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Keith Ng challenges four 'facts' about tax which he says are not true and he claims are often used to justify reducing the tax rate, especially in an election year

Keith Ng challenges four 'facts' about tax which he says are not true and he claims are often used to justify reducing the tax rate, especially in an election year

This is the fifth of ten articles in the Public Service Association's "Ten perspectives on tax" series.*

By Keith Ng*

Myth 1: “40% of households pay no ‘net taxes’”

Since 2011, Bill English has been pushing1  the idea that around 40% of NZ households don’t pay any “net tax”.

In its first iteration, the claim was very technical and specific. English said that these households “receive more in income support than they pay in income tax” [emphasis added]. But by 2016, it’s mutated into a wildly inaccurate claim in the media:2 that these households are “contributing nothing to New Zealand’s tax take” and that the whole tax system is propped up by “a small number of taxpayers [who] bear the brunt of New Zealand tax bill”.

The problem with “net taxes” is that it excludes GST, which accounts for 32% of all taxes. Not quite as much as income tax (38% of all taxes), but it’s a whopping big heap not to count. It also only counts cash transfers - so if you get cash from the government, that gets counted, but if you get a service from the government (such as education, or healthcare) that does not.

“Net tax” is an arbitrary and meaningless way to count who is “contributing” and who isn’t. It exists as a political tool. Although it is produced by Treasury, Treasury themselves have never published it. It has only ever been released by the Minister of Finance’s office, and usually its first public appearance3 is on David Farrar’s blog.4

Myth 2: The top 10% of taxpayers paying 46% of taxes proves they’re overtaxed

It’s true - the top 10% of taxpayers pay 46% of all income tax - but that’s only half the picture.

How much tax you pay depends on two things: a) the tax rate, and b) your income. It’s pretty straightforward, so it’s incredible how often people blame “high amount of tax paid” on the tax rate being too high, and completely ignore the income effect.

The top 10% of taxpayers make around 34% of all taxable income, nearly as much as the bottom 70% combined. So while they pay a lot of tax, they also make a lot of money.

But the critical part is that they pay a higher tax rate, and that’s where any debate about tax fairness ought to start. The top 10% of taxpayers have an average income of $140,000 per year, and pay 26.5% of that in income tax. The next 10% down from them have an average income of $73,000, and pay 20.4% of that in income tax.

The defining factor of a progressive income tax system is that people on higher incomes pay a greater percentage of their income in taxes. Whether you think that’s fair is a matter of values, not fact. But looking at the “total tax paid” or “proportion of tax paid” without looking at income or tax rate is just plain misleading, and tells us nothing about progressiveness or fairness.

Myth 3: Bracket creep has reversed the effects of the 2010 tax cuts

Bracket creep refers to the effect of inflation on the tax rate. As our incomes grow (due to inflation), we move into higher tax brackets and a pay higher tax rate, even though the growth due to inflation isn’t really making us richer.

Before the 2010 tax cut, the average tax rate for all taxable income was 21.4%. Immediately after the tax cut kicked in, at its lowest point in 2012, the average tax rate fell to 18.9%. That’s the impact of the tax cuts.

By 2015 (the latest year for which data is publicly available), it crept back up to 19.5%. That 0.6% increase is partly the result of bracket creep. It’s not nothing - and it disproportionately affects people earning around $50,000 per year - but people are still paying less income tax than they did in 2010.

While bracket creep is rightly characterised as “a tax increase by stealth”, successive governments - left and right - have kept it as a handy political tool. It’s a mechanism that automatically raises taxes a tiny bit each year; over time, it gives governments the option to increase spending or to tweak the tax system.

Myth 4: Tax cuts pay for themselves

Here’s an idea: If everyone gave the government less money, the government would receive more money. This is not a joke. The 2010 tax cuts5 were estimated to cost around $1.1b over four years. But by 2014, the tax cut was supposed to result in the government receiving an extra $175m a year in taxes.

The magical part is a single line in the budget called “Adjustment for macroeconomic effects”. Treasury includes this because they believe that tax cuts will help the economy grow faster, and a bigger economy means more taxes.

It’s a sound idea in theory, except it’s a bit like a rain-dance. If it rains more than average after I do a rain-dance, then clearly it was very effective. If it rains less than average after I do a rain-dance, then you’re lucky I did it, because it would’ve been much worse if I didn’t!

