By Terry Baucher*
It’s well documented that high-income earners pay substantial amounts of income tax. According to Treasury estimates, 42% of the projected income tax payable for the year ended 31st March 2020 will be paid by those with annual income of over $100,000. That group is about 341,000 taxpayers or roughly 9% of all taxpayers.
But how much tax is paid by each age group? To find out, I asked Inland Revenue for details of the total PAYE paid for each of the five years ended 31st March 2018, broken down by 10-year age bands together with details of the number of taxpayers within each age band.
The results give an insight into why the recent Tax Working Group in its Future of Tax: Submissions Background Paper warned:
“If the Government is to continue providing healthcare and superannuation at current levels, then the level of taxation will need to increase, or spending on other transfers or publicly provided goods and services will need to fall.”
As you might expect the percentage of tax payable by each age band represents a typical Bell Curve: it rises as each group moves into their prime earning years, before declining after age 55 as older taxpayers move into retirement.
What is of particular note is that the proportion of PAYE paid by the 36 to 55 age bands has fallen quite sharply over the past five years. In the 2013/14 year those two age groups paid 49.4% of all PAYE. By the 2017/18 year the proportion had dropped to 46.8%, a 5.2% decrease.
On the other hand, the proportion of PAYE paid by the 16-35 age groups (Millennials and Generation Z) rose by 5.9% over the same period to 26.2%. However, this probably reflects the effect of 170,000 additional taxpayers in those age groups over the five-year period. The rise in the numbers of 16-35-year-olds is more than five times greater than the increase of 30,400 in the 36 to 55 age groups.
The implication is that on a per-capita basis the growth in income for the two youngest groups has not been as significant as that of the older cohorts. The average PAYE paid by a taxpayer in the 16-35 age groups rose by 18.3% over the period compared with an 18.6% rise for the 36-55 age groups. (Tax rates and thresholds were unchanged throughout this period).
What’s also noticeable is the rapid growth in the size of the over 65 age group. It outstrips the total rise in the 36-55 age groups. This illustrates the effect of the Baby-Boomer generation reaching retirement.
These statistics reinforce a message of the TWG that a demographic tax crunch is coming. The TWG’s Submissions Background Paper included the following projections for government expenditure and revenue (per cent of GDP) based on historical spending patterns:
A deficit of 1.2% of GDP represents about $3.5 billion in current terms. Based on the estimated tax take of $84.7 billion for the year to 30 June 2019, this implies that taxes might have to rise by between 4% and 5% from present levels.
Furthermore, this demographic crunch is coming much more quickly than people realise. Budgets work on a four-year cycle, with each Budget projecting the fiscal position for the coming four financial years. Within the next four or five years the projections will start showing deficits towards the end of each four-year period. This will happen regardless of which party is in government.
As the TWG warned these deficits can only be closed either by increasing taxes, reducing benefits or some combination of the two. Neither option will appeal to voters or politicians.
There is also likely to be a growing intergenerational tension as older taxpayers moving into retirement will expect younger taxpayers to continue to support present levels of superannuation and health care with no guarantee that the younger age groups will enjoy the same benefits. The amount of New Zealand Superannuation paid rose more than 25% from $10.9 billion to $13.7 billion between June 2014 and June 2018. According to the latest Budget forecasts it will total $17.4 billion in the June 2022 year – an increase of 59.6% since the June 2014 year.
The inevitable conclusion from this demographic change is that the tax base will need to be expanded in some form. The decision in April not to impose a capital gains tax simply deferred the point at which this will happen.
So, what would be the most appropriate means of raising additional revenue? An increase in the GST rate is unlikely because as the TWG noted, GST represents the most regressive tax for low income earners. Increases in income tax rates look more likely and could potentially also improve what the TWG described as a “not particularly progressive” tax system.
Increased environmental taxes were mooted as a longer-term option. However, the TWG’s suggestion was that over the short-term such taxes should be used to “help fund the transition to a more sustainable economy”. The OECD’s Base Erosion and Profit Shifting initiative might over time mean multinationals do pay more but overall the TWG didn’t see the company income tax take rising substantially.
An obvious candidate for immediately expanding the tax base would be a widespread capital gains tax. However, quite apart from the fact that the Prime Minister ruled out a CGT for the duration of her time as leader of the Labour Party, a CGT would largely leave the substantial gains of the last 30 years untaxed. This would favour the older generations who enjoyed tax free capital gains tax. Instead the burden of a CGT would fall on the younger generations, a group which is struggling to build wealth at the moment. Viewed this way it’s a recipe for exacerbating inter-generational tensions.
