New Zealand takes GST on every grocery item and taxes personal income from the first dollar. Photo / Yiu Yu Hoi, Getty Images, File
New Zealand takes GST on every grocery item and taxes personal income from the first dollar. Photo / Yiu Yu Hoi, Getty Images, File
OPINION
Our tax system is one of the harshest on low-income earners in the OECD and squeezes the middle.
We are perhaps the only country in the OECD that doesn't at least have a concessionary GST rate for food and that has no Capital Gains Tax (CGT). One of thefew that taxes personal incomes from the first dollar. One where the highest individual income tax rate started from a low 17 per cent over the median wage until April, and our high earners pay far less tax than most countries. Revenue Minister David Parker has acknowledged we have an unfair tax system and requested IRD to work on it.
Mike, a university student, works Saturdays to pay his grocery bills; he pays 10.5 per cent PAYE and 15 per cent GST for food - 25 per cent of his meagre income goes to the government in taxes. In the UK and Australia, he would pay no tax. (This is an illustrative example; most of us pay rent or mortgage that attracts no GST).
Adam sold an investment property he bought 20 years earlier for $1.3m, a million dollars more than he paid for it. He paid no tax on the capital gain. In Australia, he would have paid CGT at his highest income tax rate, which could be as high as $450,000; in the UK, $280,000.
In his epic tome Wealth of Nations, Adam Smith wrote there were, "four principles of a good tax system - fairness, certainty, convenience and efficiency". Simplicity or efficiency is just one principle, not the only criteria, as many of our experts extol. Every other country manages a few exemptions without strain.
In the late 1930s, the birth of the modern welfare state required higher levels of taxes, leading to modern tax regimes. After World War II, the highest tax rate was 76.5 per cent. Still, the working class paid little tax. On £460 ($35,200 in 2021 terms) a year, a top-ranked butcher with two children paid no income tax after exemptions and rebates. Neither major party wanted to change the fundamentals of a system that enabled most New Zealanders to live a life of dignity.
Between 1984 and 1993, Rogernomics changed the tax system dramatically toward a "broad-base, low-rate regime". Income tax rates were reduced drastically from 66 per cent to 33 per cent for the highest earners, a massive drop. The highest rate started from a relatively low income of $30,000; the same top tax rate, whether you earned $40K or $1m. The Company Tax rate was reduced from 48 per cent to 30 per cent. A land tax of 5 per cent and inheritance taxes were abolished.
GST of 10 per cent was introduced in 1986, which harshly impacted low-income earners to compensate - now increased to 15 per cent. As per IRD, the lack of exemptions meant we collect the highest GST in the OECD (as a percentage of GDP).
At around 30 per cent of GDP, today's total tax take is almost the same as in 1980, although the burden on the low and middle-income earners has increased dramatically. That's a massive transfer of wealth from the low and middle to the well off.
A quick comparison with Australia points to possible changes. Their top tax rate is 45 per cent, ours 39 per cent. Their low-income earners get AU$ 18K tax-free; we tax from the first dollar. Their GST rate is 10 per cent and exempts food; ours is 15 per cent with no exemptions. They tax capital gains at the top marginal tax rate; we have no CGT. Australia has a payroll tax and a stamp duty on property purchases; we have none. The tax system exacerbates our struggle to retain workers.
Although the current Prime Minister ruled out a Capital Gains Tax, it's one of the most logical steps. Even the ultra-capitalist US taxes capital gains. A wealth tax and a higher income tax rate for high earners. Closing loopholes that allow multinational and overseas companies to pay little or no tax is using tax havens etc. Closing loopholes that enable high net worth individuals to pay low effective tax rates.
Kushlan Sugathapala. Photo / Supplied
Many welfare organisations argue that targeted welfare is less expensive but these are unpopular and usually poorly funded. The adage "programmes for the poor are poor programmes" holds true, as reflected in our measly welfare benefits. Universal benefits are easier to implement and harder to remove. For example, if the first $20K income was zero-rated, it would take a brave government to reimpose a burden of $2100 on the middle class.
A reduction of GST on food is affordable. Treasury estimates that GST revenue will increase by $2b each year for the next four years. Sacrificing one year's increase can more than pay for a concessionary GST rate. A tax-free threshold is essential and in line with almost every OECD country.
In his victory speech, Australian prime minister Anthony Albanese spoke of, "a country that leaves no one behind and stops no one from getting ahead". Our tax system fails on both counts. Our weak and strivers deserve what they would get in virtually every other country.
Not just for the squeezed middle; the bottom is, well, squashed.
