Myth: Alignment between corporate and personal tax rates is required for a coherent tax system
Reality: only two countries in the world (Mexico and Slovenia) have an aligned company and top marginal tax rate.
Rate alignment is the major recommendation of the Tax Working Group’s report. They believe that this is vital in the battle against tax minimisation, and non-alignment is one of the reasons why the system is ‘broken’.. As an aside, an interesting fact is that a person has to be earning $130k/ann or more at the flat 30% company rate to be better off than paying tax using the graduated personal tax regime.
If there is one structure that needs a comprehensive review it is the Trust vehicle. Unlike company profits for individuals, which are taxed at marginal rates, the Trust rate of 33% is the final rate. Many people have companies owned by Trusts, which will allow for tax minimisation.
Back to aligning the top marginal and the company rate: this is highly unusual internationally. In the OECD, only Mexico and the Slovak Republic have top marginal and company rate alignment In fact, some countries have gaps far wider than New Zealand. Australia, for example, if you include the 1.5% Medicare levy, has a top tax rate of 46.5%, making a gap between the two rates of 16.5%. If Australia does decide to further reduce their corporate rate, this gap will widen further. I suspect that rate alignment between the top marginal and the company rate isn’t essential to fix a “broken” system.
|
1 |
Ireland |
28.5 |
|
2 |
Netherlands |
26.5 |
|
3 |
Austria |
25 |
|
4 |
Poland |
21 |
|
5 |
Belgium |
16.01 |
|
6 |
Hungary |
16 |
|
7 |
Italy |
15.5 |
|
8 |
Portugal |
15.5 |
|
9 |
Australia |
15 |
|
10 |
Greece |
15 |
|
11 |
Turkey |
15 |
|
12 |
Germany |
14.82 |
|
13 |
United Kingdom |
12 |
|
14 |
Korea |
10.8 |
|
15 |
Luxembourg |
9.41 |
|
16 |
New Zealand |
8 |
|
17 |
Iceland |
7.75 |
|
18 |
France |
5.57 |
|
19 |
Finland |
5.5 |
|
20 |
Denmark |
1.48 |
|
21 |
Japan |
0.46 |
|
22 |
Mexico |
0 |
|
23 |
Slovak Republic |
0 |
|
24 |
Sweden |
-1.3 |
|
25 |
Canada |
-2.32 |
|
26 |
Norway |
-2.7 |
|
27 |
Spain |
-2.87 |
|
28 |
United States |
-4.1 |
|
29 |
Czech Republic |
-5 |
|
30 |
Switzerland |
-7.97 |
Well done, about time someone pointed out the blindingly obvious. We have had nothing but nonsense about a broken tax system from the vested interests of TWG, the same system that Cullen managed to produce fantastic surpluses out of for years on end. Our system is brilliant and simple compared with any other country you care to mention. We are in the middle of a severe global recession and the tax take has been hammered and thankfully Cullen paid down debt for a rainy day.
Your logic of using a trust at 33% to minimize company tax of 30% is a bit flawed though.
Stuart –
This is a really important point, and I reckon you should be doing multiple oral questions on this in the lead up to the Budget. If you get English to admit that the Nats are running away from the experience of every advanced country there is, it would hurt the credibility of the project when they try to spin it in May.
Before you do that, however, you’ll want to build in the effects of income and corporate taxes at the state / provincial level, because looking only at the national level gives you some distorted results. In Canada, for example, people are actually taxed more substantially heavily than corporations, but your (federal only) data in the table shows it the other way around. Happy to help with this if you would like.
Keep up the great work with this series!
Thaks both Rob and David. Great feedback – and I will continue with this series. Much appreciated. S
The interface of the tax sysytem and welfare displays to me where fiddling from Cullan of late and past financial ministers have made it that the tax system views individuals and welfare the family unit. The 2 are not the same, that allows for major inconsistencies that previous lab ministers failed to respond to. Why is it that 2 familes both earn $95k but one has a sole earner the other dual earners on $45k & $55k yet both get the same WFF yet one family has an additional $7+k disposable income. PAYE earners are screwed by the tax system we all know that yet Lab had no answers, remember PAYE earners are the basis of yuor voters. Or is it just that a family structure on 1 earner is not desirable or that NZ is a lower paid economy than politicians would like to admit, as that would display how they have failed NZers?
Myth: Alignment between corporate and personal tax rates is required for a coherent tax system.
Probably true but I think it is required for a coherant economic system. Currently the differential means Kiwis get a lower net return on NZ assets than overseas owners because for the overseas owners the company tax rate is generally their final tax rate, while for Kiwis the final tax rate is generally 8% higher.
That means overseas companies can afford to pay more for NZ assets than Kiwis leading to larger BoP deficits over time and a reduction in economic sovereignty.
And for the trolls look at the box up and to the right headed “About”
In the spirit of “About” above…
Trevor: “Probably true but I think it is required for a coherant economic system.”