So perhaps the answer might be not a CGT but some form of capital asset tax such as that proposed by The Opportunities Party, or maybe a transfer tax on death.
The youth wing of the Andrea Tax Party proposed charging GST on estates above a certain threshold, maybe $500,000. The theory is that the value of the estate represents untaxed consumption which should be taxed on death.
Another option might be to look again at a low-rate land tax, something which the majority of the 2010 Tax Working Group supported. This might need to include exemptions for Māori-held land, but it would at least have the merit of taxing much of the growth in land values over the past 20-odd years which has largely gone untaxed. (The move would also tax land-banking and land held by non-residents so therefore would address one of the issues around housing supply and house-prices).
Politicians come and go. Even Winston Peters will eventually leave the political stage, but the demographics are inexorable. At some point, and much sooner than any politician would probably like to acknowledge, the tax consequences of the coming demographic crunch will have to be addressed. The only question is who will be brave enough to do so.
*Terry Baucher is a tax consultant and director of Baucher Consulting Limited a specialist tax consultancy. He is the co-author with Deborah Russell MP of Tax and Fairness published in 2017 by Bridget Williams Books.
46 Comments
Good point. It might benefit from including benefit by age range. I suspect this would make the problem even more apparent since it would have over-65's with superannuation and many young people with WFF, student allowances and I suspect a disproportionate amount of accommodation allowances. The ill-health benefits may be also more for young and old people because medical advances have many handicapped children living to be adults when they used to die and for the elderly both mental and physical deterioration sets in.
I think you might be over-stating the benefit of medical advances, because access to those medical advances has been reduced for the last nine years due to policy from the National government. Some studies show the life expectancy of millenials is projected to be lower than that of their boomer parents too.
Your points about WFF, student allowances and social welfare aren't strongly correlated with the problem, expenditure on those areas of welfare is less than 2% of tax revenue IIRC. Superannuation is a valid concern though.
Thanks for your comment. If as I am sure you are right about benefits being a negliable compared to tax receipts then I accept your correction. The medical issue is very minor - what was in my mind was not projected life expectancy (BTW all past projections have been understated) but a past neighbour of mine who was born with issues that require her to have two full time care-givers - she has a mental age of about 5 - her mother was told she would die before she was five but that was 35 years ago. I expect it is improvements in medical science that keeps many impaired people alive.
However Stuart having read your comment I'm not sure if I am happier to be corrected and learn or whether I am irritated that I posted a misleading comment. Thanks.
I get super. I like super. But NZ needs to control future demand- either by reducing the benefit or changing the age limit - I'd suggest both.
Dear Mr Baucher
Agreed there will be tax consequences of the coming demographic crunch but this is only part of the crunch that’s on the horizon. Artificial intelligence - robotics is moving so fast it’s impacts are appearing in all areas of the economy here in the US & I am certain NZ will follow
5 million truck drivers alone are employed just in the US & most of their jobs are at risk in the near term by self driving trucks running in convoys. Those are US tax paying jobs that will evaporate like ether exposed to atmosphere.
Self driving cars will eliminate far more cab service jobs
Fast food chains here are already mechanizing & I go to a robotic pizza joint here with only 1 human in the store & even his job will be replaced soon.
Accountancy is ripe for revolution with artificial intelligence as are all professions & trades
So future tax revenue streams require more thinking about than purely “Demographics”
It seems to me that raising tax rates by a certain percentage is not guaranteed to produce increased tax revenue for the state by that percentage, if at all. To the contrary, lowering taxes can and has raised tax revenues under certain conditions.
To fund the government, we don't necessarily need to give them more money. Rather, they should be spending less. A fixed retirement age of 65 while we live longer and longer is not sustainable. I would start there.
I'll note this isn't the first time this accountant has written in favour of increasing taxes.
Yes and apparent support for a CGT which as proposed was going to be a recipe for rorts and tax evasion but a major bonus for tax accountants and lawyers; it also would have lead to reduced tax income just when it is needed during a recession. Either a simple land tax based on our rates or a property inheritance tax would make more sense - easy to implement.
Agreed; for savings start with super and then look at our arbitrary accomodation benefit.
