About the Author

Avatar photo

Dr Muriel Newman

New Zealand Needs Tax Reform

Print Friendly and PDF
Posted on

taxreform-final“Never let the truth get in the way of a good story.” The quote is attributed to Mark Twain but he could have been talking about New Zealand where misinformation campaigns continue apace. What’s worse is that these days they get reported as news.

In particular, there is a continuing stream of stories in the media, not only about the how the rich are getting richer and the poor, poorer, but also about how more and more children are living in poverty. Yet when the Government finally released some new facts and figures that shed light on the issues and countered the propaganda, it was hardly reported.

Last week Treasury released its 2016 tax estimates, showing just how wrong claims that the so-called rich don’t pay their fair share of tax, really are. The truth is that a small number of higher income earners pay the lion’s share of the county’s tax burden. The report also showed that the proportion of tax that they are paying is increasing.

As the Acting Minister of Finance, Steven Joyce, told Parliament, more than half of all income tax (55 percent) is paid by the top 20 percent of households.

The top 10 percent of households pay 37 percent of all income tax – up from 35 percent in 2008.

At the other end of the scale, families in lower income households are paying less tax – the 20 percent of households with the lowest incomes will pay just 2 percent of income tax this year, down from 3 percent in 2008.

When Government transfers – benefits, superannuation, and Working for Families – are also included in the equation, the ‘net’ tax story becomes even more noteworthy – while the 30 percent of households with the lowest incomes pay $1.7 billion in income tax, they receive a total of $10.6 billion in income support.

Minister Joyce explained that New Zealand is on track to becoming a country where almost half of all households will pay no net tax at all: “Treasury estimates that 42 percent of households will pay no net income tax—that is, they will pay less in tax than they receive in welfare benefits, Working for Families, New Zealand superannuation, or accommodation subsidies. This compares with 39 percent in 2007-08, when this Government took office.”

The Minister also referred to the Ministry of Social Development’s new report on the material well-being of New Zealand households, which found that across a large range of measures, “household incomes have been growing solidly since 2011 in real terms – that is, after inflation – with slightly higher gains for lower-income households. The report also finds there is no evidence of increasing hardship or child poverty; in fact, there is evidence pointing to falling hardship and child poverty rates.”

Since the report covers the year to 30 June 2015, it does not take into account the recent benefit and Working for Families increases, but nor does it cover the more recent pressures created by the current housing shortage.

The report shows that in spite of record low inflation, wages have increased by 25 percent since 2008. The fact that household incomes have increased at a faster rate than wages, is explained in part by an increase in the total hours in paid employment per household. This is largely attributed to the rising participation of women in the workforce.

The Minister explained that higher household incomes are reducing poverty: “The report concludes there is no evidence of any rise from 2008 in income poverty, either before or after deducting housing costs.

“It also says there is no evidence of any increasing depth of relative income poverty over the last two decades, and there is no evidence of any sustained rise or fall in household income inequality before housing costs in the last 10 to 15 years using a 90:10 incomes ratio, or in the last 20 years using a Gini measure, or in the last 25 years using the top 1 percent share of incomes.”

The Minister for Social Development, Anne Tolley, was also questioned in Parliament about the report, explaining that the in-depth information was being collected by the Ministry to enable the Government to better gauge the effect of social policy initiatives on low income families.

With regard to income poverty, the Minister said, “there is no evidence of any rise in recent years. In fact, depending on whether you look at measures before or after housing costs are deducted, recent trends are all either flat or falling. There is also no evidence of a rise in poverty and material hardship trends for children, and it is important to note that this data was collected before the Government’s $790 million child material hardship package came into effect in April this year.”

She also explained that the report refuted the claim that inequality is rising – “In terms of inequality, the report finds that there is also no evidence of any sustained rise or fall in household income equality before housing costs, and there is also no evidence that the income share of the top one percent has risen in recent years.”

In effect, these two reports show that in spite of the National Party’s track record of advocating for lower taxes, under John Key’s Government, New Zealand’s tax system has become much more progressive.

