Brian Gaynor: New Zealand high tax fable goes up in smoke

One of the great New Zealand myths - that we are grossly overtaxed compared with other countries - has been shattered by two recent OECD studies.

The 443-page "Taxing Wages" shows that our average tax impost and top tax rate are below the OECD average, while the 108-page "Consumption Tax Trends" illustrates that our GST rate and excise duties are also relatively low.

The other major conclusion from the OECD analysis is that our tax system has a strong bias towards single individuals while the family unit is heavily taxed.

One of the first points about tax is that it is a relatively complex and headline figures do not always tell the full story.

The tax impost for a single person on the average wage in New Zealand is 20.7 per cent, compared with 15.9 per cent in the United Kingdom and 16.5 per cent in the United States.

But, in most countries, employees are also required to make a social security contribution, which works out at 8.5 per cent for a single person in the UK and 7.7 per cent in the US. As these social security contributions are compulsory, and are another form of tax, they are included in the accompanying table.

This brings the tax rate for a single person in the UK to 24.4 per cent and 24.2 per cent in US.

New Zealand and Australia are the only two countries in the 30 member OECD that do not have compulsory social security deductions.

New Zealand and Greece are the only two countries that don't have a compulsory employer social security contribution. Although there is a strong argument that employer contributions are an effective employee impost, these have not been included in the table figures.

The first column shows the tax impost for a single person on the average wage in a select number of OECD countries. The New Zealand impost is 20.7 per cent compared with an average of 25 per cent for the 30-country OECD .

The only countries with a lower rate than New Zealand are Mexico (4.5 per cent), Korea (9.3 per cent), Ireland (15.7 per cent), Greece (16.6 per cent), Portugal (16.6 per cent), Japan (17.4 per cent) and Spain (19 per cent).

In a number of European countries, the headline tax rate is low but the social security deduction is huge. The tax rate for a single person in Greece is only 0.6 per cent, but the social security deduction is 16 per cent. In The Netherlands, the tax is 8.5 per cent and the social security impost 25.8 per cent.

The OECD report also challenges the myth that New Zealand is a great place to bring up children.

The second column shows the tax impost for a two-child family with one earner on the average wage. New Zealand, Australia, Sweden, Finland, Greece, Mexico and Turkey are the only countries that don't give tax relief to a single-income family with two children.

New Zealand's tax impost of 20.7 per cent for a single-income family is slightly above the OECD average of 19.2 per cent for this group.

Ireland has the lowest tax impost in the table because it has only two tax rates, 20 per cent and 42 per cent, and the latter does not kick in until just above the average wage. Ireland also gives tax relief on mortgage payments, medical insurance and work-related expenses.

Married individuals in Ireland also receive a special tax credit and a number of other allowances that reduce the tax rate for a single- income family below 10 per cent.

The US tax system has a strong bias towards families on low incomes. The tax rate rises from 15 per cent to 25 per cent for single individuals when they earn more than US$29,050 ($39,090); for single- income families when the head of the household earns above US$38,900; and for a married couple when their combined income exceeds US$58,100.

In the UK, a working tax credit and a child tax credit applies to low- income families with children. These are contributing factors to the difference between the single and married tax imposts in the UK.

New Zealand's top marginal tax rate of 39 per cent is also below the OECD average of 43 per cent (third column). Ireland and Spain, the two countries in the table with a lower tax impost for single persons, have a higher top rate. Australia's top income tax rate is 47 per cent, but there are Medicare and compulsory superannuation charges.

Several countries have combined central and state government income tax. The Canadian tax rate of 53 per cent is made up of a 29 per cent rate for the Federal Government and 24 per cent for Quebec.

The Slovak Republic is the only OECD country to have a flat tax rate. It replaced a progressive personal income tax system with a 19 per cent flat tax rate last year - this is the OECD's lowest top tax rate.

The consumption tax figures in the fourth column show that all 30 OECD countries, with the exception of the US, have a goods and services tax (GST) or valued-added tax (VAT).

New Zealand's GST rate of 12.5 per cent is well below the OECD average of 17.8 per cent. But the consumption tax issue is complicated because some countries have additional state sales taxes, while others exempt certain items from their consumption taxes.

There are also capital gains taxes and excise duties on tobacco, beer, wine and petrol.

New Zealand is one of the few countries not to have a capital gains tax, but we have one of the highest excises on cigarettes. As far as alcohol is concerned our taxes are in line with the OECD average.

New Zealand has the fourth- lowest tax on unleaded petrol after Mexico, the US and Canada. When our relatively low GST rate is also taken into account, the tax on petrol in New Zealand is less than a third of most European countries.

In addition, New Zealand is one of the few countries with no duty on diesel and heating gas and oil.

The OECD admits that there are great difficulties in comparing tax imposts in different countries, but its latest study is as close as we can get.

The findings show New Zealand is a particularly good country to work in if you are single, burn large amounts of petrol and don't smoke.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.