Ahead of the Government's new Tax Working Group, David Chaston casts a broad historical eye over NZ tax and how it's paid

Ahead of the Government's new Tax Working Group, David Chaston casts a broad historical eye over NZ tax and how it's paid

By David Chaston

OK. So we are having [another] Tax Working Group to review our tax system to ensure it is fair and up-to-date.

Now seems a good time to look back on the current structure and put it in a broad perspective.

How we got here, from there.

My colleague David Hargreaves has looked at the signals so far on the brief given to this Michael Cullen-led team.

And on Thursday, November 23, the OECD released its Revenue Statistics: 1960-2015 bringing an internationally comparable view of how taxes have been collected in New Zealand (see p 216 here).

That sets a neat structure and resource to do a high-level comparison.

And we can bring the OECD data up to date using the resources of Statistics NZ and the Treasury (including data released in the last Budget).

(Because this is a calendar year review and clearly 2017 has not ended yet, and full data for it won't actually be available until March 2018, we have added some estimates around the likely nominal GDP. That is why the 2017 components of the charts below are marked with an *.)

Taxes collected from our economy

Since 2010, the Government has collected about 32% of GDP in taxes, and in 2017 this will be slightly lower. That level is down from about 34% in the ten years prior.

Individuals pay most of this, either as income taxes (highly progressive - 42% of it is paid by those earning $100,000 or more), and as GST (proportional, depending on your expenditure levels). The "All other" category covers taxes like interest, dividends, petrol and for items like ACC, customs duties, and NRWT (non-resident withholding tax).

The share companies pay is rising and is now up to 4.9%, the highest in a decade. Companies pay taxes based on profitability. During recessions that can get squeezed very hard. Look at the chart below; in the late stages of the Muldoon era when there was heavy regulation and a wage and price freeze, profitability evaporated (except for those companies 'given' import licenses). It has taken decades for industry to recover the skills needed to be competitive and profitable in a globalised world.

While taxes as a percent of GDP have been stable in the low 30% range, the share of each component of the total tax collected has changed steadily over time as this chart reveals.

The rise in the share of taxes paid by companies is visible here as well, but the dominant change has come from GST which has risen to over 32% of all taxes collected.

Another item worth noting is the stable proportion local authority rates take of the total tax collected. However, note that this item does not include local authority fees and fines, which are included as "other" and amounted to $582 million in 2015 and $630 million by 2017.

The questions before the new Tax Working Group focus on the perceived fairness of these patterns.

How do we compare with Australia?

An obvious question about New Zealand's tax patterns is how they compare with other countries, and especially Australia.

Here are the same views for Australia, based on the same data from the OECD to 2015. (The extension to 2017 is based on ABS data in their 5506.0 series.)

Total taxes as a share of GDP is higher in Australia at 37.7% in 2017 compared with 31.0% in New Zealand.

And the proportion paid by companies is also higher in Australia at 5.3% of GDP compared to New Zealand's 4.8%. But the proportion is clearly shrinking in Australia.

New Zealand's share is dominated by GST at 10.0% share compared to Australia's 5.1%. If there are goals to rebalance that away from the proportional GST to the progressive income tax, then the load on individuals with incomes of $100,000 or more at 42% will need to be assessed to ensure it does not drive tax minimisation behaviours from those who can afford specialist advice. That is exactly what happened when the Clark/Cullen government brought in the 39% top rate in April 2000. That actually reduced the total income tax collected as can be seen from the chart above. It also signaled the start of the drive to find less heavily taxed income from property. It is an impulse that has stayed with us.

And notice how high the Aussie taxes on "All other" are. They tax many more things in their three-level Commonwealth / State / Local structure.

Personally, I don't think the Australian benchmark is a worthy reference for the Cullen TWG review.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I would love to be taxed like an Australian.

Tax free super contributions
Stamp duty only payable if you choose to change houses
Low tax on redundancy payments.

Australian States collect a significant portion of their income in stamp duty on housing transactions, which the locals moan about a lot, but the taxpayers I’ve met don’t seem to worry about CGT. How much is collected from that?

Wow. Good for you. High tax is the number 1 reason I'm moving back to NZ, CGT or not.

