This is the third of ten articles in the Public Service Association's "Ten perspectives on tax" series.*
By Max Rashbrooke*
What they meant, in essence, is that a good society is one that pushes back against unfairness wherever it can. It knows that our rewards in life should reflect our own efforts but in practice are affected by dozens of things outside of our control, and that society must find ways to compensate for that.
Tax matters enormously to this discussion, because it is one of the main ways to tilt the balance back towards fairness. If people’s income and wealth truly reflected their own decisions and nothing else, there would be far fewer reasons for taxation. And of course many high-earning people do work hard.
But people often succeed for myriad other reasons. They get help from their parents, or they are born with talents they have done nothing to deserve, or they happen to be in the right place at the right time.
Anyone who has made money in New Zealand has also done so by drawing on a common pool of resources: the public roads they drive on, the taxpayer-funded education of themselves and their employees, the government’s health systems, telecommunications networks and so on.
The most respected political philosopher of the twenty-first century, John Rawls, argued that even people’s talents, being drawn out of the genetic pool, should be seen as “a common asset” and that while we should encourage people to use those talents to the full, we should also all “share in the benefits of this distribution whatever it turns out
to be”.
Tax exists in part to fulfil these demands. It holds onto the portion of people’s incomes and wealth that has derived from luck, inheritance and the common pool of assets, and uses it both to top up the incomes of people who have been less lucky (via the benefits system) and to replenish the common pool. (Like any natural resource, the pool has to be continually filled up, otherwise it won’t be there for the next generation to draw on.)
In this sense, tax pushes back against unfairness, which sometimes goes by the name of unjustified inequality. The material forms of inequality – imbalances of income and wealth – have increased significantly in New Zealand in recent decades. In fact, income imbalances increased more here than in any other developed country1 between 1985 and 2005 – a major shift in New Zealand’s economy and culture.
Since the mid-1980s, the typical rich person (the mean equivalised household in decile 10, in technical terms) has seen their annual income (after-tax and inflation-adjusted) grow by around $60,000, while the typical poor person has only seen a roughly $2,000 increase.2
Stored-up wealth, meanwhile, is very unevenly distributed: the wealthiest 1% of individuals have one-fifth of all household wealth,3 while the poorest half of the country have almost nothing.
But there is little evidence that the richest New Zealanders have suddenly become harder-working or are making a much greater contribution than they used to, and equally little evidence that poorer New Zealanders are less hard-working or motivated than formerly. Indeed the hundreds of people who apply for every new supermarket check-out position tend to suggest otherwise. So there is good reason to think that the increases in income and wealth imbalances of recent decades have not been entirely deserved, and that the tax and benefit system should do more to tilt the balance back towards fairness.
Currently New Zealand does not ask much of its richest citizens. Rob Salmond’s 2011 book The New New Zealand Tax System4 showed that the poorest New Zealanders pay just under 30% of their income in tax, and the richest pay 34%.
And this excludes money made selling assets, which, if we could measure it, would almost certainly drop the tax rate of the rich below that of the poor, since it gives them lots of extra income but attracts essentially no tax.
So we don’t ask much, proportionately, from people who have often had enormous advantages and who can afford to pay more, compared to what we ask of those who’ve often had very difficult upbringings and have nothing left over once their bills
are paid.
A tax system that did more to address this unfairness and unjustified inequality would have several elements. The first would be a higher top rate for income tax, perhaps for those earning over $100,000 or $150,000 a year.
New Zealand’s 33% top rate is extremely low internationally (the UK and Australia, for instance, both have a 45% top rate), and modelling5 by economists Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva shows that developed countries could increase top rates as high as 80% before losses from avoidance and reduced effort would outweigh the revenue gains.
But the most glaring hole in New Zealand’s tax system, from a fairness point of view, is the failure to tax wealth in any form, except for the government’s very minimal tax on houses sold within two years of purchase.
Like annual income, people’s stored-up wealth can be earned through hard work, but it can also be inherited, gifted, or made by, say, flipping houses.
For this reason, most countries tax wealth in some form, and New Zealand could easily follow their lead. It could tax capital gains thoroughly, so that someone who makes $80,000 selling a house pays the same tax as someone who gets the same amount in salary. Or it could tax all wealth annually, as proposed by Piketty and (in different form) by New Zealand’s own Gareth Morgan.
New Zealand could also institute a lifetime gifts tax, as proposed by the late Anthony Atkinson, a distinguished British economist. His idea was that the first, say, $200,000 of gifts received in a lifetime could be tax-free, to allow uninterrupted inheritance of small(ish) amounts, but all further gifts should be taxed, so that those lucky enough to get these gifts could compensate those who don’t. That’s a kind of fairness that I think my parents would recognise.
*Max Rashbrooke is a research associate at the Institute for Governance and Policy Studies, and the author of Wealth and New Zealand. This is the third article in the PSA's "Progressive thinking series, Ten perspectives on tax."