Finance Minister Bill English tried to counter this when he highlighted in Parliament the benefits of the 2010 tax cuts: “The Government’s reduction in taxes on income and savings in 2010 have helped to lift take-home pay. Since the Government was elected, real take-home pay – that is, income after taxes and excluding inflation – has increased by around 2.2 percent per annum. In the 10 years up to 2008, the increase was around 0.5 percent per annum, so take-home pay is increasing at around four times the rate in this 10 years than it did in the previous decade.”

The reality is however, that in this age of increasing globalisation, there needs to be constant downwards pressure on taxes if economies are to remain internationally competitive and living standards are to continue to rise.

In a 2011 paper on our tax system, Treasury reported that New Zealand had the third highest proportion of tax on income, profits and capital gains within the OECD – behind Denmark and Australia. They warned that high personal income taxes distort behaviour by discouraging people not only from working harder, but also from gaining higher qualifications, since they would not gain much benefit from the higher salary that more education would bring. They concluded that such tax distortions could have a negative impact on productivity and economic growth.

They also pointed out how substantial the redistribution that is occurring through tax transfer payments – particularly Working for Families – really is, explaining that the differential in the tax paid by a single income household without children and one with children in New Zealand, is the biggest in the OECD.

This week’s NZCPR Guest Commentator, Darcy Allen, an Economic Research Fellow at the Institute of Public Affairs in Australia, outlines why income taxes are so detrimental:

“The real pain of income tax is not confined to the impact on our bank balances; the danger is in how income tax influences individual decisions. In short, income tax distorts the flexibility and responsiveness of our economy by decreasing our incentive to work, pushing us away from productive labour and towards leisure activities. The incentive to earn income is hampered by constant marginal decisions – ‘What am I going to take home?’ or ‘Is this tax deductible?’ – which are entirely the product of state interference.

“If these distortions exist, then why aren’t governments acting upon them? As with many policy issues, income tax debates are shackled by a lack of counterfactuals. While we can be confident high tax leads to misallocated labour and capital markets, we can never see what income could have been earned or which entrepreneurial endeavours undertaken because we can’t see a world where such taxes didn’t already exist. In part, this is why the economic distortion and efficiency arguments fall on deaf ears.”

In his article, Darcy suggests that tax reform would benefit from the simple rule – ‘don’t tax what you want more of’. It follows that lower taxes should encourage economic growth, by incentivising hard work and entrepreneurship.

That is certainly the case in Switzerland, where low tax has been identified as one of the fundamental drivers of the country’s success. In 1960, Switzerland’s Gross Domestic Product per capita was 23 percent lower than New Zealand’s. Today it is 93 percent above ours. That this country with few natural resources has transformed itself into a world class economy can be attributed to a large extent to tax competition. Each of the country’s 26 cantons (regions) has autonomy in tax matters, reflecting the different policy priorities set by local governments and residents. There is a strong belief that tax competition between cantons plays a positive role in keeping tax rates and public spending in check.

Swiss cantons also demonstrate the adverse relationship between taxes and prosperity: high-tax cantons tend to have lower income per capita than low-tax cantons, where more capital is available for productive uses.

In his article “Tax Competition: The Swiss Case”, Pierre Bessard, the President of the Swiss based Liberal Institute, explains, “Over time tax competition in Switzerland has led to many favorable developments and prevented costly policy mistakes. For taxpayers, decentralization on a small scale means greater choice and pressure on government authorities to spend tax money wisely as ‘voting with the feet’, ie, moving out of a jurisdiction, is an easily enforceable threat. Decentralization and tax competition also mean that tax authorities are easily accessible and generally taxpayer-friendly. Switzerland is probably one of the few countries in the world where rankings on the ‘customer-friendliness’ of tax authorities are regularly published in the press, whereby unfriendly cantons are named and shamed. There is absolutely no doubt that this is Switzerland’s greatest strength.”

While New Zealand’s taxes used to be relatively low by international standards, that is no longer the case. The disincentives created by higher taxes and extremely high transfer payments, particularly Working for Families, are undoubtedly contributing to the country’s declining productivity growth.

In 2011, the New Zealand Institute for Economic Research published a review of Working for Families, recommending that the scheme, which had been introduced by Labour in 2004, be scrapped. They concluded that there were better, more cost-effective ways of providing targeted assistance to low-income families that would not create such a huge disincentive to advancement through work.

