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The BulletinApril 27, 2023

IRD report reveals ‘fundamental unfairness’ of how the wealthy are taxed

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The numbers shared are stark, but the government’s next steps are anything but clear, writes Catherine McGregor in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.

A wealth gap reality check

Nearly everyone was expecting Wednesday’s taxation report to produce some striking headlines. Few would have guessed its findings would be quite so stunning. IRD’s two-year High-Wealth Individuals Research Project has revealed that the median effective tax rate paid by New Zealand’s richest individuals is just 8.9%, compared to an effective tax rate of 22% for someone earning $80,000 a year with no other income. As The Spinoff’s Duncan Greive explains, “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”. That means simply increasing taxes on high incomes, for example with the relatively new 39% tax bracket, can only do so much. For the ultra-rich who were the subject of IRD’s survey, tax-free property often underpins much of their wealth. A remarkable graph in Madeleine Chapman’s analysis for The Spinoff demonstrates the enormous size of their property holdings, with the average capital gain on residential property for this group dwarfing even that of the top 10%.

Will strong words turn into action?

In his speech yesterday, revenue minister David Parker said it was clear from the data that the country’s tax system is fundamentally unfair. But he stopped short of announcing any new taxes, reiterating that Labour’s tax policy would be announced in full closer to the election. He had words of comfort for home owners worried by talk of a capital gains tax (CGT): “I have never favoured taxing the family home, either by way of capital gains or imputed rents.” So what will Labour actually do? Parker is introducing a Tax Principles Act which, as Max Rashbroke explains this morning on The Spinoff, “will enshrine a statement of the values underpinning the tax system… and require reporting against related measures, including the tax rate paid by the wealthiest”. Whether that will have much practical effect is an open question, as is whether any genuinely impactful changes to the tax system are coming. Terry Baucher, writing on interest.co.nz, doubts it, but says he could see the trust tax rate rise from 33% to 39%, in alignment with the top individual tax rate. Rashbroke notes that Parker seems open to a tax “switch”: “cutting the bottom rates of tax (or introducing a tax-free threshold) while bringing in a CGT” – much as Bill English did in 2010, when he raised GST to 15% while lowering the amounts paid across all income tax brackets.

National rounds on ‘the Minister for More Tax’

In the wake of the report, National went on the attack. The eye-watering wealth of those surveyed was “the direct result” of the government allowing the Reserve Bank to print tens of billions of dollars during the Covid-19 pandemic, said finance spokesperson Nicola Willis, “The Minister for More Tax, David Parker, can keep flogging the dead horse of a capital gains tax as much as he likes, but it doesn’t change the fact that the main driver of inequality under Labour has been its own economic policies.” In an awkward press conference appearance, leader Chris Luxon avoided commenting on the fairness of the tax system or whether high wealth individuals were being taxed enough, instead redirecting questions back to criticisms of Labour’s economic management. Meanwhile the Greens’ revenue spokesperson Chlöe Swarbrick called on the government to “show the courage of Michael Joseph Savage and fix our crumbling infrastructure with taxes on those who profited handsomely during hard times for many”, adding it was now a “political choice” not to force millionaires to pay “their fair share”.

In Australia, planned tax relief for the wealthy comes under fire

Across the Tasman, the Labor government is pushing ahead with plans to implement tax cuts for medium and high income earners. The “stage three cuts”, a holdover from the Scott Morrison era, are due to come into effect in July 2024 and are set to cost A$254bn over 10 years. The plan involves abolishing the 37% marginal tax bracket for those earning A$120,000 to A$180,000 and creating a flat rate of 30% for those earning between A$45,001 and A$200,000. The cuts are highly controversial, with critics arguing they will hand billions of dollars back to the country’s highest earners and “exactly nothing” to those at the bottom of the economic ladder.

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