Who wins and who loses from tax reforms

Written By: - Date published: 9:33 am, January 22nd, 2010 - 65 comments
Categories: tax - Tags:

You’re probably up to your ears in this tax reform issue by now, but just one more. It’s a good ‘un, promise. I’ve made a pretty graphic of who would lose and who would gain, and how, from the tax working groups’ proposals:

The huge tax breaks for the few people on very large incomes are paid for by the middle class and poor.

Distribution of income source.
Factors: TWG proposals all adopted. ie. 38% and 33% income tax rates replaced by 30% rate kicking in at $48,000. GST increased to 15%. Benefits and superannuation increased by 2.2% to cover GST increase. Proposed land and property tax changes adopted – cost split between lower returns and higher rents as per
Treasury modelling by Arthur Grimes (or Grimey as he liked to be called). People spend 66% of gross income on products subject to GST – based on Stats average household income and spending figures (will be lower for higher incomes, so net tax cuts actually larger than given)

65 comments on “Who wins and who loses from tax reforms”

  1. gitmo 1

    Where’s the third graph on percentage of tax take paid by each of those groups………. or are you no better than David Farrar and selectively choosing only to show those items that make a dubious point ?

    • Michael Foxglove 1.1

      You’re missing the point gitmo. Marty is showing that by far most people in NZ will suffer, while Key’s rich mates get a tax break.

    • snoozer 1.2

      gitmo. It’s aobut a change from the status quo and who wins and who loses from that change. Come on, you get that, eh?

      • Tigger 1.2.1

        Actually, I get a big tax break under this but I am certainly not one of Key’s ‘mates’. Just as with the last tax break NACT handed me I’ll be pouring the money into the Labour Party…

    • Daveosaurus 1.3

      The graph in question is here.

      (Security word: “AUTHORITYS”. Is someone around here trying to discourage good spelling and grammar?)

  2. Michael Foxglove 2

    Great graph Marty. I think it speaks volumes about who would suffer under the tax changes John Key is considering.

  3. Draco T Bastard 3

    So easy to understand and a fact that has, from what I can make out, been purposefully hidden. You’ll note that in the MSM nobody talks about incomes greater than $100k.

  4. Well all I can say is that after 9 years of “closing the gap” Clark it is pathetic to think that so many New Zealanders are earning so little.

    • Clarke 4.1

      So you think John “I’d love to see wages drop” Key is going to improve matters? Remember, he’s the guy who ruled out a rise in the minimum wage to $15/hr ….

    • Bright Red 4.2

      would you like to see how it looked before Labour, dm? because I’m sure that can be done. actually, if you follow the source link marty has given, you can see what it was like in 2001 when labour had just got to power.

      By my reckoning, the median (that’s the point where half the population is above, half is below) is up 55% between 2001 and 2008, even taking into account inflation of about 25%, that’s a 30% increase. pretty damn good in 7 years.

    • Sam 4.3

      Yes, let’s completely ignore the actions of the Fourth National Government that entrenched our low-wage economy so deeply that the Fifth Labour had to use tax payer dollars to make up the difference (WFF).

  5. Zaphod Beeblebrox 5

    The above graph highlights another thing- the appallingly low incomes of NZers. As an Australian living in NZ its stunning that NZ has virtually no middle class.

    This is what really should be concerning NZ governments, not a few cents in the dollar tax rates. A prosperous, educated, hard working middle class with enough time and energy to contribute to society is what separates third from the first world countries. Have a look at the dsintegration of U.S. society and poltical discourse as their middle classes shrink.

  6. roger nome 6

    DM:

    Come again? This time try writing a coherent statement that’s punctuated properly, if that’s not beyond you….

  7. Lew 7

    Marty, not to quibble (!) but is the y axis supposed to have intervals which go $4001-$5000, $9001-$10000, or shoudl all those nines be fives?

    L

  8. So 2.5 million of us will be made actively worse off to enrich a tenth of that number who will come out ahead, while 1% – the top 25,000 taxpayers, including all Government Ministers and John Key himself – will make out like bandits. How is this “fair”?

  9. snoozer 9

    That really puts this whole argument to bed I think. You’ve got 3.2 million taxpayers getting worse off so that a few tend of thousands can have huge tax cuts.

    • indiana 9.1

      any merit to the the 250k of tax payers that may be creating jobs for the 3.2M tax payers to exist?

