Geof Nightingale: Whacking high earners won't ease pain

The global Occupy movement has its roots in the frustration of people at the rise in inequality. So how do we turn this bus around? Photo / APN

The growing gap between New Zealand's rich and poor has had a lot of media attention in recent years. Or maybe it's just the general election was this year, and "the haves" and "the have nots" are always a popular topic for politicians. No matter which side of the political fence they sit on, the main message is always clear, each promises to do its bit to reduce inequality, based on their perception of the issue.

Yet, there's no avoiding the perception generated from the recent hard-hitting report by the OECD.

Called "Divided we stand" there in black and white it pointed out that since the mid-1980s, the gap between New Zealand's rich and poor has grown faster than in any other developed nation.

And New Zealand is not alone. The vast majority of OECD nations have experienced a growth in inequality. It seems Generation Y which replaced Generation X has now been superseded by Generation Inequality ... and they're not happy.

The global "Occupy" movement has its roots in the frustration of people at the rise in inequality. So how do we reduce inequality and turn this bus around when it's been heading down the road for more than 20 years?

The OECD reckons it's vital Governments review their tax and transfer systems and increase the top tax rate so well-off individuals contribute their fair share. It also stresses the need to improve tax compliance and eliminate tax loopholes. At first glance, it would seem that New Zealand is heading the other way when in Budget 2010 we rebalanced our tax system by reducing personal tax rates and increasing GST.

But first impressions are often misleading. New Zealand is already doing what the OECD recommends with our tax system. Our high-income earners already pay a far higher amount of tax than lower income earners. In 2010, just 12 per cent of individual taxpayers contributed a disproportionate 49 per cent of all personal income tax. The tax changes in 2010 strengthened the taxation of property by removing the deductions for depreciation on buildings, by allocating $113 million of extra funding to Inland Revenue to enforce existing property tax laws, and by shutting down loopholes allowing the wealthy to claim Working for Families.

Our Working for Families tax credit system already redistributes a massive $2.8 billion each year from high earners to low- and middle-income earners.

The OECD recognises the dangers of rising tax rates and benefit levels, noting they can produce disincentives (to work, to save or even to remain in New Zealand) and damage economic growth.

The Tax Working Group saw the danger signs a while back when tasked with examining New Zealand's tax policy.

As a result it recommended reducing personal tax rates, but increasing GST and taxes on property. The theory being, reducing personal tax rates increases the incentives for people to enter the workforce and increasing tax on consumption would encourage savings.

The Tax Working Group's recommendations caught the Government's interest and National soon set to work implementing a tax reform package.

The aim of Budget 2010 was to rejig the tax mix - taxing incomes a little less and consumption a bit more. With an increase in GST, changes to depreciation coupled with cuts to personal tax rates the entire package was broadly fiscally neutral over four years. And in fact, most of the value of the personal tax cuts package went to those who earn less than $70,000 a year.

New Zealand already has the highly progressive tax and transfer system recommended by the OECD. Raising tax rates further risks economic damage.

At the end of the day, isn't a sustainable tax system which fosters economic growth our best bet? Where we sit today I think New Zealand should be focusing its energy on the OECD's other key policy recommendations to address inequality - education and high-quality job creation.

Whacking high earners with more tax may be an easier sell to the majority but New Zealand, as a country, could end up poorer for it. Which makes you wonder about what we will call the next generation to supersede Generation Inequality.

*Geof Nightingale is a tax partner at PwC in Auckland.