Reading between the lines of your comment, it sounds like you are ideologically opposed to tax?
Why should the government spend less?
There is already a paucity of expenditure in essential sectors, are you suggesting we tolerate further increases in crime, to entertain this ideological crap about less government?
Let's stick to the thrust of this article, which is that government expenditure is projected to rise therefore the tax take will need to rise to match it.
I reject the idea that government expenditure increasing is inexorable. Lange/Bolger showed us that isn't true.
"There is already a paucity of expenditure in essential sectors, are you suggesting we tolerate further increases in crime, to entertain this ideological crap about less government?". There is massive wastage, like in superannuation. There is plenty of wastage elsewhere too, if one looks. We should be aiming for quality services, not increasing the sum of $ spent. Not sure what crime has to do with this, the justice system is a pretty tiny proportion of government expenditure.
I would like to make two points: 1) Superannuation is a mess, Raise the age, make KiwiSaver compulsory and with 5% minimum contributions for both employee and employer. 2) It’s somewhat of a myth that baby boomers are getting a free ride. Their taxes, which from memory were much higher than today, have paid for much of the infrastructure that millennials are currently using, national parks, and universities/schools/hospitals. The untaxed gains Mr Baucher refers to have been enjoyed by every generation since Adam and really only became an issue after the influx of Asian money coupled with migration sent house prices rising in a few desirable locations. That is a problem, but not one caused by Mr and Mrs Baby Boomer. In this country, that couple paid for the wartime generation to retire at 60 for men and 55 for women so they had a considerable burden, too.
Great, you've just increased taxes on those who are struggling by 2% and locked it away until they're 65. Never mind that today's costs of living are happening in the here and now.
Also, think again. They might have paid for some things, but they also profited from dismantling much of the assistance they received. They've passed those costs onto the people who they're also expecting to fund their retirements, while you're also expecting the same people to pay for their own and cover ever higher costs of living- all while earning internationally noncompetitive wages.
It's the total lack of any sense of ownership or accountability in this sort of logic that is maddening, all the while complaining about 'millenials having it easy'.
Wow, CGT to the tax rescue.....are you revealing the true intent here to everyone then, its actually a tax grab, even though we have been constantly pushed TWG's mandate was TAX NEUTRAL!
Why is it always more tax, why not reduce govt size, fire half the MMP's and associated staff, remove free travel and airfare perks for MP's they get for life.
Reduce the income tax and have a consumption tax, less accountants, less IRD......man we'd save a fortune!
Totally agree my2c. As far as the constant attacks on either extending the age of eligibility for National Super or defining the amount of payment that is attacking low hanging fruit. More hollowing out of middle New Zealanders. CGT was just another tax grab. Where to from there ? a financial transaction tax. Time for politicians to run the country for the benefit of the public not their political Agendas.
A capital gains tax or wealth tax is not a bad idea while the size of the government is also reduced.
the problem with reducing government size- more and more people violate policy/rules, etc. and so more policing is needed.
Do you know that
"The richest 20 per cent of households in NZ own 82 per cent of the assets, while the middle 20 per cent own – only 4 per cent."
very soon NZ would be an Oligarchy like Russia, China or India and no form of tax reform is going to reverse the tide. Remember Boiling Frog, that applies for most of us. Enjoy while it lasts.
Why does this not flow both ways? Why do we agitate against the upper end for accumulating things but never question how sustainable it is to have an ever-growing dead-weight loss at the other end, a growing pool of citizens who never contribute and who the State pats on the head and says expecting things of them is too hard? Even if they wanted to improve their lot in life, the middle is under such a squeeze to provide for the lower end that there's no real incentive to.
There need to be a bigger picture review of taxation, welfare, debt and consumption.
Increasing fuel takes for instance seems reasonable but actually hit the lower wage earners who cant afford modern efficient vehicles or EVs. I'm sure every time they increase these type of taxes a fair proportion gets redistributed back out through WINZ. hardship payments.We take with one hand give with the other! this happens in many different ways like accomodation allowances.
With the median home owner in AKLD having a 7 to 8 DTI, every addition tax, must effect consumption through lesser discretionary spend..
The whole system is out of whack and I would prefer we address the tax bracket creep, lower the low end tax and increase the high end tax rates, would be worth implementing another level of income tax at say the $150k mark as well. The really wealthy at the moment do pay a good amount of tax but it is also our total environment that has allowed them to thrive and we should be asking for them to contribute some more.