They explained that the most damaging problem was the excessively high Effective Marginal Tax Rates, which can rise to 100 percent when someone is trying to get ahead, whereby for every extra $1 they earn, $1 is lost from their Working for Families benefit. As a result, many New Zealanders are now trapped in a system that discourages them from even trying to improve their financial position by working longer hours or looking for a promotion.

To remain internationally competitive New Zealand’s tax rates need to be lower than they are today. Lower taxes would reduce disincentives on productive behaviour, encouraging more work, saving, investment and entrepreneurship. By increasing productivity, lower taxes would enable all New Zealanders to enjoy higher living standards, reducing our reliance on ‘ambition-destroying’ income transfer payments.

During his time in office, Prime Minister John Key has shown himself to be a reformist politician, who has the ability to lead the country through controversial policy changes with a slow and steady hand. This period of stronger economic performance is providing him with a unique opportunity to use his skill to tackle fundamental tax reform and put New Zealand on a path to a future of sustainable growth and prosperity.


Are taxes in New Zealand too high, about right, too low?

Vote x 120

*Poll comments are posted below.


*All NZCPR poll results can be seen in the Archive.

Click to view x 120


We should have a flat income tax of about 10% for ALL New Zealanders, and ALL businesses operating or headquartered here, with no loopholes to slide through. Joyce
Depends on your viewpoint. Jim
We should abolish taxation and the Government should earn its money by commercial activity. K
Increased taxes would provide for better infrastructure throughout the country. David
GST was meant to eliminate personal income tax instead we now have 15% gst and still high taxes.. Vaughan
Especially when so-called charity organisations earning millions pay nothing. Craig
After reading all the comments, I think that we would be better off with a GST system where everyone pays for what they get. Bill
General Taxation I would consider about right. What is one of the problems though is tax equality. Maori companies ( which are a substantial part of the NZ economy now) are operating under a lower company tax ( 18% compared to 30% for the others) and the fact that — I name a prime example here– Ngai Tahu is declaring Shotover River Tourist jet boat operations as a charitable Trust and pay no taxes whatsoever. This is only one example which has been discovered and we can be sure as hell that there are more cases of that sort where that came from!!!No investigation –no action– nothing –from the IRD who is otherwise happy to prosecute every little offence ie a pensioner being charged with an offence when not returning his zero tax return. in time. I also agree with some of the reader’s comments re the shining example Switzerland is giving us in managing their tax system.And we all know too well that the distribution of tax funds is not as good as it could be. Not to mention this enormous financial burden placed on every one of us Citizens caused by the Treaty Industry. and this Army of 3rd generation beneficiaries. One could call this a punitive tax Michael
How about no tax on savings for say first $100k, that would help to encourage people to save. No GST on fruit and vege so people can make better food choices and therefore decrease the strain on the health system (and add a 50% sugar tax to “fizzy”: drinks). Nigel
NZ businesses, particularly multi nationals are just not paying their share. Bruce
All businesses run under Charitable Trusts such as Ngai Tahu need to pay taxes at the full rate, no exceptions. National keeps promising tax cuts but Bill English never delivers them; flat tax would be good. Monica
A good friend of mine in younger days told by his mates don’t work, you are better off on the dole. This did not appeal to him and he is now working in Austrailia with all of his children. Rodney
I believe we should be spending more on health, education, and the environment. That means we should be paying more taxes, to support these desirable ends. Don
We are overtaxed across multiple categories. Tax on a Tax. The population have no say! We urgently need citizens binding referenda on all critical issues as per Switzerland. Unfortunately the Government know most Kiwis are passively compliant. Our property rating levels are also a disgrace! David
Wouldn’t mind so much if the taxes were actually used for the purpose for which they are ostensibly collected, and if those on higher incomes had less opportunity to wriggle out of their tax obligations… Andy
The taxation for trusts needs to change. Also tax on investment properties needs addressing. Kim
If we can ever find politicians with the fortitude, and brains, to reduce wasteful Government spending, then we will have the ability to reduce taxes and improve the life style for every citizen of this lovely country called New Zealand!! Ernest
Too high! John
