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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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bus, train and ferry illustrations with frowning face emojis next to all three
Record low satisfaction for Auckland public transport. (Image: Tina Tiller)

PoliticsApril 26, 2023

Revealed: Auckland public transport user satisfaction hits all-time low

bus, train and ferry illustrations with frowning face emojis next to all three
Record low satisfaction for Auckland public transport. (Image: Tina Tiller)

‘Customers are losing confidence in our ability to provide an acceptable service,’ warns an internal AT memo. 

The “March madness” endured by public transport users across the country reached new heights of frustration and fury in Tāmaki Makaurau last month. Across bus, train and ferry services, users registered all-time low levels of satisfaction in Auckland Transport surveys, leading an AT analyst to sound an internal alarm about a crisis of customer confidence. 

Ahead of the traditionally strained month of March, impacted in part by the return of tertiary students to campus, AT warned commuters in a controversial social media post: “Please consider travelling off-peak to avoid the busiest periods on our roads and public transport services. Buses, trains and ferries will be busier and more services will have standing room only. For those who need to travel in peak, please allow extra time.”

Those concerns were borne out. The first full week of March saw users’ satisfaction with their most recent public transport journey fall to an all-time low for the second consecutive week, at just 34% of respondents. The same figure was recorded the following week.

As far as overall satisfaction with the public transport system is concerned, the first week of March saw a record low of just 22% of users. That fell a further three points in the second week, to 19%, meaning that less than one in five public transport users declared themselves satisfied with the system. Most of the comments that accompanied survey responses addressed the cancellation or delay of services.

The ratings are drawn from online surveys of registered Hop card customers who have travelled on the Auckland network, provided to The Spinoff in response to an official information request. 

‘Customers are losing confidence’

The gravity of those numbers was laid out in internal correspondence. “As reliability issues continue to plague the network,” wrote a customer insights specialist in a note that set out the numbers from the first week of March, “customers are losing confidence in our ability to provide an acceptable service, with some commenting that it is no longer worth it to use public transport.”

In the first week of the month, satisfaction with bus services fell to an all-time low of 32%, while more than half (57%) of respondents reported their latest journey being affected by a disruption.

“The frequency of cancellations has left customers uncertain, causing anxiety and stress about whether they will be able to get to their destination on time,” noted the AT survey analyst. “Whilst some have opted to leave their houses earlier to account for any disruptions, others resort to [a] private vehicle to save time. Additionally, for those impacted by cancellations, they express frustration at extended wait times due to subsequent buses being full and unable to pick passengers up.”

Auckland Transport online public transport survey

Auckland Transport online public transport survey

The following week, the analyst noted: “Frequent cancellations (coupled with March madness) means buses are perceived as crowded or at times, too full to pick customers up. This results in high stress and anxiety as customers are missing work or important appointments, and organising alternative transport can be costly.”

Satisfaction with train services came in at 41%, with disruptions reported by 58% of respondents. The analysis stresses that this result does not include those whose services were out of action as a result of the Rail Network Rebuild programme. “It is important to note that these are from customers who are currently using our train services – that is, those who haven’t been impacted by RNR.”

There were some encouraging signs, albeit from a low base, by the end of March. In the week ending March 29, overall satisfaction with the latest journey was 37%, with overall satisfaction with the system at 24%. By the end of the month, train satisfaction was at 43%. Patronage across the system increased in March. 

Auckland Transport online public transport survey

Ferry satisfaction was dire through March, reaching a record low of 28% for the month. Reports of disruption were also at their highest level, on 58%. The survey analyst observed: “Customers are frustrated with their ferry services, with one saying ‘the service is getting worse and worse, and no one seems to be held accountable’, calling it a ‘total farce of a service’. Others do not feel that AT or the ferry operators care about the number of delays / disruptions. Customers’ biggest pain points continue to be information about delays and disruptions (13%) and how often services run (15%).”

‘Light at the end of the tunnel’

The results reflected “a range of complex staffing, infrastructure and broader service delivery issues”, said Mark Lambert, AT’s executive general manager, integrated networks. “On our bus and ferry networks our passengers are experiencing a disappointingly high number of cancellations, delays and disruptions due to ongoing staff shortages from our bus and ferry operators, part of a global transport skills shortage,” he said in a statement.

“And on our rail network there are significant disruptions at the moment for passengers travelling on the Eastern Line because of KiwiRail’s Rail Network Rebuild programme, which is line-by-line replacing the foundations of Auckland’s rail network. These challenges have led to a prolonged period of disruption and uncertainty for our passengers, which has understandably dented Aucklanders’ confidence in public transport.”

Lambert pointed to progress including a lift in bus driver wages and a recruitment drive that had seen a driver shortfall at the end of last year reduced to 354 today. The goal, he said, was to deliver a full timetable by the end of the year. AT was working with KiwiRail “to find ways to minimise disruption from the Rail Network Rebuild and provide better alternative transport options” and with ferry operators “on an industry-wide training approach to help address the skills shortage affecting our ferry services”. Further work was under way to improve communications.

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“Despite the current challenges facing our network we are seeing increasingly strong patronage across our network, with passenger numbers last week reaching 79% of pre-Covid levels, made up of 83% for bus, 103% for ferries, and 60% for trains (reflecting significantly lower passenger numbers during KiwiRail’s Rail Network Rebuild),” he said. “Like most of our team at Auckland Transport, I’m a regular public transport user too and I appreciate that it is tough at the moment with the state of the network. But there is a light at the end of the tunnel, and so we’re asking Aucklanders for their patience as we continue to do our best to improve the reliability and performance of our network.”

Auckland Transport is currently undergoing a restructure process expected to see around 150 people in a staff of around 2,000 lose their jobs. 

That process follows Auckland Council demands for a $32.5 million annual saving from the council-controlled organisation, which Wayne Brown wants to see implemented “without making further cuts to public transport services that Aucklanders rely on”.

Addressing the board of AT, the Auckland mayor said: “This is a tough ask, I know, and will require hard choices, but households across Auckland are facing tough choices as interest rates rises, and council and our CCO’s must do the same.”

Brown has reiterated a request for “a fundamental change of approach from AT”, saying: “The organisation currently suffers from a serious democratic deficit and needs to regain social licence for its activities. AT needs to deeply understand and respond to what matters most to Aucklanders in transport.”

He urged a focus on meeting immediate service needs ahead of “large-scale investment in new infrastructure”, and improvement in communications with users. He said: “AT needs to reduce its cost to council. AT must at all times prioritise affordability and value for money. This should include looking at phased delivery of projects and lower cost delivery of the cycling programme.”

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