'The whole system is out of whack and I would prefer we address the tax bracket creep, lower the low end tax and increase the high end tax rates, would be worth implementing another level of income tax at say the $150k mark as well. The really wealthy at the moment do pay a good amount of tax but it is also our total environment that has allowed them to thrive and we should be asking for them to contribute some more.'
Agree.
Also, we really really need to lower immigration, so many pressures on schooling and health infrastructure are coming from high immigration.
imhenry,
And can you supply any evidence that "it will reduce the incentive to earn more"? I spent my working life in the UK and paid tax at 40% for the last 20 years till I retired at 57. The tax rate had no effect on how hard I worked and I was much more interested in accumulation assets to enable me to retire early. i was self-employed,so did not have the benefit of a final salary pension scheme.
However,I also remember that in the 70s,the tax rate on earned income went up to 83% and that was grossly excessive.That did lead to all sorts of avoidance(and indeed evasion).
Are you referring to NZ or the UK as far as 83% in the 70's? because yes it did happen in NZ then. What happened as a result of punitive income taxes was people actually left NZ in droves because hard work was being discouraged. This led to the current policy of increased immigration to build up numbers in order to build up the tax base again under more reasonable tax rates.
Nailed it on the head with the land tax idea. Even right wing oracle Milton Friedman was a proponent. https://www.youtube.com/watch?v=yS7Jb58hcsc
According to the last chart, seems to me we ought to be focusing immigration policy on the 36-45 year age group - in other words assign extra 'points' for the already educated and established career and trade professionals. The growth in that 26-35 year cohort must be as a result of current immigration settings. Time to change/adjust tack.
We also need to consider implementing a QALY type system for allocating access to medical procedures - just as we do for allocating prescription medicines.
But if we start importing 40 year olds we only get 25 working and taxpaying years out of them (assuming they decide to stay) before we start spending rather a lot on them in superannuation and healthcare. Also likely to need to allow them to bring young families across and provide education and healthcare for them. Do we end up getting one educated and experienced professional, one stay at home parent, and a couple of young children as a package?
Does that overall make them more or less of a benefit to the country than a 25-35yo graduate with a bit less work experience, and more likely to be single and therefore to pair up and integrate/anchor in NZ?
It seems to me that that is the age range that is best suited to mentoring and training the next two subsequent generations in the chart. I was surprised at the growth in numbers in our younger generations - I think we are lucky in that regard. As long as they get the right experience and motivation/entrepreneurship that good line managers and mentors afford - I think demographically, we ought to be in good shape for the next 40-50 years.
Kate - 40-50 years sees us go well past global collapse - and therefore the skills required are vastly different.
https://www.counterpunch.org/2019/06/07/112236/
And we will find that 5 million is a stuggle at that point. The more we reduce now, the better.
pdk,
40-50 years sees us go well past global collapse". So let's say a max. of 30 years to the apocalypse and the global social order would have started to breakdown well before that,say 20/25 years. You see not millions,but Billions dying from what? Presumably a combination of food and water shortages,mass migration from climate change and outright war on a global scale.Life would indeed for most be Hobbesian,nasty,brutish and short.
Could that happen? well yes,but Must that happen? Certainly not. Your view seems highly deterministic and I refuse to be so pessimistic. perhaps that is in part because I have 4 grandchildren under the age of 10 and I do not wish to see them trying to survive in such a world. However,while I see significant problems ahead for humanity,I am considerably more optimistic than you. I understand that the problems caused by climate change cannot be easily reversed and will affect the planet for centuries to come,but as the issues become impossible to ignore,then I believe(need to believe?) that humanity will take up these challenges. I think I agree with Paul Gilding's diagnosis in his book,The Great Disruption, How the Climate Crisis will Transform the Global Economy.
Time for a cross party agreement to the major issues confronting us - such as tax, welfare, immigration and climate. It seems pretty clear a 3 year window for either party gives no time to get anything done.
At the same time extend the parliamentary term to 4 years at least.
I am 74 and pay tax at 33%,primarily because of my dividends and some rental income. I am one of the lucky ones.
Of course there will need to be adjustments to the tax and benefit system. At some point,a political party will have to grasp the nettle of superannuation and signal a gradual rise in the qualifying age. There will also need to be some form of tax on capital,but again,it will take a politician to acquire a backbone for this to happen. Shorter term,the top rate should return to 36% and a new rate of say 40%,should come in on incomes over say,$200,000.
