By MARY HOLM
Q: I have often heard it said by the well-to-do that New Zealand is over-taxed.
When I was growing up in the 1950s, there was milk in schools, the Family Benefit (which could be capitalised for a loan on a first home) and compulsory military training for all medically fit 18-year-old males.
All these were provided courtesy of the NZ taxpayer. There was no GST, either.
One has to wonder how the rate of tax then compares proportionally with tax payable today.
Under-16s then were not required to pay tax as they do today. I received an "Irishman's rise" on turning 16.
A: Take off your rose-tinted glasses.
Setting aside the issue of whether military training was good - and many would debate that - we are taxed more and we get more from the Government now.
"Your correspondent has an approximate memory," says Professor Gary Hawke, head of Victoria University's School of Government, who taught me economic history many years ago.
He doesn't think there was any period when capitalised family benefits and compulsory military training overlapped.
"The detail is obviously not important, but the point that memories are selective and unreliable is."
Turning to your main point. "The level of tax relative to income quickly becomes complex," says Hawke.
Broadly speaking, though, "The ratio has risen from about 25 per cent in the 1950s to somewhere around 30 to 35 per cent now.
"There have been many changes in what we expect to be provided through the public sector and what we finance by tax, which is not the same since public sector activities can also be financed by fees, and some public sector service provision may be contracted to the private sector," says Hawke.
He gives three examples of major changes in what the Government does for us:
* "In the 1950s, old age pensions were means charged and universal superannuation at age 65 was at a low level."
He notes, too, that the proportion of the population who lived for long in retirement was much lower then.
* "The health services available in the 1950s were much more limited."
There were fewer drugs, and hospital services were much less complex.
* Fewer people did five years of high school and beyond, and schools had less resources.
Hawke sums it up this way. "Given a free choice, I am confident that few people would choose to return to the material circumstances of the 1950s or to the public sector of that era."
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Q: I wonder if you could tell us just what we are getting when we have a term deposit.
We are given an annual interest rate, but what is the actual after-tax rate and how much does that become at the end of the year?
It would be good to have a chart that showed, for $5000 for one year at different interest rates, the after-tax rate and dollar amount of interest for those paying 19.5 per cent tax, 33 per cent tax and 39 per cent tax.
A: Rather than showing you for just $5000, I'll give you some formulae that you can use on any amount of money and any interest rate.
The way the tax system works, it's more accurate to say those with taxable income of less than $38,000 are in the 21 per cent tax bracket, rather than 19.5 per cent.
So what we have is this:
* With taxable income of less than $38,000 (tax bracket 21 per cent), multiply the interest rate by 0.79.
Example: If interest is 5 per cent, multiply that by 0.79 to get 3.95 per cent after tax.
To get the dollar amount of interest on a term deposit, first divide the after-tax rate by 100, which comes to 0.0395. Then multiply that by the amount of the deposit. On $5000, you would get $197.50 a year.
* With taxable income of $38,000 to $60,000, (tax bracket 33 per cent), multiply the interest rate by 0.67.
Example One: If interest is 5 per cent, multiply that by 0.67 to get 3.35 per cent after tax.
Divide that by 100, which comes to 0.0335. Then multiply that by the $5000 deposit to get interest of $167.50 a year.
Example Two: If it is 7 per cent, multiply that by 0.67 to get 4.69 per cent after tax.
Divide that by 100, which comes to 0.0469. Multiply that by the amount of the deposit, this time $200, and you would get $9.38 a year.
* With taxable income above $60,000 (tax bracket 39 per cent), multiply the interest rate by 0.61.
Example: If interest is 5 per cent, multiply that by 0.61 to get 3.05 per cent after tax.
Divide that by 100, which comes to 0.0305. Then multiply that by the $5000 deposit to get interest of $152.50 a year.
A good tip with any calculations like these is to check your answer is roughly right - to make sure you don't have too many zeroes or too few.
In our first example, for instance, 3.95 per cent is close to 4 per cent.
Note that 4 per cent of $1000 is $40, so 4 per cent of $5000 will be $200.
Is that close to your answer of $197.50? Yes.
You can also use the numbers above to calculate how much tax-deductible interest costs you.
Let's say you have a rental property and you pay mortgage interest of 8 per cent. Multiply the 8 by 0.79, 0.67 or 0.61 - depending on your tax bracket. That is the after-tax cost of your mortgage.
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The 36-year-old died on December 19.