Are you suggesting that all those other economic systems which Stuart lists are not coherent, for the reasons you cite? Australia, the US, Canada, all of Europe, etc. If so, it makes a “coherent economic system” sound a bit like a technicolor unicorn – lovely to think about, but you’re never gonna meet one.
Other than Aussie none have imputation system and I don’t think any has our level of overseas ownership of our assets.
Trevor – this is hugely complicated, but you are not entirely correct.
1. only 8% of kiwis pay the top marginal rate and there are many kiwi shareholders who receive dividends and pay less than the company rate of 30% (for example, those on pensions for whom dividends are a major source of income – one can earn up to $48k and only pay a top rate of 21%)
2. overseas owners: this is where it gets complicated… The ability to use NZ’s imputation system will depend if the country of origin has a double tax agreement with NZ and what that agreement says. It is entirely conceivable that when profits made from NZ companies are repatriated to the country of ownership, they will then be taxed at the full rate in that country. For example, if an Australian owns shares in a New Zealand company they can’t claim imputation credits. They pay the 30c tax on the dividend in New Zealand AND then are required to declare the net dividend to the ATO and pay tax on that at the appropriate marginal rate. So their net return is 100%-30%-normal income tax. For NZers it is 100%-normal income tax. I will take a look at other jurisdictions and report back.
Trevor
I’ve been thinking more about this stuff since your intriguing comment, and I’m not sure what you’re saying here completely adds up:
In the US where I live, taxpayers pay income tax on dividends, unlike NZ. Richer folk pay 15%, poor folk pay 5%. Which means that a US citizen who earns over about $35k gets dividends from a NZ firm, she would only get 59.5% of the gross profit after all taxes, consisting of (gross profit – 30% NZ company tax) x (1-15% dividend tax). That is, of course, less than a NZ owner of the same asset would keep. In Australia I think dividends might even be treated as ordinary income, which is even worse for the investor. I think our imputation credit system is, internationally, pretty rare and pretty generous. So it isn’t clear to me that overseas owners get such a good deal, compared to NZ owners, out of buying NZ assets.
Of course, you might say well where does our high level of overseas ownership come from? Another factor we need to consider to explain that is our high level of assets relative to our population and capital.
And last, if you are in favor of aligning the rates, what level would you want? Our corporate rate is already towards the top end of the OECD, and our top personal rate is already one of the lowest in the same group. Any move to align has to exacerbate at least one of those issues.
- Rob
Stuart point one I agree at the margin but think that you will find that the small investors while large in number are pretty small in proportion of total equity owned.
Point 2 and Rob – the assumption that both of you are making is the mega wealthy individuals, investment companies and superannuation trusts are in fact taxpayers in their countries of origin when my understanding is that most are either domiciled in tax havens or have affairs arranged such that they avoid the nominal tax rates of their countries of residence. There are certainly a few people of relatively high profile who limit their visits home to NZ to avoid being caught in our tax net.
And last point Rob – I would do the company trust and personal top rate changes on a fiscally neutral basis – don’t have the model but presume it would be about 36c.
Trevor – I will do some research around the ownership of foreign-owned NZ companies, and then their ability to minimise their tax bills in the home country as this is an interesting area of debate. I suppose my question would be ‘if it is so advantagous, then why don’t companies of any size owned by NZers also domicile off-shore?’
re increasing company tax rates: this would buck the global trend and think that the higher the rate (regardless of relativity), the greater the size of the avoidance industry. It is complicated though. As mentioned, I will report on the research undertaken in good time. To all who are reading – increasing company tax rates IS NOT a Labour party policy.!!! Just mates having a debate.
Thanks Stuart. As you do the research look at whether there are advantages in alignment to minimise ability to avoid. Good debate.
Trevor, I have been looking at buying US property last year (yeilds are much better). One of the issues the accountant raised was that a paper profit (capital growth or currency movement) could incur a very large tax bill in NZ while not yet turning a cash profit in the US business. He did have a way around it, but the compliance costs at both ends deterred me from proceeding.
Stuart: the same accountant also suggested that a profit over 1 mill/yr was needed before even thinking about tax havens, and I do know a New Zealand resident who owns NZ businesses through a tax haven.
Trevor: Do follow up on the mutual funds, as these leaches cause nothing but harm to clients and economies.
Everyone goes on about aligning the tax rates as if there’s only one way to do it – lowering the top personal tax rate to that of the business tax rate. This is untrue and it doesn’t address the problem of tax minimisation which is what the TWG is proposing this as a solution for. It will have some effect upon it but it doesn’t address it.
The best way, IMO, of aligning the tax rates (yes, I actually think they should be aligned) is by putting businesses and trusts on the progressive tax scale. Basically, put them on PAYE and get rid of the old and dated Provisional Tax system. The businesses and trusts would still have operating costs being tax deductible. In addition to that dividends would also be tax deductible meaning that businesses and trusts, if they paid out their full profit, would pay 0 tax. The dividends would be taxed at the receivers NZ PAYE rate (this would mean that foreign owners would need a NZ IRD number).
PS, no, this doesn’t address the issue of tax minimisation either.
Cut both