About the Author

Avatar photo

Dr Muriel Newman

Time for a Flat Tax?

Print Friendly and PDF
Posted on

26 November 05

Time for a Flat Tax?

In 1990, my husband Frank and I co-authored the book How to Grow Rich: secrets to better money management, a guide to financial independence. It became a best seller, both here, in Australia, and interestingly, in Hong Kong.

One of the key steps to achieving personal financial independence is to find ways of boosting household cash flow. That means reducing outgoings and increasing income.

But, while individuals undoubtedly have a big part to play in increasing their incomes through gaining a promotion, taking on part-time work, and so on, wage rates are inextricably linked to a country’s standard of living.

Back in the 1950s and 60s, New Zealand had one of the highest standards of living in the developed world. Today, because of government mismanagement, we rank amongst the lowest in the OECD.

According to Sir Roger Douglas, the driving force behind the economic reforms of the eighties, if New Zealand had succeeded in growing at the average rate of the OECD over the thirty-year period from 1960 to 1990, by 1990 our standard of living would have almost doubled. Imagine how much easier it would be to achieve financial independence, if incomes were more than double their present level!

So why is it that successive governments have failed to manage our economy in a way that maintains high living standards? The answer of course, is politics: governments have a tendency to take their eye off strategies that drive economic growth, in favour of policies that will win them votes at the next election.

Having said that however, sometimes even when politicians try to do the right thing, they find that their efforts are frustrated by the powerful forces of the status quo: in their book The Tyranny of the Status Quo, Milton and Rose Friedman describe it as an “Iron Triangle” made up of the beneficiaries of a particular policy who want it to remain, the bureaucrats who thrive on its very existence, and the politicians who introduced it and have a vested interest in its continuation.

A simple case in point is the promise made by successive governments, to reduce business compliance costs. Yet, in spite of all of the fine rhetoric, bureaucracy and red tape continue to grow unabated, fuelling a serious decline in business confidence and falling productivity growth.In it’s briefing paper to the incoming government (view ) Treasury sets out a plan for raising productivity and growth. Along with reducing compliance costs and improving infrastructure, central to their advice is the urgent need to lower tax rates, in order to boost economic growth and raise living standards.

According to Treasury: “high marginal tax rates on personal and company income are the most damaging to growth” since they discourage investment, hard work and entrepreneurship. They recommend prioritising tax reform: reducing the high marginal personal 33 percent and 39 percent tax rates, reducing the high 33 percent company tax rate, and reducing the high effective marginal tax rates (which Labour has made worse through its Working for Families package).

Tax reform is not unknown to New Zealand. In the 1980s the top rate of income tax was halved from 66 cents to 33 cents and within two years income tax receipts were higher. Reducing our company tax from 45 percent to 33 percent, created a distinct competitive advantage, ranking us well below the OECD average at the time, of 40 percent. However, other countries have now eclipsed us and New Zealand has the eighth highest top corporate income tax rate in the OECD.

In 1986, New Zealand was the first country in the world to introduce GST, a consumption tax with no exemptions (although with some zero rated supplies). This broadened our tax base away from a straight reliance on income tax, and it’s underlying incentive – the more you consume, the more you pay – is widely regarded as “fairer” than income tax, which penalises hard work.

In light of the recommendation by Treasury that personal and company tax rates should be urgently reduced in order to boost New Zealand’s growth rate, and with our long and trouble-free experience of having a flat consumption tax, surely it is now time to consider a flat income tax.

Richard Epstein, Professor of Law at Chicago University and our guest contributor in this week’s NZCPD forum (view ) in his book The Case for a Flat Tax puts it this way: “When the overall question of wealth production and wealth transfer are combined, the flat tax emerges as a very powerful, durable and simple institution”.

The case for a flat tax is overwhelming: it draws job-creating capital, it cuts massive bureaucratic red tape and compliance costs, it rewards productivity, and it creates an enormously strong incentive for hard work. A flat tax has unleashed an economic revolution in eight Eastern European countries including Estonia, Slovakia and Russia boosting economic growth and raising living standards at an unprecedented rate.

