Taxation Systems

BY MARY HOLM

Q. Congratulations on your always interesting column which, together with readers' comments, provides useful coverage of investments in general.

A recent correspondent (September 28) complains that GST costs the taxpayer 12.5 per cent, additional to income tax. Not so.

As GST is not payable on income tax or on savings, but on expenditure only, the effective rate can vary from approximately 9 per cent on low incomes to only 5 per cent or less on high incomes.

For that reason GST has always been, relatively, a much greater burden on the low than on the high income earner.

Countries such as Australia, the UK, the US and others apply capital gains tax to share and property sales, even one's own home, in addition to substantial income and consumer taxes, so relatively speaking, New Zealanders are certainly not highly taxed. Godzone indeed.

A. Let's not start a debate on which countries are more highly taxed.

I've seen lots of comparisons over the years, and none is straightforward.

For example, Blue Country taxes all income over $20,000 at 20 per cent and then all income over $80,000 at 70 per cent. Green Country taxes everything over $30,000 at 40 per cent.

Which taxes more? It depends on the income level you look at.

Okay, you might say, we'll use an average income. But the average in which country?

Then there are various sales taxes, such as GST. As you point out, they affect some people more than others. Poorer people spend a greater proportion of their income, so they are hit harder.

It is also important to look at what you get for your taxes. People would be more willing to pay higher taxes in a country where all health care and education was free than in one where the Government covered none of that.

You're not quite right about capital gains tax in other countries. Australia, the UK and the US do all tax capital gains on shares and property, to varying degrees. But they all have exemptions for gains on the sale of owner-occupied houses.

The qualifying criteria and the levels of exemption differ between the three countries, says PricewaterhouseCoopers.
Note, too, that in some cases capital gains are taxed in New Zealand.

Still, we do get off lightly on that front. Too lightly, in my opinion.

It is not obvious why some people should be taxed on the dollars they earn by the sweat of their brows while their neighbours aren't taxed on the dollars they get from the bank.

But it would be a brave politician who changed that - especially as it would hit retired people hard, and they've done their share of paying tax on their earned income.

One good thing we can say about New Zealand's tax system is that, for the ordinary wage earner, it is easier.

In many other Western countries, practically everyone spends hours on their taxes, or pays someone to do so.

* Mary Holm is a freelance journalist and author of Investing Made Simple

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