      • Idiot/Savant 9.1.1

        None. If they do that (and I do not believe the rich are indispensible supermen; if they move, someone else will fill their niche and make that money), then they’re already doing it, so clearly the present incentives are sufficient. So why do we need to fuck over 2.5 million to give them a windfall?

      • Bright Red 9.1.2

        indiana, put down the Ayn Rand. That stuff rots the brain.

        Jobs are not created by the rich. They are the result of the application of labour and capital to create supply to meet demand. We don’t need mutli-millionaries for that to happen. And we certainly don’t need to give them tax cuts.

        • Watermelon 9.1.2.1

          Increasing spending in Education and R&D would be a far better way to create jobs than giving the “rich pricks” another tax cut.

          Captcha: schemes

          • Tigger 9.1.2.1.1

            And how is giving someone a personal tax cut going to enable them to ‘create jobs’? To do this they would need to (a) own businesses that employ people and (b) put their tax cut into hiring more staff in the business. Likely?

  10. vto 10

    This is such a dumb argument.

    If all income taxes were able to be wiped altogether then those that pay the most would get the biggest saving. What is the problem with that? It is just simple maths. The rich pay more, so it makes total sense they also get the biggest reduction. Just like when taxes go up they end up paying more.

    out

    • Bright Red 10.1

      no vto. because we’re not talking about wiping the taxes out altogether. These are fiscally neutral tax changes.. We’re talking about tax changes that specifically only benefit the rich and impose more cost on everyone else.

      This is about a proposed change from what we have now and who gets the gain from that change and who bears the cost.

  11. Good to see the Standard continuing to do the job and the analysis that the MSM should be doing.

  12. vidiot 12

    “1.2 million taxpayers (19,001 to 45,000), no compensation for GST, higher rents and or/falling property returns. No income tax cut”

    Eh wtf ?

    Read the piece by Bernard Hickey – http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10621483&pnum=0 it has a great summary of how things could play out.

    Or is he just another wing-nut ?

    • Bright Red 12.1

      vidiot. Some people in that group rent. Some people in that group have investment properties. The TWG report says that the cost of the changes to property tax will probalby be split between renters and landlords.

      What do you do for a living? I hope it doesn’t involve simple deduction, or even reading the notes at the end of things.

    • IrishBill 12.2

      I have some sympathy for Hickey’s argument but in his last para he states:

      They [landlords] need to get back down to the business of making sustainable yields on rental properties with real people in them.

      I don’t know how he expects landlords to make sustainable profits when he also expects house prices to remain stable after a land-tax is introduced and tax breaks are removed.

      At the moment rental returns (excluding capital gain and tax breaks) are averaging around 4% (or at least I recall that’s the figure).

      You can do better than than with a term deposit.

      Of course some people may shift their capital to the markets but given the regulatory failure we’ve seen over the last few years and the lack of the current government to fix this failure I’d suggest that few will be in any hurry to liquidate their property portfolios and plunge into financial investments.

      Which doesn’t leave much for landlords to do to maintain profit other than raise rents.

      • Zaphod Beeblebrox 12.2.1

        Its quite possible that it could become more economical to leave your rental property empty and not even let tell IRD about it. Thats if they are going to expect you eran 6% pa on it.

        You’d expect a reversion to cash in hand blacket market rentals as why would any property owner want to subject themselves to thousands dollars of assessable income which they would never be able to earn anyway.

        A Land Tax and a CGT would be much more practicable.

  13. burt 13

    So the current tax system isn’t fair that’s OK, it’s popular with enough people to win an election. What else matters?

    Everything that was wrong with Labour can be seen in Dr Cullen’s approach to taxation it’s not about getting it right it’s about enough people believing you have it right to hold onto the treasury benches. No more no less.

    Bleat about tax rorts as much as you like, the Labour govt policies created whole industries based on working the angles and you had nothing but praise for the policies when Labour were in govt it is very sad it took a change of govt for you to wake up to what was really happening and what inequities the policies of envy marketing campaign created. But still you want status quo . Unbelievable.

    • Bright Red 13.1

      who says its not fair for those who benefit most from our capitalist economic system to pay the most for the cost of maintaining and moderating that system?

      Ceterus paribus, the cost has to be paid by someone. You would rather put more of the cost on the poor and middle class?