Having watched the incredible prosperity generated by Hong Kong’s low tax structure, and now the example of the benefits to Russia of a 13 percent flat tax, it is rumoured that China is looking at adopting this simple pro-growth system as well.

The merits of a flat tax are now being debated by advanced industrial economies – Britain, Canada, USA, Germany countries looking for new ways to boost economic growth and raise living standards. Why not New Zealand?

If New Zealand adopted a flat income tax, to accompany our flat consumption tax, then we too could enjoy the unparalleled growth that it would bring. Financial independence would then become a realistic goal of every New Zealander. What’s wrong with that?

Links on this subject

Reform 30/30: Rebuilding Australia’s Tax and Welfare Systems by John Humphreys. (CIS, Australia). Humphreys proposes a single (flat) income tax rate of 30% (the Medicare levy would be scrapped). The tax free threshold (TFT) would be increased to $30,000 per person, so nobody would pay the 30% tax until they earned above this amount.Those earning below $30,000 would receive top-ups in the form of a Negative Income Tax (NIT), which would be paid at a rate of 30% (i.e. every dollar of income short of $30,000 would attract a top-up of 30 cents). The NIT would replace all existing welfare payments and tax expenditures. A key feature of this proposal is that it overcomes the problem of high effective marginal tax rates as people move from welfare to work. (30 November 2005)

Other CIS policy papers on tax. To view

This weeks poll. This week’s poll asks, if you support the idea of a flat tax for New Zealand, and if so, what rate you think it should be? To take part in our online poll

All my working life my income has been at the level that always attracts the higher taxation rate. I worked hard to gain qualifications that enabled me to earn a good salary. I did not begrudge paying high taxes because I thought I was contributing to our health, education and social welfare systems and that one day I, or a family member, may have to make use of them. Having had to pay for my education and that of my children, discovering that when I require medical attention I have to go private and pay, learning that some families live on benefits as a lifestyle choice, observing that the free health system is used by non-contributors, and noting that few use the education system to advance their lot, I am now resentful at having to pay exorbitant taxes from which I gain little personal benefit. I believe the personal tax rate should be reduced to 20% and GST raised to 15%.

Flat taxes are very hard to achieve politically. This is due to the argument the left will throw at you: You’re just helping the rich. Progressive taxes are successful because you can offer carrots to most of the population, though annoying a small percentage that probably wouldn’t vote for the party in question anyway. When the tax system is flattened, some group has to be getting less out of it than others, and they’re going to complain. If it’s the poorest people, you’re hurting the poor, and if it’s somewhere in the middle, mainstream New Zealand is unhappy. Regardless of how fair or rational it may be, success in politics is not necessarily about that.

Therefore, you need to offer a carrot to voters in the process. Something like guaranteed minimum income could work. It probably couldn’t be set too high, probably just barely subsistence on its own if that. This will encourage people to work, even if it is only part time, to be able to afford practically anything. It could gain support from the poorest people for the welfare side of it and wealthier people for the flattish tax. The middle class may not get as much however, though we could assume that the replacement of the welfare state and extra tax revenue could help relieve their taxes a bit more, plus they may appreciate the removal of the welfare trap.

Regardless, we need to remove the high marginal tax rates. Working for Families is just horrible for incentives, despite its appeal. As is the current welfare system. If you’re earning $60,000 and have a few children, there’s very little point in trying to earn more money. Earning $10,000 more will cut $2000 from your WFF entitlement, plus have the 39c in the dollar tax. That’s effectively 59c in the dollar – not good. The standard defense against this is something along the lines of Oh well, well at least it encourages parents to spend more time with their children. Fine, but what about savings and investment? I thought this Government was trying to encourage it? If said $60,000 earner decided to save or invest some of their income, any returns will also have this high rate of tax. So if this person had a choice between purchasing a new Plasma TV/pouring their money into a bigger house or saving with 59% tax and 4% inflation, what are they going to do?

It’s also the case with welfare. Why get a job? If it’s only paying a little more than what I can get on my sickness benefit, it’s not worth it. Hence why something like Guaranteed Minimum Income could work. Just anything that will stop these huge disincentives.