The tax system does need an overhaul. If the country is to do well there must be incentives for workers & innovators. Brian
I think this is so because too much of our tax money is wasted on Maori, etc. interests 1 Cyril
Instead of asking this old vexed question are taxes to high or too low. The question might be re-phrased. Are our taxes being used wisely, correctly, and without any local political bias? Are our MMP electoral type Governments which are subjected to a minor party domination the right vehicle in determining where those taxes are spent to the best advantage? One might further add that the growth of Super cities such as Auckland, which with its increasing population growth automatically see an increase in its representation in Parliament. Thus the direction of tax spending will flow even more to these centres, when political parties accede to an electoral power base. It will mean either the winning of an election, or being consigned to the political wilderness. Or indeed should we not be looking forward to actually eliminating the collection of Income Tax, which is costly to administer, subject to constant changes and barely understood by professional accountants let alone members of the public. The answer lies, or one answer lies in collecting revenue thru a consumption tax on every purchase and every sale, similar to GST, but with no exclusions either for business or personal demands! Its advantage is that it would be cheap to administer and act as a brake on public spending and borrowing when fuelled by over-excessive lending by the Banks. Just a thought. Brian
This is a major contributor to “brain drain” also which has apparently not been considered. Stuart
Keep reforming Social Welfare and discouraging Solo Mums. Eric
We need more money spend on our public hospitals,schools and other public institutions,homes.more jobs and less dole payments resulting in less crime and a more caring lot of people. Theodorus
We should take a leaf out Switzerland’s or Singapore’s book. Dennis
After reading your article, clearly lower tax rates would stimulate the economy and improve production. Neil
Workers pay TOO much of their labour & ALOT of families could do much with a little more in pay packets. Cindy
The problem we have could be described as democracy; one ‘party’ promising more just to get elected, then inventing more tax scams to pay for the promises that should not have been made in the first place. The only tax should be G.S.T. Then the population would be taxed on the amount it could afford to spend. Wealth redistribution taxes such as E.T.S, should be abolished immediately, as should hand-out gifts, disguised as treaty settlements.. A.G.R.
I would like to see an across the board tax of 25%. This should be taxed as GST, which would catch every offending tax Dodger. The black money market would cease to be a worry. Lloyd
If we look around, the government does not seem to have enough money to maintain and improve infrastructure. However, much funding goes in to Treaty Settlements( are we ever going to see the end of this?) and really high Public Service costs. Tremendous waste of Tax money which would not be tolerated in most businesses or in personal expenditure if the decision makers were paying from their own pockets. Generally, I don’t think taxes need lowering, the net gain individually is really quite tiny. We do need accountability from Government both Local and National. Have we ever had it from them?? Mike
Progressive rates are the problem – the total tax take is OK, disincentives are obvious. Stewart
HongKong used to be a prime example of good tax management where 59% of earners paid no tax at all yet economic growth was significantly higher than anywhere else. Kevin
Except for those on the highest incomes. Even pensioners pay tax after working over 50 years. The average dairy farmers pays what I do as a pensioner. John
Particularly for those retirees getting interest on there savings. Tom
The problem is that the government is the master of propaganda! Take the current economic statistics. Remember that in a functional economy a 3-4% REAL (GDP) growth statistic based on proven fundamentals around production – does the following: – v Employs the young entering the workforce v Reduces homelessness v Reduces Poverty v Enables a country%u2019s services to be expanded with increasing population Take a look at the real state of New Zealand: – o Up to 25% of the young are unemployed in the regions o 41,000 people are homeless and homelessness is increasing o 10% of New Zealanders live in Poverty and poverty is rising at about the rate of ‘Published’ GDP growth. The fact is that strategic government services are shrinking. Eg. State Housing. Growth is being driven by immigration that brings in funding for house construction. Housing, construction and infrastructure spending is fuelling growth and the housing crisis in Auckland. One of your writer economists identified that 400,000 jobs will be needed in the Auckland area in the short term to make the expansion of the city sustainable. Thus the real NZ is looking into the abyss!!! Frederick
Can’t run a country with no money in the coffers and it don’t grow on trees. Donald
