It’s a feast of New Zealand’s workers.
Waged and salaried workers are a tax rich environment. We’re the piñatas of the tax world. Give us a whack, some dollars will fall out.
If you are taxed, taxed, taxed every time you earn a dollar it is a reasonable reaction to think, maybe I won’t work so much. I won’t take a second job, what’s the point? And once I earn a certain amount, is it even worth trying to earn more?
This is one reason some were pushing for changes to our tax system, before the Tax Working Group started its work into looking at how our system works, right through the working group process, and are still saying to this day that New Zealand needs a tax refresh.
If we keep focusing tax on workers, it is obvious that earning other kinds of income becomes more attractive.
A tax note by big four firm KPMG published in the lead-up to the Tax Working Group put it this way: “Boiled down to a point of extreme simplicity we’ve heard the US approach to taxation described as “a buck, is a buck, is a buck” – i.e. it doesn’t matter how you made the money, if you’ve made money you should pay tax on it.”
But in New Zealand a buck isn’t a buck worth taxing depending on how it is earned.
This is a key unfairness in the system. Why can’t we stop whacking the workers?
Is it because those with assets and capital are too influential and powerful to tax, unlike the taxed wage earners?
Workers can’t avoid PAYE. We can only avoid GST by not buying stuff.
If we don’t buy stuff, we tank the economy. See the pleas to shop local, eat out, just get out, and spend, please.
And if we buy too much, we’re contributing to inflation and adding to arguments that wages rising is something of an economic curse, to be avoided at all costs.
It’s not the poor corporations, and their super pandemic profits. It’s you, all you.
Workers are damned if they do, and damned if they do more. There is no don’t, when it comes to paying tax as a waged worker.
Before you get paid, the tax department gets paid.
From April 1 of this year, for every dollar a worker earns up to $14,000, workers pay a rate of 10.5% tax.
For the dollars earned above $14,000 to $48,000 a tax of 17.5% is taken. For above $48k the tax on workers' wages rises to 30% up to $70,000, and once you hit that every dollar until $180k is taxed at 33c in the dollar.
Above that, for the big earners, it hits 39%.
These tax thresholds haven’t been changed for more than 10 years, although the top tax rate is new. Practically, this has meant that over time, as wages rose, more and more wage and salary workers have been paying more and more tax. How nice for the Government.
Treasury's Budget Economic and Fiscal update, published in May, found “source deductions,” yes that money taken from workers before they earn it, as a share of the total tax take are forecast to keep rising, outpacing growth in the corporate tax take.
The budget and economic update says we can expect tax from workers to rise by $18 billion by 2026. The GST take (also paid of course by workers) will rise by $9.1b in the same period, Treasury says, and the corporate tax take will increase by $7.7b.
The boffins at Treasury reckon though, that the corporate growth will largely be contained to the first two forecast years because of bumper profits and revenue filed to the tax department post Covid.
And those source deductions are going to keep growing. Treasury is forecasting they will rise on average by about $3.6b each year.
This growth is predominantly due to wage growth, that delightful fiscal drag (the increase in a person’s average tax rate as income increases) and employment growth, Treasury says.
The worker piñata gets another whack.
An Organisation for Economic Co-operation and Development (OECD) report about tax in New Zealand showed NZ’s takings from personal income, profits and gains outstrips the OECD average.
In NZ 40% of tax receipts in 2019 came from this category, compared with a 23% average across the OECD.
That made NZ the nation with the fifth-highest share of its tax revenue coming from personal income profits and gains, out of 38 countries.
In 2020 personal income, profits and tax take made up 39% of tax receipts. Again the OECD average was 23%.
The most recent available data, the OECD said, suggests that by OECD standards New Zealand obtains a relatively large share of tax revenue from taxes on income and profits (including company and personal income taxes).
And these taxes, on people's incomes, are among the taxes the OECD says are the worst for economic growth.
A 2014 report out of the Brookings Economic Studies programme found that the structure and financing of a tax change are critical to achieving economic growth, and income tax cuts encourage people to work, save and invest. Discussion documents from NZ's Tax Working Group echoed these ideas.
A June 2022 report by the US think-tank Tax Foundation found that "research almost invariably shows a negative relationship between income tax rates and gross domestic product (GDP)". Tax cuts for most workers (or the bottom 99% as the think-tank puts it) leads to economic growth, income growth for workers and decreases unemployment.
A much older report, from 2004, from the National Bureau of Economic Research found taxes on labour income and consumption spending encourage households to work in the black market or shadow economies, and see efforts go towards untaxed uses of time such as leisure or household production.
If we have outliers, like a lack of capital gains tax or land tax, where a buck earned isn't taxed like a buck earned from a wage, that affects how people and businesses make decisions, including about what they will invest in.
Broadening the tax base leads to efficiencies in the tax system, ensuring personal income isn't taxed too much ensures there is a fair reward for a hard day's work, and that taxpaying workers have the ability to take risks, maybe start a business, or to live their lives how they want to.
What might happen if we finally bit the bullet, and decided we were going to broaden our tax base, by introducing taxes on assets like land, or even houses?
The Tax Working Group reckons the first five years of a capital gains tax could bring in $8b.
A 2018 discussion document prepared for the Tax Working Group by Inland Revenue and the Treasury found (although it relied on work from another working group, in 2009) broad-based land taxes "are highly efficient, simple to administer, and difficult to avoid".
The 2009 report calculated that a non-deductible land tax levied at a 1% rate on all land, except public, conservation, and Māori authority land, could bring in tax revenue of $3.8b a year.
With this additional tax income, not coming from the ever-rising income tax revenue, could potentially drop all the tax rates, for everyone, tax experts say. Yes, even for corporations.
A truly broad-based tax system more evenly spreads the cost of the things we need as a nation.
Now that’s not so terrifying, is it?
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