealanders” to drift into the top tax bracket due to inflation. People in the $70-100k are paying over 30% tax on 2/3 of their income. This equates roughly to 40% of the total revenue collection from personal income tax, by the government. This is unfair. Fairness also relates to those paying so much for services that they never get to use – such as the health system whereby, because they are not deemed to be poor enough to qualify for the government subsidies, have to pay $70 or so for their 15 mins of fame at the GP and only get about $15 off from the After Hours visit if they are there under ACC. Fairness also relates to those who have worked hard and made good financial decisions/adjusted their expenses and long term plans etc so that they better suit today’s economic environment, having to pay MORE for those who make poor decisions such as having children that they can’t afford or buying a house on a 2 person income which leaves no room for a what if, such as one person losing their job. This is unfair too. It is unfair that I have to pay higher taxes because someone on the benefit, who’s reason for going on it maybe justified, goes and has a second, third, fourth etc child while on that benefit. It is unfair that I have to pay higher taxes to pay for Working for Families – something that I will never personally have the privilege of receiving and something that actually encourages people to make poor choices such as “oh, we can afford to have a child or another child as under WFF we will get the Family Assistance and/or accommodation supplement. This definitely happens and it is not fair. And lastly, it is unfair that I am left carrying the can for those rich enough to pay hundreds of dollars to an accountant each month so that they can avoid paying the top rate of tax via Trusts etc or actually by lowering their personal income, and potentially pay less Child Support and claim WFF. This is not fair. As for imputation credits, that it is a “rich” thing, no I disagree. They are to prevent double tax as it means that shareholders don’t have to pay tax on income that the company has already paid tax on. The real issue is whether the Company tax rate should have been reduced by Labour to 30c. I don’t think so as while countries overseas have a lower company tax rate, they don’t have imputation credits. By lowering our company tax rate NZ tax residents are overall, paying less tax that they would overseas = like what Trevor Mallard said in a previous post, making our companies very susceptible to foreign ownership. That tax system has been changed so that it is fair and equitable for everyone. Period.