In Australia I paid $70k in stamp duty for the privilege of buying a property in the Sydney suburbs. Marginal income tax above $180k (which yes, what people earn) is 45%, without additional budget repair levies etc which adds another 2%+. Then you have to get health insurance which is another $180 per month.

Oh and then as a Kiwi, we would get no rebate on our child in childcare.

Don't get me wrong, I have no problem paying my fair share, but when its all taxation and reduced benefits as a Kiwi over here its a bitter pill.

NZD 200,000 has a base income tax rate of 28.46%. Spending everything left on GST paid goods gives the Government a further $21,462 of your income. The effective tax rate is 39.19%. If you are made redundant on a good salary you will pay up to 33% on it depending on the payment timing.

AUD 180,000 has a base tax rate of 30.17%. GST of 10% will not apply to basic food, some medical, education, childcare services. If you are made redundant, the payment is tax free up to limit based on years of service.

I didn’t like the fact Australia treated me differently to an Australian citizen even though I was creating revenue
for Australia
I still have a Macquarie a/c & brokerage but honestly Aus is not much flasher than NZ although the sun is nice

“Spending everything left on GST” - in what world is this a reality? A huge chunk of an individuals after tax income goes on non-gst items such as housing costs, and savings.

And how much of the Australians after-tax income of $125,694 is he spending on “basic food, some medical, education, childcare”? Average person would struggle to hit even $40k I imagine.

As PAYE taxpayer and renter, I agree with you. Australia also has a flat 15% tax on Super earnings compared to a top PAYE tax rate of 45%, and your first $18,200 earned per annum is tax free.

If you're wealthy with a lot of vices, then it's not as good:

Indeed if you look at the budget, about the only thing going up in terms of revenue for the federal government are taxes on you having a good time- taxes on beer, wine, spirits, luxury cars, cigarettes and the like. It would probably shock the average person on the street to discover that the government collects more tax from cigarettes ($9.8 billion) than it collects from tax on superannuation ($6.8 billion), over double what it collects from Fringe Benefits Tax ($4.4 billion) and over thirteen times more tax than it does from our oil fields ($741 million).

Turnbull is increasing the tax on cigarettes by 12.5% a year for the next four years. In the latest federal budget, the government forecasts that by 2020 that it will collect $15.2 billion from taxes on tobacco per annum. This is four times the amount that the government collects from the entire coal industry per annum.

Just compare these numbers: $15 billion is over double what the government projects it will collect from petrol excise in that year ($7.15b), 21 times what it will collect from luxury car tax ($720m), 27 times what it will collect from taxes on imported cars ($560m) and 89 times what it will collect from customs duty on textile and footwear imports ($170m).

As a sign of how addicted to taxing you the government has become, look at the myriad of taxes on cars — high import duties, stamp duty and a luxury car tax — these were designed to protect a car manufacturing industry which doesn’t exist anymore. Yet the government is still increasing them. We closed the last factory this year. These taxes are not only blatant cash grabs but serve to stifle the deployment of electric cars, which have hit a dead end in Australia. Likewise, the taxes on textile and footwear imports were originally designed to protect our textiles, an industry that has now collapsed and that lost 30% of its manufacturing workers this year.

Source: https://medium.com/@matt_11659/matt-barrie-australias-economy-is-a-house-of-cards-6877adb3fb2f

It is strange to find a lover of tax in New Zealand when its tough just to make ends meet with our minimum wages.

The way most of us minimum wage poor souls get buy iin NZ is to buy a rental in the hope of a survivable retirement.

Increasing tax on capital and reducing tax on income would be quite beneficial to those struggling to make ends meet. If you are on minimum wage and own a rental property, I would suggest you are in an extreme minority among minimum wage earners and tax policy should not be formulated on your behalf.

And when the struggling have eaten the fish MFD what happens? Oh yes they are back to struggling but now you've spent the loot!

Nah, most of us poor minimum wage souls leave the country and move to Aus.

It's also quite tragic if the only way to retire is to own a rental property.

Robert Redford hasn’t acting provided a nest egg ?
NZ offers more social assistance than anywhere else I’ve lived
It isn’t perfect but better than many other countries

Tax companies on revenue.

