This is the second of ten articles in the Public Service Association's "Ten perspectives on tax" series.*
By Lisa Marriott*
Moreover, tax policy has become less complex in recent decades, with the removal of personal and company tax concessions.
Individual income taxes
New Zealand has a history of progressive income taxes, whereby income taxes are structured on an individual’s ability to pay. Rates for 1981 and 2017 are outlined in Table 1. Table 1 shows how rates have become less progressive over time: rates have reduced across all income thresholds and the thresholds have also reduced. While the tax rates are higher in 1981, the effective tax rates were frequently lower than those shown, due to the rebates that were available to taxpayers.
New Zealand is unusual in taxing from the first dollar earned. Most OECD countries have a tax-free threshold, whereby no tax is paid until income exceeds a certain threshold. Instead, New Zealand targets low-income earners through the Working for Families package of tax credits. This is discussed further [in Terry Baucher's forthcoming article #8].
Like individual income taxes, company taxes have also reduced in recent decades from 48% (1986-1988) to the current rate of 28%. Company tax rates have been relatively stable, remaining at 33% from 1989 to 2007, before commencing the decline to the 28% rate where it remains today. However, the 28% rate is not low by OECD standards. Reference to Figure 1 outlines corporate income tax rates across OECD countries. This shows New Zealand’s current company tax rate of 28% is now one of the higher rates among OECD countries. While New Zealand has followed the trend of other countries in reducing its company tax rate, other countries have continued to reduce their rates while New Zealand’s rate stabilised.
New Zealand’s goods and services (GST) regime is admired globally. GST replaced the wholesale sales tax system that was known for its multiple rates and exclusions, which limited its ability to effectively contribute to government revenue.
Since its inception in 1986, GST has collected a large proportion of government revenue at a relatively low cost. It commenced at the rate of 10%, increased to 12.5% in 1989 and 15% in 2010. New Zealand’s GST system is relatively simple and benefits from having limited exemptions. At the present time, GST accounts for over 25% of New Zealand’s tax revenue collected.
The efficacy of the GST regime can be seen in Figure 2. In 1981, approximately 11% of government revenue was collected from sales taxes, while nearly 66% was collected from individual income tax.
Some 30 years later, GST was collecting 32% of government revenue, while individual income tax had reduced to 41%. While GST is highly effective from the perspective of revenue collection, it lacks the ability to capture an individual’s ability to pay, that is, it is regressive – those on lower incomes pay a higher proportion of their incomes in GST than those on higher incomes. This is because those on lower incomes will typically spend a higher proportion (often all) of their incomes, whereas people on higher incomes will save a higher proportion of their incomes.
In the present time, New Zealand has few taxes that would typically be considered as wealth taxes. However, this has not always been the case. Death duties and gift duties were introduced in 1866 and 1885, respectively. The initial objective of these taxes was revenue generation and redistribution.
Gift duties had the additional aim of limiting the opportunity for people to avoid death duties by gifting their assets prior to their death.
In their early days, these taxes collected a moderate amount of revenue, but this deteriorated over time as avoidance measures became commonplace.
There appeared to be little political appetite to strengthen these forms of taxes, which contributed to their eventual demise. Estate taxes were repealed in 1992 and there has been no further attempt to introduce a similar tax. Gift duties were repealed from 2011.
Historically, New Zealand had a land tax that operated from 1878 to 1992. In a similar way to death duties and gift taxes, it eventually collected little tax – 0.2% of tax revenue by 1980. However, there has never been a comprehensive capital gains tax in New Zealand.
There are some components of capital gains that are taxed as they are explicitly included in the Income Tax Act 2007. But in the absence of such an inclusion, capital gains are not taxed in New Zealand.
This provides a tax advantage to those who have capital assets and has the potential to distort decision-making towards investment in capital assets due to their tax-preferred status. This approach is unusual among OECD countries and has generated much debate. While it is generally accepted that the New Zealand income tax base is effective, it is also recognised that the absence of capital gainstaxation is a gap that undermines the overall philosophy adopted to tax policy in New Zealand. This topic is covered in more detail [in article 3 by Max Rashbrooke].
New Zealand has adopted a ‘broad-base, low-rate’ philosophy to tax policy. The concept of this approach is that taxing across a broader base provides for overall lower tax rates.
While some tax policy adheres to this approach, there are some significant gaps that challenge the coherence of the approach. The most obvious gap is the almost complete absence of taxes on capital in New Zealand.
It is notable that the primary group benefitting from this absence of taxes on capital is the wealthy who own capital assists.
By way of contrast, the group most disadvantaged from increases in rates of GST are those who have the lowest incomes.
The political sensitivity of taxing capital gains is acknowledged, but it must also be acknowledged that a broad-base, low-rate tax regime cannot be achieved when a key component of the tax base is excluded.
2. McLeod, R., Patterson, D., Jones, S., Chatterjee, S., and Sieper, E. (2001). Tax Review 2001: Final Report. Wellington: New Zealand Treasury and Inland Revenue (2015) Tax Policy Introduction Template, Policy Advice Division.
4. McCaw, P.K., Schmitt, G.J., Kean, J.A., Phillips, R.T., Thompson, E.G., Titter, H.M., Tyler, B.H.C., Vautier, K.M., and Wright, A. (1982). Report of the Task Force on Tax Reform. Wellington: Government Printer.
*Lisa Marriott is an Associate Professor of Taxation at Victoria University of Wellington’s School of Accounting and Commercial Law.. This is the second article in the PSA's "Progressive thinking series, Ten perspectives on tax."