And that’s what happened. By the time 2014 rolled around, the economy grew slower than expected and tax revenue was $4b less than the 2010 forecast. Did the tax cut fail to stimulate growth? Or was the economy worse because of the Christchurch earthquake and other factors, and the tax cut helped soften the blow?

Even with the benefit of hindsight, it’s impossible to prove or disprove. That’s a pretty lousy way for an “evidence-based” government to justify spending a billion dollars.

*Keith Ng is a data visualisation consultant by day and data journalist by night, "using data to understand and explain complex issues and policies". This is the fifth article in the PSA's "Progressive thinking series, Ten perspectives on tax."

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>Myth 4: Tax cuts pay for themselves

Especially now housing costs are so out of kilter.

What young person - i.e. the generation that is saving money at a higher rate than previous generations did - is going to spend their tax cut to stimulate the economy, rather than saving it too?

Saving still stimulates the economy by lowering the cost of borrowing for someone else.

That is so funny and IMHO uniformed in modern day 'fairly tale economics'.
Money printed (ney, computer added) out of thin air is an order of magnitude greater than the savings effect on interest rates.

Please say more about the uniformed fairly tale. That sounds interesting. (sorry - I couldn't resist...)

We're much more reliant on overseas funding. Local savings are really only an issue at the moment re capital ratios.

Baby Boomers rant and rave about people buying smashed avocado. Buying it stimulates the economy, versus saving which means that they money doesn't flow. What Boomers should be encouraging is Sky TV subscriptions and reckless spending on avocados because when you spend the value of a house on consumption it should give us 8% GDP growth.

Of course that isn't happening. Buying a house, then stuff for a house now happens over decades instead of a few years. The fact that there is very little savings because people are working to survive is also really bad.

Where the real spending on houses and house contents comes from is debt. People are borrowing tens of thousands to alter their home as they don't have any savings. A lot of that is going through peer to peer lending and the interest rates aren't low.

Kiwis are going to have to learn to pay down debts and save. Those that are younger also have a component of forced savings with student loans and kiwisaver. Let's hope the forced savings encourage voluntary savings. We should create a nation of investors instead of debt slaves.

What I don't get Dictator - is supposedly we drop lending rates to stimulate the economy (post GFC). We've had the prime opportunity over the last 10 years for people to pay down debt massively with such low interest rates - we should now be sitting pretty with a lot of people mortgage free on their houses, and have a bunch of spare income to spend in the economy and generate growth. However that hasn't happened and people have done the reverse of what they should have been doing and we've ended up borrowing more and more and are now further in debt.... We shouldn't have allowed so much debt to be created in the low interest environment - it's a pretty foolish move in my opinion. Sure do it for actual productive assets/investments that will add value to the economy - but to allow the nation to become so indebted in housing would appear to me to be very counter-intuitive....

Our h'holds are among the most indebted in the world. If we started saving more and spending less, the economy would implode.

I'm not saying we should be saving more - what I'm saying is we weren't so indebted (in housing) the spare money (that is current being paid in the form of mortgages) would be free to be spent in the productive economy and result in growth..But people are too greedy and couldn't help themselves - they wanted to get into the capital gains, gravy train, that was our buoyant housing market. I think we're going to pay for that for quite a while now (literally). Perhaps DTI ratios need to be directly coupled to OCR drops for non-productive assets like housing - otherwise whats the point in dropping the rate when people have no self-control when it comes to debt for non-productive assets?

Borrowing from the future only can work for so long... at some point the economy has to become sustainable and not dependent on being fueled by ever increasing debt. The longer we put this correction off, the larger the implosion.

Monetarism was always intended to operate on a short term basis. You drop the interest rates to get that initial hit to boost confidence and get some short term borrowing going. Then push the rates up and the debt is knocked back in a year.

Now we're under socialist central bank operations where they interfere with the operation of the market on a long term basis. RBNZ think they know what people want better than the market.

Kiwis are borrowing a lot and that debt is not going away for a long time even if people are sensible. Even I'm contributing to the terrible household debt level because I bought a house a few years ago. I've accelerated payments to a 15 year term but I'll be helping to pull the average household debt to income ratio up for many years. On one hand we have people being sensible but low interest rates have pushed up house prices, and we have people making poor life choices and borrowing for consumerism. Either way we're going to have low growth from the debt hangover for decades.