CGT is a bad move as is any sort of Stamp Duty.

"Tax companies on revenue."

A thought experiment (the safest kind).

Assume that Revenue = 80% of Expenses: that is, a continuous cash burn.

This, BTW, is extremely common to all start-ups...

So, despite the fact that either such enterprises are surviving courtesy of the Banks or continued calls on Shareholders to Send Munny, they will, under this scheme, be paying Tax on their Revenue, as well.

A wonderful recipe for business creation - not....

Please, let's have some less clueless thoughts aboot tax, common taters....

But, as Schiller said, 'Against Stupidity, the very Gods Themselves contend in Vain'.......

As workers are replaced by automatons.
Wages stagnate.
Benefits, rebates, UBI, etc... increase.

Business creation will be irrelevant

The individuals will no longer be paying, they will be earning.

So who will pay?

We pay on income, but a company cannot?

My point is quite simple: first define 'Income'.

Revenue (as the post which started this, averred)?
GP?
EBITDA?
Taxable profit?
Net Assets?

Unless common taters are prepared to understand and use such internationally accepted definitions, any comment on tax policy they then make can be disregarded out of hand....

Revenue - i.e. money coming into the business in the form of sales of the relevant good or service that the business provides.

I thought Revenue was a pretty well accepted term, after all it is posted on all their annual accounts.

So, lets, take a real company (another thought experiment) - Tesla - stock ticker TSLA..

Here's their NASDAQ filing: http://www.nasdaq.com/symbol/tsla/financials?query=income-statement

Assume a company tax rate (on Revenue) of 10%.

Tax payable for the latest FY filed (FY2016, Revenue $USD 7 billion) would be $USD 700 Million using this assumption.

Assume this drops straight to the bottom line (ignoring any US IRD tax code complexities):

Loss for FY2016 then more than doubles: from $USD 675 million, to $USD 1.375 billion.

Please (I am only vaguely Interested) let us have your considered thoughts on:

  • The likely effect on TSLA share price
  • The likely effect on TSLA potential investors
  • The likely effect on TSLA's current financiers
  • The likely effect on EV start-up prospects over the next 5 years
  • The likely effect on transport battery development (bearing on mind TSLA's involvement in large-scale battery technology development)
  • The likely effect on current sub-contractors and suppliers to TSLA, especially w.r.t. their prospects of payment terms being met

(I know, I know, its shooting fish in a barrel. But consequences of stupendously ignorant policy - even though thankfully mythical at present - deserve to have a spotlight shone upon them so we can all point and laugh. Pour encourageur les autres.....)

You still miss the overall point - who will pay when the worker has no more income to tax? or worse, if they are tax receivers (i.e. benefits/UBI).

Thought experiment... Tesla, if they meet there goals, would have fully automated, electric vehicles, that are manufactured almost entirely without human input, sold online with no human input, and ultimately driven without human input. They would seldom crash, and need virtually zero maintenance.

Tens of Millions of jobs related to the car industry would disappear. Taxi drivers, bus drivers, mechanics, panel beaters, petrol station attendants, salesman, just to name a few.

Some could retrain, re-skill, or find other employment, but show me what "business" lately is creating millions of jobs? All I see is anywhere is reduction in workforce (In fact it has been a recurring theme across many media outlets, including this one)

The whole industry (composed of those employees) currently pay more in tax than Tesla ever will?

So my question to you, is who makes up the shortfall?

"manufactured almost entirely without human input, sold online with no human input, and ultimately driven without human input. They would seldom crash, and need virtually zero maintenance."

Lets chase the BOM down on each of these.