8 Comments
A bit of rhetoric here... "the hundreds of people who apply for every new supermarket check-out position"... really? My local New World periodically puts out a chalkboard advertising for open positions. I've never seen a queue forming to put in an application. When I see obvious over the top exaggerations, I tend to dismiss the underlying discussion.
I looked at your reference 1. In regards to increasing income inequality, I note that Finland and Sweden both had much higher GINI coefficients than NZ for the ~30 year time period listed. I was under the impression that Scandinavian countries were rather egalitarian, the data would indicate otherwise. Your claim that NZ increased more than any other developed country doesn't match with the reference data, as noted via FIN or SWE.
As to taxing wealth, good luck with that concept. Wealth is mobile, and will move to avoid this taxation. I'm all in favor of a comprehensive CGT, which would solve many of the contemporary issues facing NZ. Taxing wealth is likely to result in NZ returning to a poverty stricken back-water. I'm not that wealthy, and my accumulated wealth is due to rather aggressive savings during my wage earning career. If a wealth tax similar to that espoused by TOP appears, well, I'll likely be paying my tax to a different entity than NZ.
add: your claim that most countries tax wealth in some form. I would be interested in citations backing this claim as this does not match my understanding of taxation amongst most developed countries. I'm neglecting inheritance taxes for now, just looking at wealth taxation for the living.
Land is not mobile, and land won't move to avoid taxation.
>"But there is little evidence that the richest New Zealanders have suddenly become harder-working or are making a much greater contribution than they used to, and equally little evidence that poorer New Zealanders are less hard-working or motivated than formerly."
This is a good point. There's so much claiming here that having a house go from $400,000 to $2 million in value is somehow down to one's hard work. At a certain point we need to get a bit more real.
Despite the majority of kiwi views, land should not be confused with wealth, and is a rather piss poor method for increasing wealth. Also, land isn't really fungible at times, you may end up needing to sell at a time where there are few buyers.
I consider a home purchase to be a drag on my wealth accumulation. Despite market timing the one property sale I have done almost perfectly, my gains via work, saving, and appropriate equity investing far outstripped the property gains. The best way to accumulate wealth is to first work hard, second spend beneath your means, and third, when savings finally accumulate to invest carefully. Some neglect the first, more neglect the second, and even more neglect the third.
The concept of taxing diligent and prudent savers is odious. Moral hazard should not be an appropriate policy choice.
This is true, skilled people owe society for their skills, and lazy people are owed a great debt by skilled hardworking people. If lazy people weren't unlucky enough to born lazy, then they would be rich and hardworking. This is why hard working people must work extra hard, to repay the huge debt their hard work creates from the inequality.
If we created a special administrative district with no social security and very low public healthcare with the correspondingly lower taxes and got the top 20% of wealthy/high earning kiwis to switch to being citizens of this district, then inequality in NZ would drop drastically.
If the goal is really to reduce inequality instead of increasing total wealth then why don't we just create the special administrative district? Both the new district and the remainder of NZ would have far lower inequality!
Because ignoring the wealthy (or the poor) when measuring inequality will give you an inacurate measurement. How about when measuring life expectancy we take all the people that died in childhood and move them into seperate administrative region? Would it increase the life expectancy of the rest of the population?
NZ has one of the highest GST rates in the world. Why do you think they are heading for good budget numbers. I have no problem with taxes, they are necessary.
Look at some of the things NZ taxes which other countries don't. GST on rates. That's nothing more than a tax on a tax (rates are just another word for property tax) I believe you should have property taxes for services rendered, but to tax the tax, disgusting. GST on Insurance, that's just plain disingenuous, you are penalizing the tax payer from protecting his property from the 'poor' scum bag thieves that want to steal his stuff instead of working for their own stuff. . GST on fresh food. That does not do anything to promote a healthy lifestyle to the hundreds of thousands of obese Nzers causing a huge burden on the health system. The 15% GST reaps in billions ( 32% of overall taxes collected, almost equivalent to the % of income taxes collected ). NZ has decided that is the way to make ends meet. To say they need to tax capital gains or arbitrary wealth only comes from people who do not understand the current tax system in NZ or deliberately mislead people in their commentary like this nefarious article. Do your research before saying uneducated things. This author only mentions the top tax rate, which is only a one portion of the overall tax system in NZ. GST and other taxes are never mentioned. Wealthy people by effect naturally buy more stuff, thereby paying more taxes (GST) and cause the economy to produce more and create jobs, creating more taxes etc, etc. Economics 101.
There will NEVER be a tax system where it is FAIR to everyone. I don't think GST in NZ is fair for the above, and a lot more, reasons. But you'd better adjust the GST or other taxes before you arbitrarily add on capital gains or otherwise. And don't forget the deeper negative economic effect when this is done. Think back to the 70's in NZ when the top tax rate for a second job earner(read hard worker trying to better themselves) and higher earners was close to 70%. The country hemorrhaged skilled workers to Australia and the USA as they sought a fairer life for their hard work. That led to the current policy on immigration in order to replace those workers when the Govt. realized they had taxed away hundreds of thousands of NZs most valued workers.
Just another poorly researched socialist commentary.
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