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Image: Archi Banal
Image: Archi Banal

PoliticsApril 26, 2023

New Zealand’s unfair tax system in three depressing graphs

Image: Archi Banal
Image: Archi Banal

We’ve always known the richest among us probably don’t pay their fair share in tax. But a report released today shows it’s even bleaker than imagined.

The Inland Revenue Department today released its High Wealth Individuals research project, reporting the findings from its six-year tracking of 311 of New Zealand’s wealthiest families. The top line? That between 2017 and 2021, those families’ collective annual income grew (not the total, just the annual growth) from as little as $1b in 2017 to as much as $14.6b in 2021, and on average, they paid an effective tax rate of 9.5%. That’s less than the lowest tax bracket (those earning less than $14,000, who pay 10.5% income tax). 

Read the full explainer on what’s in the report here.

The report itself is hundreds of pages long, with extensive methodology, definitions and findings. But the general, depressing story can be told in three graphs. 

NZ income tax vs Australia income tax

This isn’t even in the report but is important context to show how low, middle and high income earners are treated by our tax system. New Zealand taxes earners from the very first dollar. If you make $500 in a whole year, you’re paying tax on that. In Australia, the first $18,000 earned is tax free, because anyone earning an annual salary of $16,000 probably needs every last dollar of it. 

At first glance (meaning if glanced left to right on the graph) we appear to have an aggressive income tax system. But then it immediately goes the other way. On the other end of the spectrum, Australia’s top tax rate is 45% for any dollar earned over $180,000. New Zealand’s top tax bracket is 39% for every dollar earned over $180,000, and that was only raised in 2021.

So in short, those earning a lot of money are on relatively low tax rates, especially when considering that even those earning very little pay income tax on every dollar. 

Wealth by taxable income

Our tax rates may be low compared to our neighbours but if the wealthiest New Zealanders are millionaires – and even billionaires – that’s still a lot of tax being paid, right? Wrong. 

Image: HWIRP/IRD

This extremely bleak and basic graph shows a simple truth. Only a tiny portion of the wealthiest New Zealanders’ income is taxable. Just 7% of the 311 wealthy New Zealanders’ annual earnings was taxable income (like salaries). Meanwhile, the majority of New Zealanders earn all (or nearly all) of their income through salaries and therefore are taxed on 100% of it. But the wealthiest don’t become wealthy by working hard for a big salary. That other 93% of their annual income is largely drawn from and held in trusts, assets, business entities and property.

So while higher income tax brackets will make a difference, it will still only impact a fraction of the wealth accumulated every year by New Zealand’s richest citizens. 

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Pandemic property boom, baby

The report tracked the 311 individuals and families (aka the Project population) from 2015 to 2021, and covered their wealth growth both as individuals and as a population. Their wealth increased year on year throughout the six years but saw a particular jump in 2020/2021, largely thanks to skyrocketing property prices. Unsurprisingly, those who already held great wealth heading into the pandemic (again, often held in real estate, regardless of a person’s area of business) saw their wealth grow hugely in the 12 months from the start of the first nationwide lockdown to April 2021. Even the top 10% (decile 10) can’t hold a candle to the extremely wealthy. I can hear Bernard Hickey screaming as I type.

Note: OOH stands for Owner-Occupied House (Image: IRD)

Once again I gently suggest that you just buy a house to secure your financial future. No follow-up questions, please.

An effective tax rate of 9.5% on annual earnings of $14.6b from just 311 individuals means that any move to bring that effective rate closer to the average earner (32%) would see massive increases in tax revenue each year. As revenue minister David Parker said while presenting the findings, the project was not about “chasing tax avoiders” or “attacking the rich”. It’s simply a long-overdue step in understanding just how unfair our tax system is.

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hand holding money giving it to a outstretched hand
The government funds lots of accelerators, with the hope that it will create more successful businesses Illustration: Toby Morris

PoliticsApril 26, 2023

Shocking new IRD data reveals the average wage earner taxed at twice the rate of the wealthiest New Zealanders

hand holding money giving it to a outstretched hand
The government funds lots of accelerators, with the hope that it will create more successful businesses Illustration: Toby Morris

The survey covers over 300 families, with effective incomes averaging $8m per year, and has the potential to reset the tax fairness debate for the first time in decades.

The results of a landmark IRD study of a group of very wealthy New Zealanders have just been released, revealing a yawning gap between the group’s towering effective incomes, which have a median of around $8m per year, and the corresponding tax rate, which comes in at 9.4%, after benefits are subtracted and GST paid is added in. The equivalent rate for a median wage earner is 20.2% – more than double that paid by this group, comprising of some of the wealthiest New Zealanders.

The research covers the period from 2016-2021, and the IRD noted receiving “a high level of responsiveness” from 400 individuals and their immediate families, resulting in a final group of 311 whose incomes were considered for the report. The reason it emphasised “effective incomes” is that while most New Zealanders earn the majority of their income through wages, which are fully taxed, this group earns the largest part of its income through the increase in the value of assets they own – what’s known as “capital gains”. 

