Written By: - Date published: 4:51 pm, July 12th, 2008 - 61 comments
Categories: tax -
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We have a progressive tax system, whereby the portion of income paid in tax increases with income. Many on the Right argue that moving to a flat tax system, where everyone pays the same portion of tax on income at all income levels, would be fairer. Let’s look at what such a change would entail.
The 3.25 million adult New Zealanders had an average income of $34,800 in 2007, equating to total income of $113 billion. $26 billion in income tax was raised in the last year. That’s 23% of income. So, if we were to introduce a flat income tax, it would have to be set at 23%.
So far, so good. Now, how many Kiwis currently pay more than 23% of their income in tax? If your income is below $50,000 a year, you pay less than 23% of your income in tax. Of 3.25 million taxpayers, 2.55 million earn less than $50,000 a year. That means 78% of people pay less than 23% of their incomes in tax.
S0, if we were to replace the current progressive tax system with a flat tax system, it would put up tax for 78% of Kiwis. And the poorest Kiwis would have the largest increase in tax. A person on an income of $10,000 a year would see their after tax income drop from $8,470 a year to $7,700, a 9% drop. A person on $100,000 would see their after tax income increase from $69,730 to $77,000 a 10% increase. The higher your income, the higher your tax cut would be.
What’s fair about putting up tax on 78% of Kiwis to give a massive tax cuts to the few most wealthy? What’s fair about taking from the poor to give to the rich?
Oh, we could just slash government spending to get income tax lower? You would have to cut revenue by $10 billion to get the flat tax to the 15% the lowest income earners currently pay. It would be the poor that suffer from $10 billion less government spending (which equates to nearly all health spending, or education spending and is more than is spent on superannuation and benefits).
Whatever way you cut it, introducing a flat tax would make most people poorer. Doesn’t sound fair to me.
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Optimist – Your argument is completely retarded. Health, Police, Education etc etc etc don’t get funded by the ‘Money Fairy’ just because they’re rights. You still need to pay for them.
Envy? You mean me being envious of rich people? Ahhh… no, I’m not really in a position to do that. I’m contemptuous of stupid rich people who don’t understand what it is that keeps their lives so good and don’t give a damn about people who have it a bit harder than them, but that’s different.
Mr Pierson, your argument will apply to any tax relief anywhere anytime virtually. Those that pay the most now will almost certainly get the largest cut in dollar terms no matter what sort of tax cuts are put in place. Unless tax cuts are implemented which give larger dollar cuts to the lower income brackets, in which case the tax rate differential widens constantly – to some kind of end near oblivion.
It will always be deemed “unfair” in the eyes of this type of ideology.
Its a brainless point being made.
T-rex, just to expand on my comment, the reason I think I pay too much tax is because I think our government spends it inefficiently. I don’t disagree generally with what it is spent on, I just think we could do way, way better in the quality of how it is spent. Many, many little things – in no particular order…..
- why do government departments need to rent offices in Tier 1 commercial space? Contrast the commercial property market in Wellington vs Auckland or any similar market overseas. The best investment in NZ for the last decade has been as an owner of a wellington office building with a lazy government department tenant who can’t negotiate to save themselves, but feels its important for their departmental culture to have a fancy office. Keep the money rolling in thanks. I appreciate the fact I can ratchet the rent every two years and you have no right not to renew for the next 12 years.
- why do we have so many DHB’s with all the duplication that implies. Look at the growth we have had in health spending over the last 10 years without any improvement in service levels and waiting times. Its not a doctors and nurses problem.
- ditto for education. How do we have a free and efficient education when so many families have opted out of the state sector and those that haven’t pay up to $500 per year to send their kids to the local school. The GST received on private school fees is greater than any state subsidy to private schools.
- why do we have so many terrestrial region councils and layers thereof
- why is public sector productivity generally in decline?
- why do we regard benefits as a wage and not as an investment in human capital?
- why don’t we fund existing community organisations to deliver services particularly to Maori and PI recipients rather than leave it up to a combination of half a dozen government departments who perform the task by remote control
One could go on and on.
gomango,
Are you still around? I think I saw on another thread that you’ve decided to leave, but if you haven’t I’m happy to answer a bunch of your questions from that list.
Anita: I think he got frightened off by my (perceived) gender.
It is kind of amusing when you consider the In Real Life realities – like my bald patch. Says a *lot* about the gendered perception of reality.
I’d write a post on the topic but I got rather bored with it decades ago.
lprent writes:
Hee!
I am childishly pleased by this, but I also wanna know your trick – no-one seems frightened by my actual gender
Well, people have already commented on high marginal tax rates (in particular due to welfare abatement). But on the tax avoidance, this graph shows a good illustration: The peaks at 39,000 and 60,000 show where people have structured their tax to avoid paying tax in the next bracket.
http://www.ird.govt.nz/resources/file/eb63e749b236af0/bim-figure9-large-doc.jpg
I’ve held back on this topic for a while now, but it remains my single biggest dissapointment with Michael Cullen (whom I very much admire in many respects) that he has failed to reform our tax system more radically. There is one major reform opportunity he knows about, but has failed to tackle.. that is the notion of Universal Basic Income.
