Today your money's your own

By JIM EAGLES

Free at last!

For the average New Zealander today is Tax Freedom Day.

Independent research commissioned by accountants Staples Rodway has concluded that for the first 145 days of this year every cent earned by the average New Zealander was siphoned off to support Government and local government expenditure.

So today is the day New Zealanders start working for themselves.

Should we care?

Well, yes, because it provides an accurate measure of the overall trend in how much we pay in direct and indirect tax, duties and local body rates.

For instance, this year's Tax Freedom Day, May 26, comes a week later than last year, showing that in the past 12 months the tax burden has increased.

The concept also provides an ongoing basis for comparison with other countries, which is fairer than merely quoting tax rates.

New Zealanders have to work for two weeks longer to pay their tax bills than Australians, who celebrated Tax Freedom Day on May 12, and five weeks longer than in the US, where the big day came on April 18.

That shows New Zealanders are more heavily taxed than either of those countries. But it could be worse; Tax Freedom Day in the more heavily taxed UK will not arrive until June 4.

Changes in the date of Tax Freedom Day over the years show the trend in New Zealand is in the opposite direction to the other three countries studied.

Most recently it has got earlier in the US, Australia and the UK.

Tax Freedom Day is well-established in many countries as a simple way of illustrating the extent of the overall tax burden.

Now Staples Rodway wants to promote it in New Zealand.

Peter Guise, managing partner of Staples Rodway, said yesterday that the group planned to announce Tax Freedom Day annually "as a means of providing a comparison of taxation with our leading trading partners".

To put the idea on a sound footing it commissioned independent economist Rozanna Wozniak to look at the various definitions of Tax Freedom Day and come up with an appropriate formula for New Zealand.

Wozniak looked at the formula used in several other countries and also had extensive discussions with Treasury, Statistics New Zealand and the Institute of Economic Research.

In the end she decided the Australian model suited the nature of the New Zealand economy. The UK and US results were recalculated using this model for direct comparability.

The model basically divides aggregate national and local government tax income (ie the national tax bill) by Gross Domestic Product less depreciation (ie the nation's income), for all of which official data is readily available, and then multiplies by 365 to find the number of days it takes for the national income to pay the national tax bill.

Doing that calculation with the latest figures (for the financial year to the end of March this year) revealed that it took 145 days of the national income to pay the national tax bill.

The 146th day, May 26, was therefore the first day New Zealanders were free to earn for themselves.

Making the same calculation back to 1985 revealed that this year's Tax Freedom Day is the latest since 1998.

On the other hand, it is a lot earlier than in 1990 after GST was increased to 12.5 per cent and the average Kiwi had to work 163 days to meet the tax bill.

Wozniak used the same formula to work out the Tax Freedom Days of Australia, the US and the UK to provide an international comparison.

Staples Rodway then took Wozniak's work and used it to develop a computer program to enable ordinary taxpayers to work out their own Tax Freedom Days.

Guise said he found the individual calculation one of the most fascinating parts of the exercise because it revealed "taxes that many of us pay without realising the contribution we are making to the Government".

For instance, someone who smokes 30 cigarettes a day contributes $2628 a year to the state coffers in tobacco tax plus a further $548 in GST.

"When we talk about tax we tend to think of income tax, overlooking the fact that out of an income of $30,000, over $2300 is likely to go in GST," said Guise.

"The costs of running a family car also contribute to the Government purse. A $40 weekly spend on petrol results in $720 in excise going to the Government, add the licence fee and you're looking at around $1200 a year. And the list goes on."

Find the day anonymously

May 26 is Tax Freedom Day for the average New Zealander.

But the actual date that individuals stop working for the Government and start working for themselves varies according to personal circumstances.

New Zealand accountancy firm Staples Rodway has developed a simple program which enables anyone to anonymously work out their own Tax Freedom Day.

First it wants to know your annual income - say, $50,000.

Next the programme asks for housing details - let's say you own a house with a mortgage which costs $750 a fortnight and pay rates of $1600 a year. Do you have any other income or investments - no.

Any taxable vices - we'll say you have a drink and occasionally gamble but don't smoke. Spending on a car and petrol - say, $40 a week.

Just click on the "calculate tax" button and it emerges that your total tax bill is $15,963, that would absorb your earnings for the first 117 days of the year and 28 April is your Tax Freedom Day.

The Tax Freedom Day calculator

* In Dialogue tomorrow, Peter Guise and Roger Kerr, executive director of the Business Roundtable, discuss the implications of Tax Freedom Day.