Avoiding tax not only preserve of wealthy

A drop in the tax rate doesn’t always mean a drop in the tax take.

 Kiwiblog reminds us that in the 1980s when tax rates dropped the tax take increased. I rememberthen- Finance Minister Ruth Richardson showing a graph which illustrated the same thing happened in the early 1990s.

The inverse is also the case. If tax rates go up the tax take may not increase as expected because people find ways to avoid paying.

The Tax Working Groups said:

. . .  an Inland Revenue sample of 100 of the highest wealth individuals in New Zealand, data indicate that only about half are paying the highest marginal tax rate on their income. These taxpayers are not necessarily doing anything wrong but are merely taking advantage of the opportunities offered by the current system to shelter income from higher rates.

Tax evasion is illegal, avoidance isn’t. When the top tax rate increased to 38% and Working for Families was introduced, lawyers and accountants had a field day with clients looking to minimise their tax liability.

It wasn’t just minimising tax, it was minimising their income so they’d qualify for WfF and this isn’t confined to the wealthy.

A friend has a business in which employees often work a lot of over time. When WfF was introduced he found several of his staff didn’t want paid for all the hours they worked because the reduction in what they got from WfF had the effect of giving them a high marginal tax rate and it wasn’t worth their while.

Some wanted to work the extra hours and be paid cash or in kind so that their earnings could escape the notice of the IRD. That is not avoidance, it’s evasion and our friend declined to abet them.

Not everyone will be that honest.

That’s why rises in tax rates, or measures like WfF which have a similar effect, don’t necessarily result in a corresponding increase in the tax take and might even reduce it.

And cuts in the rate may increase the take because people stop trying to avoid taxes and put their efforts into earning more instead.

One Response to Avoiding tax not only preserve of wealthy

  1. scrubone says:

    But Labour know all this.

    The last tobacco tax increase actually reduced revenue – I wonder how many people noticed how long it’s been since the last increase?


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