This site has a good collection of local content on the idea:
http://users.iconz.co.nz/iwgordon/ubinz.htm
UBI can take a number of forms, but in its most basic shape it pays all citizens over the age of 18 (regardless of whether they work or not) a fixed annual income, paid weekly/fortnightly. For the purpose of this example, imagine about $10,000 pa.
As a result ALL targetted benefits, unemployment, sickness, DBP, Super, etc can be largely eliminated with only some much smaller residual top-ups or wider support to social agencies required.
Then all PAYE is replaced by a single flat tax in the range of 30-35%.
There are a number of very interesting postives that come out of this idea that rather nicely combine many of the advantaqes of both a progressive AND a flat tax system, while mitigating the disadvantages of both.
Personally I have long thought that UBI is the potential ‘circuit breaker’ idea that could get NZ politics out of the current stale mode we are in squabbling over taxes versus public services.
Can any of the righties here actually provide any examples of countires with low taxes that have greater productivity and standard of living than those which have higher taxes and greater social spending?
When I read this thread title first I read is as “On the Fart Tax”. Funny that.
At least Lange died in a ditch (metaphorically) to stop the Flat Tax.
Who will die in a ditch to get rid of the existing Flat Tax, GST?
It isnt meaningful to look at figures of gross income tax without looking also at GST and the ‘social wage’ which redistributes taxation.
Most of the righties would be happy to eliminate the social wage for workers (eg nasty handouts disguised as negative income tax for state dependents) while they boost it for bosses (eg farmers avoiding Fart tax, RUC for truckies and tax rebates on private health massively subsisised already by the public death system) not to mention, Rio Tinto, Fonterra blah blah.
So when we take into a/c the social wage for bosses, their taxes are considerably flattened already. What is the actual net tax (not evaded but avoided remember) of the big banks, Rio Tinto, Fonterra?
My point in case you are wondering, is that once the net tax flows are calculated my bet is that we have already exceeded a flat tax regime with a highly regressive tax regime. And that’s even before we talk about who creates the wealth in the first place. Bring back Harry Holland and die on the high ground.
I don’t know of any practical implementation of such – this, of course, is no proof that it won’t work. You cannot find the answer to the future in the past.
Yep, that’s a major reason why I keep telling people on wages to go on contract and get a good accountant
So how is it fair that 12% of working New Zealanders pay 51% of our tax take?
Absolutely fair.
Right now I am well enough, earn well, and pay whacking great heaps of tax.
A decade ago, when I was really unwell, I survived on the sickness benefit.
For some time after that I worked part time (as much as I could) and paid much less tax than I do now in both relative and absolute terms.
I pay what I am able to toward supporting all of my community – when I am able to earn well I pay a lot more than people who are less fortunate than me, that seems fair to me.
I pay tax to support our public health system (without which I would be either a permanent beneficiary, or permanently hospitalised, or dead), I pay tax to support our education system so that we all have the best chance to be as productive and happy as we can (as I am), I pay tax to support all other services of government that we need to be healthy, productive and happy as a community and as individuals.
What is so unfair about that?
Your guys view point is astounding:
“What’s fair about taking from the poor to give to the rich?”
How the hell can taxing someone be seen as taking from the poor to give to the rich, when it is their own money?
Its about fairness, something that Aunty Helen knows nothing about. You can bring about all the graphs you want to, but there should be one low tax rate for all.
What is so wrong about it is that the government has worked itself into a position where it relies on a section of scoiety that has the ability to up sticks and move overseas, where they can earn significantly more. It’a no-brainer, what would you do?
Gustavo,
I choose to stay in NZ. What about you?
Quoth the Raven
“Can any of the righties here actually provide any examples of countires with low taxes that have greater productivity and standard of living than those which have higher taxes and greater social spending?”
Singapore.
Everyone has basic housing supplied – HDB. Good capitalists rent out their “mansion” to expats and live in their HDB.
Very much focussed on a user-pays system for luxury items. Basic essentials are free of GST and typically cheap (by Singapore Standards)
Hopefully once the heathen is shown the door, Mr Key will restructure our economy in a similar way.
My effective tax rate in Singapore was ~9.5% on total earnings over 180k. I came back to NZ because it is a great country – yet because I am a “rich prick” I am paying ~35% tax. More than $60k in tax for what? SFA, because I end up paying for everything I need and use anyway through everyother tax.