  1. Manufacturing is the end product - metal-bashing and assembly of a plethora of components, every one of which has been: Designed, Prototyped, Materials Mined, Transported, Refined, Shipped, Cast, Moulded, Machined, Painted, Warehoused, Sold, Financed, Transported again, all before getting to the TSLA factories. Every single one of those activities has their own BOM, into which humans are an essential input. Who else Brands, creates a compelling website, decides on Finance, writes up the Contracts, Programs the CNC tools, Builds the manufactories, and passes the bills for payment. I've been involved in automating finance-related jobs out of existence for forty years, and quelle surprise, there is still wetware at the root of most of finance activities.
  2. 'Online' is the visible result of literally person-centuries of clever coding, marketing ideas and entrepreneurial individuals (Jack Ma...). It's wetware all the way down for the Ideas. As to the 'automation' possible, well, Compilers, which take away the burden of writing in binary, have been around since the 1950's, yet, quelle surprise, IT in general is part of the STEM explosion in careers.
  3. 'Driven with no human input' is an aspiration, not a fact. Caterpillar has had self-driving mine trucks for three decades, yet wetware is still employed to spot them for loading, and to dump them at the top of the haul road. And self-driving in winter ice, snow, fog and other very common North American road conditions is certainly gonna create work for panel-beaters: because ABS, vehicle dynamics adjustments and environment detection are useless in such conditions, as many tourists discover up our NZ ski access tracks....
  4. Last I checked, TSLA vehicles have Tyres, Suspension, and other moving parts which wear. So zero maintenance is another myth. There may well be less mechanics. But then where are the buggy-whip makers and wagon wheelwrights of yesteryear? 80% of employment in developed countries 150 years ago was agricultural. Now 2% is. What happened? Yes, too many barista and aromatherapista.....

In short, we need not worry about Workers and their Income just yet. Heck, even Bicycles need Mines, Refineries, Ships, and Tyres to supply their very simple BOM's. Mines need Miners and before that Stone-gazers who can look at an outcrop and say ' yup, there's Cu, Fe, Sn or Pb in that there Rock'. I'll stop now but y'all get the drift....(mining pun right there)

Nocents
Yes you are right that a new revenue paradigm must be formulated for those without capital generating an income.
Charity could become big again with Zach & DubleDzz donating
These two could form the cornerstone of giving foundation
Seriously you are bringing up an excellent point that politicians are choosing to put off discussing seriously

Nocents Nonsense
You tax companies on their profits not their revenues if you want businesses to remain profitable ?
Everywhere else has stamp duty on property providing much needed revenue for infrastructure extras
The states provinces & counties all need revenue sources other than federal government in all countries
Why NZ fails to add stamp duty on every property sale is frankly silly especially when you see Aucklands obscene city debt level.
Then there’s the welfare for rich suburbs where people like Zach & DubleDzz get to live in areas that are subsidized by placing unfair rating burden on lesser suburbs This doesn’t go on in a properly organized city where you must be wealthy to afford to live in a wealthy area to afford the obscene annual property tax
The money is used for all sorts of things decent cities provide and if you cannot afford the annual property tax you might as well forget buying in an affluent area. Lastly CGT should be implemented immediately and could be charged after the first $750K which would be tax free on the family home only
As they say it’s not rocket science the rest of the sane worlds been doing it for decades

2% land tax (and halve personal and business tax to attract more industry and high-earners to NZ)
5% reduction in personal tax rate for every child <18 you support. Get rid of or downsize WFF.
no CGT or water tax or GST variation or estate taxes or other inefficient revenue gathering.

Income tax is a relatively new idea. Lets just dump and go to a basic asset tax. With the growth of government, the range of new taxes and costs they have imposed, we would be better served with a simple asset tax and the removal of personal income taxes.

There is something immoral about the present system and the way it traps people in poverty. While those with money can use property and other assets, as well as tax deductibles to pay next to no tax.

Yes, agreed some type of asset or capital tax would be fairest and ideally it would be based on change in wealth rather than net wealth (assumes you've paid tax on the wealth accumulated to that point).

The issue with an asset tax (marginal wealth increase) is that it is likely to be pro-cyclical - more tax in good times and less tax (less government revenue) in poor times. This is probably why governments like income taxes as they are more steady income flows.

Any sort of asset / wealth tax (marginal wealth increase) may still require an absolute wealth component to provide government revenue stability.

Not really asset values are normally very stable, also you haven't taken in to account the behavioural changes from an asset backed tax. Just the change to the way interest deducted and the increased spending power of the middle and lower classes and the change in investing outcomes.
Income tax has distorted our view of the world, we need to move back to asset taxes.