I’m kiwi and live and work in Hong Kong where we have 16% highest tax rate – no GST and no tax on interest and dividends. I am here largely because NZ tax is so repressive, unfair, and largely spent on those who can’t be bothered working for a living. I believe a NZ flat tax should be 25%, and reducing to say 22% after 5 years. Income should be tax-exempt for the first 15-20k of annual earnings so we have lower rates than all our major trading partners, tomake NZ more attractive to higher educated and higher paid people – kiwis and immigrants – and will help retain our graduates. NZ would become significantly more competitive on the world stage in all areas of business.

About 15%, increase GST to same rate and remove all other taxes rebates such asFBT, Fuel tax,Working for families, childcare subsidiesand so on.

10 – 15% with people self insuring for health etc.

How about just starting with the current minimum 19.5 to put everyone on the same playing field, with a view to reducing to 15% over a couple of years so lower income earners eventually benefit too once it is proven successful and sustainable.

15% would be a great incentive to work and prosper but it would also limit government waste by ensuring that there would be insufficient money for ministers to spend on personal whims.

Twenty per cent would be a good starting point. Successful counties such as Singapore and Hongkong have had low tax rates for years and have done very well indeed economically.

It should be 15%. People would be enormously encouraged to work harder to get ahead. Our young people would not need to be bribed with other taxpayers hard earned money to stay in NZ. New Zealand would offer them the best income opportunity available. It would turn this country back up onto it’s feet and we would be economically speaking, running flat out in no time.

With a 12.5% GST 25% flat tax, with a 15% GST a 20% flat tax.

A 10% company tax could be proposed for foreign companies employing more than 10 kiwi’s – to keep NZers at home.

Personally, I would have a 15% flat tax rate, a 15% GST rate and the first $5,000 of gross income being tax -free. I would have a 15% tax rate (both company personal) as thatrate has helped Hong Kong to flourish.

A lower tax rate would also reduce the incentive for evasion by those currently working in the ‘black economy’, with more citizens contributing to the revenue required by the government.

We don’t need flat tax we need VOLUNTARY tax! Send me an itemised invoice and I will tick the ones I am willing to pay for, then Depts will rise or fall on their REAL popularity with the customers!

I would budget in the removal of tariffs at the same time so probably about 19 cents in the dollar required if introduced over say a 3 cycle.

15% so that it’s high enough to support our infrastructure but low enough to encourage work ethic, investment, and international competetiveness but raise the gst to 15% to discourage consumption and increase the tax take.

Before govt can entertain a flat tax rate it needs to identify policy for which govt must fund and stop running commercial activities eg TV, bank, airlines etc. also, needs to stop corporate welfare. There are approx 100 ministries most of which are ideolically driven not necessary as true govt function. Once that is achieved it can work out cost of running govt a suggested 20% flat rate with a tax free threshold of $15k is a good start with a goal of reducing to 15% ultimately 10% – dreams? Maybe, but mightiest oak trees started as acorns once!!

18 to 20% but we have to make sure that genuine safety nets are in place for those genuinly in need and be a lot tougher on those that skive.

Suggest rate to be 15% . If old soviet bloc countries can achieve on less then we should be able to do better.

20% which is, I believe, what Roger Douglas first proposed. Who am I to doubt his wisdom. It has to be low enough to make it not worthwhile to fiddle tax and will therefore destroy the under the table economy at 20%.

25% to start with,to stimulate the economy and give NZ business and taxpayer a competative edge over our nearest neighbours, Australia. Combined with GST the tax take would amount to 34.375% of net income, before petrol tax and other levies, which is still a high proportion of one’s earnings. Monitor the results, then make another reduction to 20% to further stimulate the economy.

As a small business owner we struggle with having to pay the tax we do. It is destroying us financially and emotionally.

There should be a variable VAT rate, say 30%, and no PAYE. In that way everyone pays tax and the ‘user pays’ scenario will also be factored in automatically.

19.5% However I also beleive this could be reduced by more if people were more self reliant rather than expecting Government hand outs. For example everyone should have Health insurance.

15% keeps it close to other flat tax nations and is a great reduction from current levels. I would also suggest raising GST to 15% – would help reduce initial tax base loss from lower income tax and could also argue is a tax increase for the wealthy – big spenders.

