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.”

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