Agreed. The behavioral changes as a result of a full asset tax would have the biggest benefit to society. Bubbles become less likely, money flows to productive assets, the rich cannot hoard assets and avoid tax and your worth becomes tied to your ability to generate positive after-tax yield through hard work.

AndrewJ
Absolutely correct
Wipe income tax completely
The fact the first so many thousand earned is tax free just bolsters your argument
Government won’t abolish income tax though
They want to keep it but will play with the figures

Why do you people always get hung up about quoting very specific numbers - like a 2% level of taxation.

Moot the idea, drop the figures unless you are an expert/analyst in the area.
The idea might be sound but as soon as you put arbitrary figures to it, it loses a substantial amount of credibility.

Hypothetical:
Auckland in 2018.
The average house price @ 1mil.
- A family pays $20,000 in land tax.
- The family had a combined income of $100k, so for arguments sake they have an effective income tax rate of around 25%. You "halve" this, meaning they pay $15k in income taxes.
-> combined, that's now $35k in central govt. taxation, whereas before they were paying ~25k.

So, what are you advocating?
Also, the child tax reduction policy - that's 7 children for the hypothetical case above to have an unchanged tax bill.

The formula for calculating the impact of a capital tax is quite simple.

If income taxes across the board were reduced by 10% and assets taxed at 2% then anyone earning less than 5 times their equity value gets a tax cut.

10%* salary = 2%*capital which rearranges to 5*salary = capital

You can replace the % with whatever you like

Find it interesting that the 33% increase in my GV on my South Auckland home is ALL in the land value of the 600 square metres of dirt, not the house value or its improvements.. Land value has miraculously increased to be now double the house value.

Cunning plot; raise GV land values followed by an introduction of a land tax based on GV value.

Thanks David, interesting summary.

I love the bit about the effect of higher marginal tax rates on actual tax collection. My impression at the time was that high earners were much, much happier to potentially waste money on a speculative winery or vineyard in Otago than hand over 39% to the government. So Michael did, in a sense, give us Otago Pinot Noir. Pity we can't afford it though.

Given that Michael's attempt to extract more from the "rich pricks" he despised was a failure, he managed to balance the books by keeping the allowances the same so that eventually policemen started paying the top rate too as inflation pushed their apparent earnings up.

Remember, Labour under Cullen and Clark generated a doubling of house prices in this country by encouraging high levels of immigration. We all thought we were very clever at the time, until it blew up. National then repeated Labour's failed policy, even though they should have known better (actually they only managed a 50% increase in house prices nationwide). This time around however, people realised the stupidity of the immigration fueled rampant house price inflation national business model. So, in a wonderful twist of irony, they put Labour back in. Presumably to get house inflation roaring again so those who missed out can get their share too.

It's not a good look to appoint a politician that the electorate have booted out to head the Tax Working Group, might as well not bother. Smoke and mirrors.

Trademe has 50% less rental properties available for tenants since the 40% LVR was introduced.

When Labour brings in ring fencing there will be another devestating loss of rental properties available in New Zealand for tenant families.

Rental Crisis is here created by National with Labour adding to the disaster for tenant families.

That's cool. there's tremendous pent up demand to buy from everyone under 40. As soon as houses return to anything like affordability criteria, many of us renters will buy and vacate our rentals, freeing up rental properties en mass ;-)

Short term you may see alot more rentals change to homeowned properties but that will result in a sever lack of houses for tenant families.

The rents will skyrocket and the Landlords that are left will make a fortune in rent and justify their increase by Labours ring fencing of expenses on tax returns making it impossible to subsidise existing tenants rent.

Robert Redford

you may see alot more rentals change to homeowned properties

Good, this is exactly what we want to see! I feel like you are forcing me to explain basic maths though.

So let me explain it for you. There is 1 family and there is 1 house.

If the house is a rental property and is rented by a rental family but then the landlord sells the house, and one rental family instead becomes a home-owning family there are no houses missing from the housing stock. The effect on the shortage of houses is completely neutral.

1 family still lives in 1 house.

Just that now the family is home owning and paying off a mortgage, rather than a tenant paying off a landlords mortgage. And this stems the growing tide of wealth inequality. HUZZAH!!!

