INSIGHTS
TAX CHANGES ARE BACK ON THE TABLE
Mark Lister, 28 April 2023
The eagerly awaited Inland Revenue tax research report was released on Wednesday.
Revenue Minister David Parker suggests this provides evidence the super-wealthy are paying much lower tax rates than many ordinary New Zealanders.
According to his press release, the average person in the former group pays an effective tax rate of just 8.9 per cent on their economic income.
Parker notes that this is less than half of the 22 per cent income tax rate that someone on an $80,000 salary would pay.
That's true, sort of, but it’s more complicated than that.
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It also includes any other returns they've received (even unrealised ones), such as the increase in value from any businesses, farms or real estate that they own.
To work that out, there's been a lot of guesswork involved. It's extremely difficult to know what a private company is worth, until you sell it.
The salary earner who pays 22 per cent of income tax on that $80,000 pay packet might not be paying quite that much either.
He or she might own a home or property which has increased in value (meaning their economic income is higher than $80,000), while they might get some of that tax back by way of Working for Families.
Those things have been conveniently ignored to ensure the headline claims look better.
That's not to say this person isn't paying too much income tax on their $80,000 salary, because they almost certainly are.
If the Government cared about workers as much as it claims, it would take a look at our income tax brackets.
Apart from the addition of a new, higher tax rate on those with very high incomes, these haven't been updated since 2010.
With inflation as high as it's been in recent years, this has significantly boosted tax revenues at the expense of workers.
Despite all that, I'm open-minded about potential changes to our tax system.
I just worry the politicians will get it wrong.
They almost did in 2018, when considering recommendations from the Tax Working Group, which was headed by former Finance Minister Sir Michael Cullen.
The proposals in that report were riddled with holes, exceptions, and inconsistencies.
Small investors were set to be punished at the expense of large fund managers, while (equally bizarrely) international shares were going to be advantaged over investments in local companies.
This time around, we know anything that’s proposed will exclude the family home (at least to a point), as is the case elsewhere.
The rest is guesswork, but they’re definitely trying to set the scene and influence the narrative.
My biggest concern is that any proposed changes would see asset classes like shares and businesses getting hit unfairly hard.
That would be a disaster, given the need to push capital toward those productive, job-creating parts of the economy and get people off the real estate bandwagon.
It'll also be interested to see what policymakers have in mind regarding income taxes.
For any new tax targeting "economic income" to truly be a rebalancing exercise, the tax rates on income must be reduced at the same time.
That would shift the focus toward actual cash profits that reflect genuine growth, and drive investment decisions in the right direction.
Anyway, the real question is what the Government does with this report, if anything, and when.
What makes sense from a purist tax policy perspective won't necessarily work for politicians with an eye on trying to win the election in October.