I can’t see the point of taking tax with one hand and giving it back with the other. All that does is create work for civil servants. Mark
Drop income Tax to 15 cents in the dollar then people will try not to avoid paying, also put GST up to 20%. Geoff
The over-all tax take in NZ is carefully hidden from view…it is excessive in comparison to other countries. John
Read the facts in the government’s reply. JUST LISTEN TO THE PEOPLE COMPLAINING.No FACTS. Lance
Too many forms of tax!! Pierre
There is a shortage of workers as its “not worth working if i have to pay Secondary tax”. Low tax, get rid of benefits costs of goods will come down. Michael
Wrong question Should be ” How is it it spent?” Robert
But so is central and local body spending hence the reluctance to lower taxes, as higher spending also increases the economic benefits for the central and local government decision makers. John
The money is largely spent in the wrong places too much breeding by the wrong people who cannot afford to support so many children, putting too much financial burden on the normal person with sensible values. Roy
We should do away with all forms of tax except GST. Run ONLY a GST system even if it meant temporarily raising it. Geoff
You also have gst a form of extra tax. Jim
About right for the majority anyway. However the tax on Government Superannuation is much higher than the standard rate for many superannuitants and has been for many years but successive governments have refused to reduce it to the standard rate. Rog
I chose the middle ground, as if everyone (personal and Corporate) payed their fair share, the overall taxes for all but the shirkers would drop and level out eventually. Graeme
Especially when said tax money is squandered on pointless, racist, “maori” initiatives. John
Why not reduce GST on building supplies to reduce the cost of new homes. Chris
Remember tax is citizens money appropriated by the state, then inefficiently spent. We should consider a general flat tax rate with the first $20k income tax exempt. Scrap working for families and provide some assistance for those in the most need. Willy
If all of New Zealand paid tax including the ‘privileged Trusts’ then less tax would need to be taken. GST accounts for a massive take and incompetent Government spending is also a great contributor to the current high taxes. One answer would be to raise the tax thresholds for each tax bracket and as in Australia, have no tax up to $20,000.00 income. Dave
” the Chains of Poverty” will encircle us for generations to come…..!!! ChrisH
If the taxes were lowered or evened out, one would not feel the injustice of paying for just about everything and many people with little in return. For Instance this new tunnel for Auckland will never be of much use to rural NZ. Elizabeth
Low taxes are the key to prosperity Look at Singapore 50 odd years ago they had half the National income per head of Population New Zealand had Now they have 2 and a half times what New Zealand has. too many people have their hands out for so called entitlements that they could well do without. I don’t care how big or small a little perk you get from the benevolent government of the day someone else works for nothing. People do not willing pay the taxes to support your “perk” We have bred generations of people who think the world owes them a living when it fact the world wants it pound of flesh for everything we buy off them. Let the entrepreneurs go for it and set the rules in such a way that it pays them to share it with those that help them make it. That is turn selfishness on its head and when people act in their own self interest they act for the benefit of others. Colin
No only too high but race based as well .eg 17.5% Maori Trust and of course no to mention charitable trust which is a bigger rort for NGA Tahu and Sanitarium to name just 2. Greg
Way too high. Peter
Unfortunately our politicians are not of sufficient ability to understand the needs of smaller businesses in relation to the costs of benefit entitlement therefore the requirement for taxes to fund these benefits will not produce reduced taxes. John
Rates and gst are off the charts, disproportionate and burdensome. Rebecca
The tax system is now very unfair. Contrary to what the socialists say, the tax burden should fall across all New Zealanders. At the present time too many people are trapped by the system or coasting on it. A flat tax would work best. Kate
Yes, NZ is now being disadvantaged because of our high company tax. Income taxes should be reduced to incentivise hard work. What’s the point in striving at the rpesent time and going the extra mile, when the rewards are almost non-existent. Thomas
The Australian economy is picking up now, so if John Key and co don’t watch it, Kiwis will flock back to Aussie and our economy will take a tumble. They need proper reform so NZ leads the world as a great place to live and work. John
A flat tax is the best idea for NZ, but I don’t think Key and co have the guts to promote it. David
Yes to tax reform, otherwise we will end up playing second fiddle to Australia again. Graeme