Parker has written a note to accompany the project which underlines this, saying it proves that “we tax those who earn all their income from salaries at a much higher rate than the very wealthy.” He also says that the report “breaks new ground”, because it is built on “actual data”. Parker concludes by saying the reports provide “a fundamental baseline for debate on the fairness of our tax system, allowing future tax policy to be based on better data and more solid evidence.”

What is the report and how was it constructed?

Beginning in October 2021, the IRD wrote to hundreds of individuals it believed to have a net worth of more than $20m, indicating it wanted to look into what they own, covering the six year period covering 1 April 2015 to March 31 2021. It was able to do this thanks to an amendment to the Tax Administration Act which allowed them to compel those selected to reveal the scale of their asset portfolios.

As the project notes, “economic income is a broader concept… it includes non-taxed forms of income, such as capital gains on shares and real property. It seeks to measure the increase in an individual’s economic resources during a period.” The study then attempted to take account for transfers, like working for families, and GST paid on what the group bought and sold. After all that, it settled on a variety of effective tax rates so as to illustrate how much the total wealth of these individuals and families increased during the period, and how much tax they paid on that increase.

What did it find?

The results revealed the group has enormous levels of household wealth, mostly well above the $20m floor identified at the study’s inception. “The mean [average] estimated net worth of the families in the Project population for 2021 is $276 million and the median is $106 million.” It also found considerable variation in how much total income the group cumulatively generated, from a low of $1bn in 2017, to a high of $14.6bn in 2021. 

The biggest driver of this was increases in the value of businesses owned by the group. It’s perhaps telling that the largest increase happened during the first year of the pandemic, when the government’s wage subsidy was in operation – a huge spending programme which flowed into businesses, criticised by some as a wealth transfer from future generations to business owners.

The study notes that 2016-2021 “was a period of relatively high asset price growth,” meaning that it might be somewhat atypical over a longer time period. However it noted that when tested against shares held in listed companies going back to 2004, “effective tax rates were still very low”. 

The low tax rates paid are achieved because this group earns just 7% of its income through wages, with a further 10% taxed at a similar rate through trust income. As a result, an enormous 83% of the group’s increases in wealth was earned through other means, such as increase in the value of property or businesses they own or control. 

“It shows the effective tax rate paid by middle income New Zealanders is at least double that paid by the wealthier New Zealanders in this Inland Revenue study,” Parker wrote in his note. “Our tradies, nurses, school teachers, hospitality workers, hairdressers, cleaners, engineers and small business owners all pay much higher effective tax rates than their wealthier fellow Kiwis.”

The counter-arguments

Last week, in what can be read as a pre-emptive strike against the fundamental basis of the report, Sapere released a report funded by tax consultants OliverShaw. “One of the questions asked is whether the very wealthy pay taxes at the same or higher rate than middle income earners,” says OliverShaw Principal, Robin Oliver. “This research [from Sapere] shows clearly that, whether you consider taxable income or other measures, such as economic income, the answer is: ‘Yes, they do’.”

The Sapere report had clearly been digested by the IRD report’s authors, who singled it out for a specific response. “The Sapere research shows scenarios assuming that most income is earned in a taxable form up until retirement. In contrast, the [IRD] Project population earn most of their income as returns on investment that are not directly taxable.” OliverShaw itself issued a statement about the IRD study, decrying it as “likely to paint a misleading picture of our tax system making it seem broken when it is not… It is based on officials’ assumptions about unrealised capital gains and a tax treatment of the family home that would not be acceptable to New Zealanders.”

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The Act party, long a proponent of a low rate flat tax system, approvingly cited the OliverShaw-commissioned report, while has decrying the IRD study as “a politically driven fishing expedition”. It goes on to explicitly reference a capital gains tax, saying “a CGT won’t address any of the issues in New Zealand’s society. It will make people less aspirational and less likely to invest in an economy that needs to grow.”

What happens next?

All eyes are on David Parker, whose speech today will expand on his remarks to accompany the reports. In the speech, an embargoed copy of which was distributed to media, he describes the IRD’s report as delineating a “fundamental unfairness in our tax system”.

PM Chris Hipkins has worked assiduously to develop a cautious and pragmatic reputation since taking over from Jacinda Ardern, but told Morning Report today that the government’s position on tax would be clear ahead of the election. Parker backed this up in his speech. “I want to be clear today that I am not announcing any new tax policy or tax switch. Labour’s tax policy will be announced before the election.” However, both statements leave an opening for a reversal of Jacinda Ardern’s ‘not on my watch’ position on a capital gains tax. Parker is also at pains to say that any such tax would be limited in its scope. “I have never favoured taxing the family home, either by way of capital gains or imputed rents. High rates of home ownership are a cornerstone of a fair society.”

Still, it’s clear from what Parker describes as a “truly groundbreaking” study, that it is intended to be a new baseline to understand the nature of tax in New Zealand. It all sets the stage for a debate which is more substantive and less vibes-based than any prior, with this report laying out in detail how much of the effective income of our richest is derived from the increase in the price of assets they hold – and thus the relatively small proportion of it which is in scope of our current tax system. During a cost of living crisis, it’s the foundation for a potential future tax switch which reduces the burden on wage earners in return for introducing, for the first time, a broad-based tax on other forms of income.

read more: All of a sudden, a capital gains tax is back on the political agenda

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