This is the third of ten articles in the Public Service Association's "Ten perspectives on tax" series.*
By Max Rashbrooke*
When I was a child, I remember often complaining, as all children do, that certain things weren’t fair. My exasperated parents must have responded, as all parents do at least once, that life often isn’t fair. But the larger lesson they taught me, across the whole of my upbringing, is that it doesn’t have to be that way.
What they meant, in essence, is that a good society is one that pushes back against unfairness wherever it can. It knows that our rewards in life should reflect our own efforts but in practice are affected by dozens of things outside of our control, and that society must find ways to compensate for that.
Tax matters enormously to this discussion, because it is one of the main ways to tilt the balance back towards fairness. If people’s income and wealth truly reflected their own decisions and nothing else, there would be far fewer reasons for taxation. And of course many high-earning people do work hard.
But people often succeed for myriad other reasons. They get help from their parents, or they are born with talents they have done nothing to deserve, or they happen to be in the right place at the right time.
Anyone who has made money in New Zealand has also done so by drawing on a common pool of resources: the public roads they drive on, the taxpayer-funded education of themselves and their employees, the government’s health systems, telecommunications networks and so on.
The most respected political philosopher of the twenty-first century, John Rawls, argued that even people’s talents, being drawn out of the genetic pool, should be seen as “a common asset” and that while we should encourage people to use those talents to the full, we should also all “share in the benefits of this distribution whatever it turns out
Tax exists in part to fulfil these demands. It holds onto the portion of people’s incomes and wealth that has derived from luck, inheritance and the common pool of assets, and uses it both to top up the incomes of people who have been less lucky (via the benefits system) and to replenish the common pool. (Like any natural resource, the pool has to be continually filled up, otherwise it won’t be there for the next generation to draw on.)
In this sense, tax pushes back against unfairness, which sometimes goes by the name of unjustified inequality. The material forms of inequality – imbalances of income and wealth – have increased significantly in New Zealand in recent decades. In fact, income imbalances increased more here than in any other developed country1 between 1985 and 2005 – a major shift in New Zealand’s economy and culture.
Since the mid-1980s, the typical rich person (the mean equivalised household in decile 10, in technical terms) has seen their annual income (after-tax and inflation-adjusted) grow by around $60,000, while the typical poor person has only seen a roughly $2,000 increase.2
Stored-up wealth, meanwhile, is very unevenly distributed: the wealthiest 1% of individuals have one-fifth of all household wealth,3 while the poorest half of the country have almost nothing.
But there is little evidence that the richest New Zealanders have suddenly become harder-working or are making a much greater contribution than they used to, and equally little evidence that poorer New Zealanders are less hard-working or motivated than formerly. Indeed the hundreds of people who apply for every new supermarket check-out position tend to suggest otherwise. So there is good reason to think that the increases in income and wealth imbalances of recent decades have not been entirely deserved, and that the tax and benefit system should do more to tilt the balance back towards fairness.
Currently New Zealand does not ask much of its richest citizens. Rob Salmond’s 2011 book The New New Zealand Tax System4 showed that the poorest New Zealanders pay just under 30% of their income in tax, and the richest pay 34%.
And this excludes money made selling assets, which, if we could measure it, would almost certainly drop the tax rate of the rich below that of the poor, since it gives them lots of extra income but attracts essentially no tax.
So we don’t ask much, proportionately, from people who have often had enormous advantages and who can afford to pay more, compared to what we ask of those who’ve often had very difficult upbringings and have nothing left over once their bills
A tax system that did more to address this unfairness and unjustified inequality would have several elements. The first would be a higher top rate for income tax, perhaps for those earning over $100,000 or $150,000 a year.
New Zealand’s 33% top rate is extremely low internationally (the UK and Australia, for instance, both have a 45% top rate), and modelling5 by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva shows that developed countries could increase top rates as high as 80% before losses from avoidance and reduced effort would outweigh the revenue gains.
But the most glaring hole in New Zealand’s tax system, from a fairness point of view, is the failure to tax wealth in any form, except for the government’s very minimal tax on houses sold within two years of purchase.
Like annual income, people’s stored-up wealth can be earned through hard work, but it can also be inherited, gifted, or made by, say, flipping houses.
For this reason, most countries tax wealth in some form, and New Zealand could easily follow their lead. It could tax capital gains thoroughly, so that someone who makes $80,000 selling a house pays the same tax as someone who gets the same amount in salary. Or it could tax all wealth annually, as proposed by Piketty and (in different form) by New Zealand’s own Gareth Morgan.
New Zealand could also institute a lifetime gifts tax, as proposed by the late Anthony Atkinson, a distinguished British economist. His idea was that the first, say, $200,000 of gifts received in a lifetime could be tax-free, to allow uninterrupted inheritance of small(ish) amounts, but all further gifts should be taxed, so that those lucky enough to get these gifts could compensate those who don’t. That’s a kind of fairness that I think my parents would recognise.
*Max Rashbrooke is a research associate at the Institute for Governance and Policy Studies, and the author of Wealth and New Zealand. This is the third article in the PSA's "Progressive thinking series, Ten perspectives on tax."