You are forgetting to use your advanced landlord maths diploma (you can only get this qualification by attending a special seminar advertised on the radio) - any change must make rents go up.

Robby Redford
Do not fret
Zach & DubleDzz will not let an opportunity go by to meet the demand for rentals
They’ll be there until the cows come home
(now there’s an old phrase for union steam ship DubleDzz) Ha

a) GST is getting bigger, yet is regressive in nature.
b) The amount of overseas produce coming in and not paying GST must be climbing fast? Hard to see that being allowed to continue even though it hits the poorer the hardest and dumping it and source taxing "easy". (not politically but there you go)

I see thwe biggest problem here is thenaivety of the new government (again)
They see the gap and base problem between high and middle/ low incomes as a tax issue, rather than a faire redistribution of the countries overall 'profits'
A fair tax system , what we basically have now, can be changed to redistribute NZ 'wages'. But in doing so, historically creates even bigger anomalies..long term headaches, which in many cases makes bigger issues (eg Muldoon, and Clarkes efforts)
Yes the current tax system could be modified/ tweaked a little.. say no gst on basic non proceeded foods.. meat, veggies etc.. and certain bank deposits, superannuation, , maybe health care (???)
But these are more are designed to increase healthy living and such..(in effect reducing the looming obesity health bill paid for by taxes)
I do have an issue with this current tax Working group, going in on a preconceived election rantings and an attitude of we are going to put it all right... Rather than the more objective attitude of the last TWG of " lets have a look at what we have and see if it can be changed or tweaked in a better manner with better outcomes.. This latter attitude results in nil or very little change to something that is basically proven to be, and most likely to continue to be a fair system..
The form results ( as happened with Clarke and muldoon) well we made a lot noise on this and have to come up with something significant to keep face...anyway if messes up we will not be around then, and ppl will will most likely remember us for our other things..(+ve)

Cant fix something that is not basically broke...can tweak for changing circumstances fine.
Eg can change a law that was meant to prevent being distracted while driving to include new technology like a phone... doesnt change the concept of not driving distracted..
Or remove gst on basic food.. or increase on say sugar... or both
Basic change simply because the sake of it.. eg education, results in staff shortages, work loads where professional teachers due to those work loads dont have classroom time, and if calculate their working hrs/ salaries are near or below min wage.... not the so called property boom / shortage.

Anyone looking for a research project for a PhD?.. look at teacher hrs from new entrant thru to tertiary...include class teacher class room times

Have to say, any account that starts with an assumption that the tax system we have currently is "fair" is built on just that - one massive mother of an assumption. Seems there's a good chance such an assumption comes from it simply being in place for a while.

Quite
- Make $1m in a year selling houses (which you didn't intend to sell) - $0 tax paid
- Make $1m salary - $322,448 tax paid (inc ACC)
- Make $1m in savings interest - $322,090 tax paid
- Make $1m return on PIE fund - $280,000 tax paid

Hint: one of these is not like the others

> Hint: one of these is not like the others
Indeed ; it actually involves a risk of suffering losses unlike the rest of them.

The PIE fund could be a share fund which arguably has more risk than property

There are many reasons to argue that the current system is pretty fair - but I will focus on the reason you think is the only one , namely that a ( similar) system has now been in place for a while .
This is in fact a valid reason to consider a tax system fair ; tax laws are the rules by which economic game is played. Changing the rules in the middle of the game is not generally fair. ( people ran their lives by those rules ). Sometimes changes are inevitable of course - "unfair" as they are - but it is for those advocating the changes to make the case. and it needs to be a VERY strong one .
In any debate about tax fairness status quo deservingly starts with a large advantage.

What a lot of rot.
Rules change in all games, and just because the existing system has been around does not make it fair.
Was owning slaves fair until Lincoln got around to the Emancipation proclamation? No.

The case is the strongest it has been ever on a income-to-price, % household expenditure on housing, rent-to price basis and the strongest since 1951 on a home ownership basis.

Also, anyone investing in property in the last 10+ years has been well aware that there is an unfair tax advantage and invested on that basis so has taken the risk that the playing field might be leveled in the future.

Yes, we need fresh thinking and breaking of a few sacred cows with regard to taxation.