33% nonsense

Written By: - Date published: 9:00 am, January 22nd, 2010 - 13 comments
Categories: dpf, tax - Tags:

David Farrar has one of his dodgy maths posts, where he argues that getting rid of the 33% rate is necessary because typical New Zealanders are paying it:

“You see [not] only should people not be paying a 38% rate, most FT workers shouldn’t even be paying the 33% rate.”

Quite why 33% is such a disastrous number, Farrar can’t explain, he just holds it to be self-evident, but that’s not important for now (I might do a piece on the Laffer curve and ‘optimal tax’ on the weekend). My point is that “most Full-Time workers” do not pay the 33% rate on any of their income. The 33% rate kicks in after your first $48,000. The median full-time wage is $45,000, so 50% of full-time workers earn less than that.
Even someone on $50,000, who earns more than 79% of Kiwis, isn’t paying 33% of their income in tax.  They pay 33% on just $2,000 of income, they pay 21% on $34,000, and just 12.5% (thanks to Labour’s tax cuts) on the first $14,000. Their total tax bill is $9,550 – just 19% of their gross income.

What would this person, who remember is on above the average wage, get from reducing the 33% rate to 30%? Well, $30 for every $1,000 they earn over $48,000. For our person on $50,000 that’s just over a buck a week. Hardly seems like the difference between manifest injustice and the perfect tax system to me.
Compare that to the $12 a week tax cut they got when Labour cut the bottom tax rate to 12.5%. 

It’s misleading to talk about the average full-time wage as if that is representative of Kiwis’ incomes. 25% of workers aren’t full time, so we shouldn’t just be looking at full-time workers’ wages but all workers’ wages. Really, we should be looking at all taxpayers’ incomes, including those that aren’t working for whatever reason (retired, lost job in recession, student, invalid etc). We shouldn’t be using the average, because it is pulled upwards by outliers (like the CEO of Telecom on $5 million). We should look at the median instead.

So, if we want a true picture of what the typical Kiwi’s income is we want the median income for a New Zealand taxpayer: $28,000. Nowhere near the 33% bracket (which is why Farrar went for a subset with higher incomes). In fact, the typical Kiwi pays less than 17% of their gross income in tax.
The Right needs to get a sense of perspective. 78%of New Zealanders have incomes below $48,000. Cutting the 38% and 33% rates is no tax cut for nearly 4 out of 5 Kiwis. They just end up paying more GST. If tax reform is really about making a better deal for everyone, not just the wealthy, then cutting those top tax rates isn’t the way to do it.

13 comments on “33% nonsense”

  1. I do wonder what will happen to ‘average’ New Zealand wage statistics if/when it’s no longer possible to use losses from housing investments to articifially lower your taxable income.

    • Clarke 1.1

      This is a very very very interesting question, IMHO. I’m unable to put a finger on the stats, but IIRC there are hundreds of thousands of LAQCs, all of which would no longer be able to attribute losses back to their owners regular incomes … so such a change is likely to have a pretty significant impact on both the tax take and the median income.

  2. Excuse my tax law ignorance but I presume those tax bands apply to trusts and company tax too, so trusts and companies pay 12.5% tax on the first $14,000 of profit and only pay 38% over $75,000? If not, how does it work for them? And will that 30% alignment make any difference?

    • snoozer 2.1

      Corporates and trusts pay 30% and 33% respectively from the first dollar of profit.

    • Draco T Bastard 2.2

      Company tax rate is 30%
      Trusts tax rate is 33%

      The progressive scale only applies to personal income taxes.

      No, the alignment won’t make any difference as it’s sole purpose is to prevent the tax rorts that are going on now and which will still be going on after the alignment. Some of the rorts are a function of being able to right off business expenses – fishing trips with the boys in the company launch (doesn’t even have to pay GST on the fuel), McDs for the family etc, etc.

  3. Draco T Bastard 3

    The Right needs to get a sense of perspective.

    They won’t – reality doesn’t suit their spin so they’ll ignore it.

    • gitmo 3.1

      The Left needs to get a sense of perspective.

      They won’t reality doesn’t suit their spin so they’ll ignore it.

      gosh that’s an easy (and meaningless) naming game to play.

      • snoozer 3.1.1

        Yeah, name calling seems to be all you can manage, gitmo. No response to the substance of the post?

        captcha: commented – yes, yes I did

      • Draco T Bastard 3.1.2

        When the right start paying attention to reality I’ll point it out. Same as I point out when the left don’t. My expectations are that the left will listen and maybe change and that the right will continue to ignore reality because paying attention to reality doesn’t make them rich.

      • rob 3.1.3

        perspective is exactly what is sounds like…

        My perspective is my view of reality, the rights perspective is their reality (see Don Brash/Roger Douglas etc) .

        But there is only one true reality!!

        • fizzleplug

          Which is, of course, that we are all fucked because we have politicians (regardless of bent) making the rules up as they go along.

          • Draco T Bastard

            Only the NACT type politicians make the rules up as they go along. The ones on the left actually do research before putting the rules in place. Unfortunately, even the ones on the left are still using the neo-liberal theory to base their research upon which, inevitably, returns the wrong results.

  4. randal 4

    okay kiddies, you heard it here first.
    when woger finally realised that he would never be prime he went looking for the best way to get his revenge and falling into bed with the rabid right was just up his alley.
    and just for finishers is there anywhere esle in the world where their type of tax system is used.
    come on now..
    lets hear it.

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