The Tax Working Group and the Current New Zealand Tax System

The Tax working group came back with their report last month. And the national media went crazy. Everyone was speculating about what impact a capital gain tax would have on ordinary people. It all reads doom and gloom for some, while others are championing the ideas.

The terms of reference of the tax working group were to determine if our tax system was efficient, fair and simple and if it wasn’t, how do we change it so that it becomes more efficient, fair, and simple.

I would argue that we already ahve one of the simplest tax systems in the world. Half of us don’t even need to file for taxes each year. Compare that to the USA, whos tax code is a 3000 page long document.

GST is universal with no exceptions. There have been many calls for GST to be except on basics like bread, fruit, and vegetables. Or even a sugar tax. But I would argue that once you start introducing exemptions you open a whole new can of worms. For instance, what is the definition of bread? We would need to pay experts to classify what is bread exactly and what produces would come under a sugar tax. Would honey need to be taxed for sugar?

I don’t want to talk much about the tax working group document. Currently, it is all just a prosal for the government to review. Let’s look into what is happening right now by examinign some data from the OECD.

Lowest tax on Labour in the world

It has been pointed out that the tax working group sought to balance the tax take away from labour and more onto capital. To make it fairer. That is an admirable goal. And one I fully support.

The interesting thing is that when you look at the OECD data, New Zealand already has one of the lowest tax rates on personal income for a single person. In fact, we have the 5th lowest tax rate on personal income.

New Zealand had an effective tax rate of 18.1% in 2016. Compare that with the OECD average of 25.5, and Belgium with the highest effective tax rate of 40.5.

The net personal average tax rate (NPATR) is defined as the sum of personal income tax and employee social security contributions minus cash benefits as a percentage of gross wage earnings. The highest NPATR for single workers with no children earning the average wage were in Belgium (40.5%), Germany (39.9%) and Denmark (35.8%) and the lowest were in Chile (7%), Mexico (11.2%) and Korea (14.5%).

Redistribitution of Tax

The tax working group wants to raise the tax on capital income and lower taxes on personal income. But according to the OECD research, we already have of the lowers taxes on labour and wages.

I’m not convinced that capital gains tax is a good thing or bad thing yet. One argument for a capital gains tax that keeps coming up is that nearly every other country has some form of capital gains tax.

How is that a good argument? If every other country in the world had nuclear power plants would New Zealand need to get one? Just becuae everuone else is doing it doesn’t mean it’s a good thing.

Besides, every other country in the OCED does something that New Zealand doesn’t. That is, tax income for social security- aka your retirement benefits. New Zealand is the only country in the entire OCED that doesn’t do this. 0% tax for social security. Absolutely nothing.

Why was this not included in the tax working group’s report?

Income tax plus employee and employer social security contributions as a percentage of labour costs for OCED contrys in 2017

There is ACC which, in a way, is like a social security tax. This is paided by employees and employers at a rate of 1.21% of gross income. But it’s not really a social security tax like the rest of the OCED.

Captial Gains tax

One of the ideas suggested by the tax working group is that the capital gain tax needs to be introduced so that the ultra-wealthy pay their share of tax. The Mark Zuckerbergs’ of New Zealand need to pay their share of tax.

The thing is New Zealand doesn’t have many ultra-wealthy individuals. There are only two Kiwi billionaires, and they don’t live in New Zealand. And, there aren’t many millionair running million dollar tech companies in New Zealand either.

The vast majority of people in New Zealand earn income from wages or are self-employed. So, how much do you think an individual wage earner would need to earn to be in the top 1%? 1 million dollars? 2 million dollars per year?

For an individual to be in the top 1% of income earners they would need to earn over $200,000. 1.1% of New Zealanders earn over $200,000 per year in 2016. The top 2% of income earners in New Zealand earn $150,000 or more.

Other strange NZ tax rules

There are some other strange NZ tax rules that I don’t fully understand. I am no tax expert, so there might be a reason for them to exists. And if so, please explain them to me in the comments, as I would love to know why they exist.

Members of a family are taxed separately

Many country will tax a couple as one unit for all tax matters. This is because staying at home looking after a family is considered work in many contries. Unpaid work, but work nevertheless.

In New Zealand, you are consider an individual for income tax, but when applying for working for families you are condisered a couple. Isn’t that strage?

A couple each earning $40,000 would be taxed less than a couple where one spouse earns $80,000 and supports the other spouse so that they can looki after the family at home.

No local Income Taxes

Many countries have local income tax to support local initiatives and projects. New Zealand doesn’t.

I believe this is one of the reasons for the high price of housing. It’s a supply issue. Local councils have no incentive to open up more land for new housing development, and the tax system is partial to blame. I will explain why.

When a new development takes of the government receives an increase in taxes from labour, be it income tax on builders, engineers, architects, real estate agents, lawyers, etc. They also receive an increase in taxes from GST on all the goods and services needed to build the houses.

Local councils do not receive any benefits from labour or GST. Instead, they have to pay for all the infrastructure and services for the development. And once complete, they need to pay for maintenance. Sure, there are increases in local property rates, but these do not cover the cost of development. If they did, then there would be no councils with record debts levels.

What do you think of the tax working group recomendations? Let me know in the comments.


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5 thoughts on “The Tax Working Group and the Current New Zealand Tax System”

  1. Hi Rohan,

    Which table did you look at to get that top 1.1% and 2% income earners? Their interface is a bit confusing.

    Reply
    • It’s the table in the link, column B. There where 27,920 people earning salaries over $200k for the year 2016, out of 2,510,860 people- so just over 1.1%. and 60,570 earning more than $150k- which is really more like 2.4% of all salary earners.

      Reply
  2. That is very helpful information. Our household was in the top 2% for a few years and it felt like we were taxed enough to support a small African country. It was also during the GFC which hammered our fledgling investments.
    We seem to be so much better off now that we are out of that tax bracket and on only one income plus rental income, which mostly just breaks even.
    I like simple!

    Reply
  3. Tax isn’t fair for married couples. My wife is a stay-at-home mum but we get taxed on my single income so I’ve got her to be the “investor” to help balance the ledger. One day when we get 10k+ of investment income at least it will be at a lower tax rate.

    Reply

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