One fact which is rarely mentioned in discussions on inequality: around 40% of people pay no net tax:
. . . A table from Finance Minister Bill English’s office shows 663,000 households – or 40 per cent – receive more in tax credits and other benefits than they pay in tax. Thousands more are neutral contributors, or are close to it. . .
Households earning less than $50,000 receive more in credits than they pay in direct income tax by about a third.
By comparison, the top 3 per cent of individual income earners, earning more than $150,000 a year, pay 24 per cent of all tax received.
Mark Keating, a senior lecturer in tax at the University of Auckland Business School, said the idea of “net tax” – the amount paid after credits and benefits were deducted – was hard for some people to get their heads around.
But he said people who received any benefit, or superannuation, as well as people who worked and met the criteria for Working for Families tax credits could end up with a net result that was negative or neutral.
“If you are working and earn $1000 a week but have four children, you might pay $200 a week in tax but get back $300.
“They are net receiving. It’s quite a strange system. It’s not common overseas because it’s quite bureaucratic.”
This is income tax. Everyone pays GST too and while poorer people are more likely to spend a greater proportion of their income, wealthier people generally spend more in total and therefore also pay more GST.
Peter Vial, New Zealand tax leader at Chartered Accountants Australia and New Zealand, said some people would be surprised to find they were not paying more than they received.
“It’s not a calculation they would do automatically. In an ideal world it would be good if there was more knowledge about the interaction between the tax and benefit systems.”
Many were unaware how dependent New Zealand was on a small group of high-earning, salaried individuals to pay a large chunk of the tax, he said.
“We never talk about that. It’s always a risk to our tax base because people are mobile and can move. But New Zealanders want a progressive tax system, the more you earn the more you pay.”
This is something those called for higher taxes on higher incomes overlook.
Jean-Baptiste Colbert said, the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.
Tax is necessary to fund essential services and infrastructure but there comes a point when people believe enough is enough and the extraction of more feathers will result in more than just more hissing.
If taxes on higher incomes become too high, at least some of the geese laying the golden tax eggs will start looking at ways to minimise their liability which will hit productivity and discourage investment.
It could also encourage flight to countries with less punitive taxes leaving fewer geese to provide more feathers.