Shouldn’t Cullen be encouraging people to aspire to be like John Key (Do well for themselves) rather than calling him a prick because he has been successful? This twat is supposed to be an exemplar for our young, entrepreneurs, socially misdirected etc. and he goes around making comments like that…. What sort of opinions is he forming in the minds of the young and impressionable? – Can only loathe him.
Gustavo – are you Burt? It’s just you’re saying very similar things at kiwiblog and at the same time:
http://www.kiwiblog.co.nz/2008/07/hotton_hon_how_labour_can_win.html#comment-463771
Not taking that ban too well, eh?
Repeatedly we see right wingers fall into the same narrow trap, that taxes are a payment for services they personally consume. This is partly true, in that at some point in our lives most of us will consume education, health, infrastructure, welfare services and benefit from an enormous range of regulatory functions that most people are entirely ignorant of. (Eg you can buy electrical appliances without having to worry if they are safe to use or not…). To this extent tax can be seen as an invoice for services rendered, and those who want to pay less are engaging in miserly quibbles about the line items.
But many rigthies goes further than this, they are men firmly possessed of a belief in their own great talent and self-worth. This belief that all his wealth and power he enjoys is somehow entirely of his own making and deserving leads to the belief that all tax is at some level a form of theft.
The Christian viewpoint informs us that this is wrong. (As do most other religions as well.) The underpinning idea of a Creator, who is not only the inspiration and sustaining power underpinning Creation, but a loving God who in His Grace creates us all different, born to differing nations, families and places in history, but also with our own particular capabilities and characters. These things determine our path in life, equally as much as education and application. Oftentimes it seems that great fortune is as matter of grace as anything else.
Yet all prosperity is absolutely conditioned by one thing. Wealth ONLY exists in the context of a civilised, decent and cohesive society. The greater the wealth, the MORE dependent that wealth is on the efforts of myriad others who have made that wealth possible. No man is a multi-millionare on the back of his or her own personal efforts. (John Key for instance made his wealth by speculating on currency movements between nations. He generated not one jot of benefit to society for doing so, but nonetheless because our current civilisation is exceedingly complex there is a fine living for some to be made by exploiting these sorts of parasitic opportunities.)
It is indeed entirely fair that those few of us who attain to great wealth should be also obliged to repay a larger share back to society as a whole. We are unavoidably, our brothers keepers.
Mateiro – Good example. New Zealand has a higher GDP per capita than Singapore, Higher personal incomes and a higher Human Development Index ranking. Singapore is not even a functioning democracy. There are other countires you could have chosen that would have worked. Look at the countires that consistently rank the highest for any good attribute. Then look at their taxes. What do you see?
Got one wrong, sorry
God no, I’m not Burt. Shudder. I’m more an advocate for more spread out, frequent brackets that more accurately reflect the reality of our current income levels then the current ones that were drawn up in 99.
Darren,
Flat taxes give people an incentive Stevo
Huh? How would the incentive be any different from the current one?
I get a pay rise, I get more money in my pocket, I am pleased. The End.
Anita, if you cant see why I cant really help you. All I can say is if your income tax rate goes up the more you earn, the incentive isn’t there for you to work harder. If the tax rates went down as you earn’t more then the incentive to work harder is clear.
Cheers though, Darren
Darren- Taxing people’s income often results in better spending efficiency than leaving it to them. Even with high taxes there’s still plenty of reason to earn more- you still get a lot more money, it’s just a lot of it is spent on roads and public services instead of going directly to your pocket. If you use public transport, have health problems, drive between cities, etc you’ve benefitted significantly from paying taxes.
Ari, taxing peoples income is more efficient than letting them spend it? That is the funniest thing that I have heard since Helen Clark studied and lapped up Stalin and Lenin in her university days and trialed it out what she learned on New Zealanders in the late 20th century!
It is inefficient and wasteful to pay too much tax. Economies work better under lower taxes. It is basic economic fact that I learn’t in the third form.
Dazza: “Taking money off those who earn it by force’
pweet – offside! For consistency’s sake you can’t argue tax is theft and simulataneously argue a flat tax system, unless that tax system is flat at a rate of 0%. If you want to argue that, be my guest.
Lew, we need some tax to run police and armed forces. Nothing else. A flat tax would be best.
Still waiting for an answer to my original post Stevo, I’m guessing you don’t have one
Cheers, Darren
“In fact, as the Incomes Report shows http://www.thestandard.org.nz/?p=2419 cutting taxes for the rich and cutting benefits to pay for it just made the rich richer and the poor poorer in the 1990s.”
Funny that even in that article no such claim is made. As we all know the benefit cuts were not linked to tax cuts because the benefit cuts were made in 1991 and the first tax cuts for the same government were not until years later, 1996 IIRC. The benefit cuts were made to address the immediate budget deficit that Labour left on their departure from office.
If Labour has given tax cuts without reversing the benefit cuts they must be following that kind of policy according to such logic.