More than 20 years ago then Finance Minister Ruth Richardson produced graphs which clearly showed that the tax take had increased after tax rates were reduced.
Higher economic growth might have had something to do with the higher tax take but lower rates were also a factor.
People decided the rates were fair and put their energies into making money rather than avoiding tax.
Now Treasury research shows that the higher tax rate imposed by Labour in 2001 resulted in a lower tax take from the wealthy:
Far from its intended purpose of increasing the contribution by wealthy people to the cost of running the government, the 2001 tax increase spurred the highest income earners to find ways of avoiding tax, the “Elasticity of Taxable Income in New Zealand” paper found.
Published on the Treasury website, the research paper tracks the proportion of income tax paid by different income bands between 1994 and 2008, and finds the top 10 percent of income earners had begun to pay an increasing share of total income tax in the years immediately preceding the tax rate increase and peaked at 38.9 percent at the time the tax rate increase was announced.
“However, following introduction of the 39 percent rate, it fell to 33.9 percent in 2001,” the report says. “Between 2001 and 2009, the share of taxable income obtained by the top decile fluctuated between 33.7 percent in 2008 and 34.6 percent in 2005.”
Treasury warned the results should be treated with caution, but that it showed “the elasticity of taxable income is substantially higher for the highest income groups”, meaning the higher the income bracket, the more capacity that group of earners has to manipulate declared income.
Adherents to politics of envy liked the higher tax rate on upper income earners, at least in theory. Accountants and lawyers who got a lot more work from people looking for ways to minimise their tax liability did too.
But the tax increase was motivated by politics and, just as its critics foretold, it didn’t work in practice – the higher rate resulted in a lower take.