10% max. A flat tax of 10% would give incentives to both employer and employee – employees would work harder so there would be more productivity for the employer and this would prommote growth for the economy. I have lived in a country which had NO income tax. Companies flock there, there are jobs galore (high paying) and people a higher percentage of diposable income, so there is more saving and less borrowing.

20% for all taxes:- PAYE, GST, Company tax. Increasing GST while reducing PAYE would emulate the 1980s intro of GST and reduction of PAYE. It would shift the taxation structure further towards consumption and away from work. It would promote saving instead of consumption especially if tax on interest was abolished.

25% when you have a flat rate everyone knowing its is equal to all puts their efforts into making money not minimizing tax and 25% seems low enough to encourage but high enough to preserve the tax base.

20% with no exceptions, this combined with GST means a tax rate per earner of 32.5%.

Start by copying the most successful country which isalready using the system.

At least 2 points below Australia at all times.

It should be below 15% -a higher rate would make avoidence worthwhile.

No more than 20%. The way I look at it, I would then get to keep 4 days of MY earnings and I would gladly work overtime if I got to keep MY money.

Isuggest NO income tax! The fiscal sense of having ONLY a CONSUMER TAX has huge ongoing growth potential. Use GST at whatever level is required to balance the books. Imagine the creation of wealth and attractiveness for offshore companies to operate here. Low compliance and administration costs, no unemployment….. keep imagining!

In spite of powerful arguments regarding economic growth and incentives, the most striking aspect of flat tax is its contribution to equality. Incremental tax structures favour those who already have the resources to avoid them, being those with trusts, inheritances, and companies. By adding to the price of labour they disadvantage those reliant on their own human capital for financial success. Thus incremental rates actually preserve privilege and the status quo.

20%- what Roger Douglas almost achieved until David Lange wrecked our chances!

10% – we are already paying 12.5% GST.

25 cents in dollar with first $10,000 tax free.

15% sounds like a good place to begin. It helps those on low incomes who are presently paying 19.5% tax on their income, and therefore everyone benefits. Those on low incomes, in particular, would be increasingly able to become more financially independent AND save for their retirement. Gotta be better for the country as a whole, as it would potentially cut dependence, long term, on govt benefits and superannuation.

0% income tax – just raise GST to 20%.

10% – the good old Biblical injunction to pay that amount of your income to the community but it might be a bit too low. 25% max, with some rebates for lower earners.

I vote for National Gross Salary Day. One day every year the boss is required to pay you in cash. Then with a huge pile of cash on the boss’s desk you deduct the ACC levies (employer and the PAYE employee amounts,) the holiday pay, the income tax, the petrol, cigarette and booze tax (estimated of course) the GST, perhaps add the rates you pay – they are increasing as the local bodies cuddle up and claim to do more of the Government’s work – and then you take what’s left.

Much greater minds than mine have already made a compelling case for a flat rate of 20%: Dr. Patrick Caragata in Why are your taxes so high and author of the underlying report to the Labour government. That advice was of course quietly buried. Now the same advice from Treasury is ridiculed. With some effort from the public, tax reform may yet progress to a proper debate in Parliament, andthanks for the opportunity to add to that!

15%, and set GST at the same rate. Remove all rebates (except donations to charities, the claim amount of which should be increased) to simplify tax returns and downsize the IRD. Then minimise government expenditure. As absolute tax take increases with growth, decrease the tax rate yearly to minimal levels.

15% for all. GST PAYE Company ALL Trusts = single rate simple implementation, remove ALL non value add organisations or structures to reduce tax. A ceiling should be established eg $500,000.00 pa for personnal income after which the tax drops to 10%. This would encourage people to get to a higher level to pay less tax. Any funds placed in a retirement fund would reduce taxable income. Any funds withdrawn from a retirement fund when retired is not taxable. If you receive a state denefit / retirement assistance then any funds from a retirement fund are taxable.

20% – this along with Gst would still be taking about one third of an average income in tax – surely that is enough to run a country.

Send this page to a friend:

[Note: the page link will appear in the email]