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.