I can hear the squeals of protest as I write.
Here's an idea: Tax people over 65 more aggressively to recover the gains they made from dismantling the state for their own benefit.
The under 40s have had enough of being handed the bill by everyone. You can't expect one cohort of taxpayers to cover the damage done to the economy done by another, who just get to waltz off into the sunset.
It is not only strange but deeply problematic that the Tax Working Group failed to properly address retirement savings and superannuation issues. It is strange because by far the biggest difference between New Zealand's tax system and the tax system of the rest of the OECD concerns retirement saving and superannuation - and this difference is scarcely mentioned in the final report. New Zealand is just about the only country in the OECD without either a compulsory saving scheme or dedicated social security taxes on labour income, and the TWG fails to discuss the implications of this - one being that it means NZ has the second lowest taxes on labour income in the OECD, a second that it has (by many measures) the highest taxes on business income inthe OECD, and a third that it has a tax and retirment system systematically biased against young people and future generations. It is problematic because the TWG has essentially forestalled further fundamantal analysis of the tax system, having ignored the major differences of the New Zealand tax system and those overseas, which means fundamental reform will be delayed yet another decade. Unfortunately it seems that we are going to have to wait until the people who reformed New Zealand's tax system in the 1980s are old enough that they no longer determine policy agendas (When will that be, Sir Michael??) before we get a tax system that reflects orthodox economic theory and stops favouring the old over the young. I hope young people won't blame all old people, but I won't blame them. let the clamour for land taxes - which offset the intergenerational bias of the current tax system - begin.
"charging GST on estates above a certain threshold, maybe $500,000. The theory is that the value of the estate represents untaxed consumption which should be taxed on death. " - This makes no sense, because those assets would have had GST charged on them when purchased - either directly from a vendor or builder, or historical GST payments would have been embedded in the price if the vendor was itself not GST registered. And what if the $500,000 is just cash or shares, how is that a consumption item?
Correct. Logic dictates that if an estate is going to pass GST on to an end-user, it should be able to claim GST on the inputs; which would have been me buying things while I am alive. Ergo, the entire basis for anyone paying GST just disappears, simply because people lack the political courage to call something is that effectively a death duty what it actually is: A death duty.
Not only that, every dollar that was spent on those assets was AFTER income tax. The dollar is taxed as it is earned, then it is taxed again when spent eg. gst on building materials, accountants/lawyers invoices, utility bills.... etc etc. So the tax rate for everyone is not just their Income tax bracket. And God forbid you want to save all that money instead of accumulating assets..your interest will be taxed and now some people want to redistribute those hard earned savings to people that did not want to work for it, via increased retirement/inheritance/estate taxes....!
2 names come to mind. 1)Robert Muldoon - The labour govt before him instigated a save up for retirement expenditure scheme. His govt stopped this and instigated a pay as you go scheme. 2)John Key - The prior labour govt instigated a save up for retirement expenditure scheme(to at least partially cover the cost) called the super fund. John Keys govt stopped contributions to this fund at the bottom of the market when even had they used borrowings(at very low interest rates) the returns would have been far in excess of repayments on said borrowings. They did not go so far as to dismantle it altogether however.
There has been mention of health costs in these comments and the need to save money there. A good starter would be to reduce the number of dhbs to 1 or 2 which would pay for alot of hips and knees.
Terry, you say that "the only question is who will be brave enough to do so." Therein lies the issue: NO pollie, no matter how altruistic, far-sighted, intelligent or persuasive - is gonna get themselves re-elected (or elected in the first place) by promising higher taxes on earners, killing off seniors' incomes or any of the many other august suggestions on this thread.
Plus, you need to consider arbitrage: if neighbouring or transferable-to jurisdictions have markedly lower tax rates, feasible superannuation offerings or in general a more amenable environment, then if locals are pressed too hard they will simply up stakes and cross the border. Them Cash Cows have Wings....
Much of what you suggest may well come about via a crunch of some sort. It certainly won't be Voted in....but how to time that event - there's the rub. As my main argument against the various catastrophists who tend to infest these threads goes, and as some dead white male said centuries ago, there is a Deal of Ruin in a Country. Call it inertia, call it Inventory, call it inventiveness under necessity. To quote another dead white male, things may just wind down gently - Not with A Bang, but a Whimper.
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