Of my friends who own houses as far, as I'm aware, I only know one other person who has increased mortgage repayments to take advantage of the low interest rates. Everyone else seems to be using the reduced mortgage payment for consumerism.

Re boomers, smashed avocado (AKA The Antichrist) and Sky TV subscriptions, what's odd about this ranting is that it's built on fairytales. As we've seen, young people are out-saving preceding generations.

Also, people who think young Kiwis are buying Sky TV subscriptions are merely showing their age...very few young people consider buying Sky TV, from all sentiment I've heard in person and seen online. It's simply not part of their demographic.

A large aspect of this savings delta could due to the higher disposable income available now as compared to the distant past. I'd love to see the decadal cohort chart showing disposable income in addition to savings. Wages have consistently climbed higher than CPI. That includes entry level wages. Hence the increased ability to save for the current generation, despite the smashed avocado thing...

I'd love to see some data on the age profile of Sky subscribers..My guess is you'd see a median of 45 or so.

This would be interesting data.

I went to rather extreme lengths to save my deposit amount when purchasing my first home. I was rather well trained in fiscal deprivation as I had self-funded my university attendance including all costs (fees, food, lodging, etc.). This deprivation included not owning a TV (much less Sky) since the hand-me-down POS (with tubes!) that I got when leaving for uni, which is still true to this day (that POS was put in a landfill probably 30 years ago). I was a bit on the high saving rate side back then, and now... well, I have to start learning how to spend the savings that have built up over the years. It is definitely a change of mindset. My experience is that a bit of deprivation at the start provides rather outsized benefits at the end of the track.

"Myth 1"... didn't really refute the statement. Bringing in GST does change the dynamic somewhat, but doesn't change the underlying statistics of the net taxes minus GST.

"Myth 3" Quite creative usage of the data. I'd suggest using the data in "Myth 2" to sort out the effects of bracket creep by income strata. The highest 10% of earners had the lowest change in percentage of tax paid due to bracket creep, the median earner has has a high percentage change in tax paid due to bracket inflation related creep. Using the argument of the outsized effects of the high income outliers on one side for Myth 2" and not using the outsized effects in "Myth 3" is disingenuous. I'd be curious as to what percentage of the earning population received what percent change in taxation.

Using the wage inflation rate from the RBNZ website, the tax rate change for someone earning $50k in 2010 would have increased by 2.2% due to bracket creep. If instead, the wage increased by only the CPI during this time, the tax rate creep would be only 1.5%. The total tax relief due to the bracket change has been entirely consumed by bracket creep for the $50k wage earner if one assumes that the wage increased by CPI and if wage increased by the wage inflator the 2010 $50k wage earner is now paying almost $1k more tax now than the wage earner was paying in 2010 prior to the institution of the tax reduction. Myth3 is not busted here. As noted in a prior comment, innumeracy indeed.

Perhaps any increase in the top tax rate by a Labour Govt will see high income earners jumping into property like they did when they raised the top rate to 39%.

So this would be the shot in the arm the stagnating Auckland property market needs. So only upside which ever way the election goes.

Good analysis. Non emotive and it is fact based. Probably too dry for many voter's attention spans but a good resource to help form (or rationalise) political views.

I'd recommend checking the facts as they are presented in the article before claiming that this is fact based. My analysis suggests that at least part of the article is clearly misleading if not completely erroneous. BTW, I consider people that intentionally misrepresent data via errors of omission to be misleading. This is easily demonstrated when doing factual analysis of the claims made in this opinion article.

Note carefully the category that this article is listed under... opinion... not analysis. I'm beginning to sort out that I shouldn't read opinion articles with the assumption that I may find objective analysis. It seems that I instead find "analysis" that distorts the facts via selective omission, and misleads one via conclusions that belie the underlying objective factual data.

I am curious as to where company tax fits into the % paid by whom calculations. Many high earning taxpayers would be paying company tax ( because they own a company or have shares etc) on earnings over $ 48k, paying 28 % vs 30% or 33%. and some lower income brackets would be paying the higher 28% if they own shares etc.