      • burt 13.1.1

        The people who benefit the most should pay, I have no issue with that. But when under Labour 75% of high school teachers had slipped into paying the top tax rate and about half of the 100 most wealthy people in NZ were not – I need to take a whole jar of “Labour good’ pills to agree with you Cullen had it right.

        But hey, Cullen only had 9 budgets to dodge the unpopular changes, the McLeod report to ignore and the constant drone of treasury & economists to denigrate he plucked the goose and the duct tape over it’s beak stopped it’s hissing from being heard pity it died of cold as soon as the black clouds of economic trouble appeared on the horizon.

  14. Zaphod Beeblebrox 14

    Burt- right about Cullen, free student loans and WFF two cases in point.

    However, listening to Goff and Cunliffe for the past year, I’m pretty sure they don’t want to keep the staus quo.

    Every side seems to agree the tax system is stuffed, but no two people will agree on how to achieve the desired outcome.

    You accuse Cullen (rightly) of kowtowing to political opportunism, do you trust Key not to do the same?

    Why, for instance is he entrenching WFF and has already ruled out a CGT?

  15. TightyRighty 15

    Lolz on the grimey call in the footnotes. one of the bet ever simpsons episodes

  16. RedLogix 16

    Proposed land and property tax changes adopted cost split between lower returns and higher rents

    Brilliant as usual Marty, but Grimey is being highly optimistic here. Most landlords are already putting cash into the business in order to cover costs. ie the extra cash from their LAQC tax break, is cycled straight back to pay the mortgage, rates, maintenance, insurance, etc. Effectively it is being used to subsidise low rents.

    Take the tax break away and the loss of cash flow will have to be fully passed on to the tenant. With returns around the 3-5% mark anyway, there really isn’t room for most landlords go lower without making a total loss.

    I’ve done my numbers. Most of my tenants are currently paying about $300pw. If all three proposals go through, the Land Tax, the RFRM tax on equity and the dismantling of the LAQC cash flow smoothing mechanism… I’m going to be fronting up to my tenants with an increase to $375pw.

    The conversation at the door will start like this, “You know that tax cut ‘north of $50pw’ that nice Mr Key promised you… this isn’t it”.

  17. BLiP 17

    The promise:

    My Government is today tabling a Bill to reduce personal taxes from 1 April 2009.     Its intention is to pass this new tax legislation by Christmas and it  believes this tax reduction will equip New Zealanders with some much needed extra cash in tough economic times.

    Personal taxes will be further reduced from 1 April 2010 and from 1 April 2011.  As a result, by 1 April 2011 around 80% of New Zealand taxpayers will end up paying no more than 20c in tax for every additional dollar that they earn.

    This programme of tax reduction is a central part of the economic plan of my Government, because it believes in encouraging New Zealanders to get ahead under their own steam, and it views personal tax reductions as an essential step in ensuring that can happen.

    John Key 09/12/08

    The reality:

    The rich get richer, the poor get poorer

    Thanks National Ltd® – I’m lovin’ it.

  18. Uroskin 18

    How much would the 38% to 30% alignment be worth in the lower tax bracket, i.e. how much of everybody’s income could be tax-free (or the lowest tax threshold reduced for everybody)? That way the tax cut could be for everybody on their first tranche of taxable income and much fairer.

    • burt 18.1

      Uroskin

      I’ve never understood why both Labour & National are so anti a tax free bottom bracket for income. I guess it is just too simple and provides no opportunity to play god with winners and losers.

  19. tsmithfield 19

    Has anyone got any idea of what the true rate of taxation is when all the various forms of taxation are taken into account: e.g.

    Income Tax
    GST
    Various other consumption taxes (ciggies, booze, petrol etc)
    Rates
    Indirect ways of taxing such as dividends on government-owned electricity companies etc.

    Income tax is only one component of the tax system afterall.

    • snoozer 19.1

      ts. easy. go to the treasury website. look the the budget documents. find the amount of tax revenue raised and the gdp. divide first by second.

      tell us what you come up with

      • rainman 19.1.1

        If I’m reading the numbers right (big if), for 2008 that was apparently 30.8%.

        captcha: collection 🙂

  20. Herodotus 20

    It is not a given that rentals would increase, pure speculation, as when interest rates move rentals tonot follow this trend. Also there is not as I am aware not a surplus of tennants out there, there is a cost to both parties in a change of tenancy, and depending on the time e.g. tennat vacates in Dec a potential of many weeks of the rental property being vacant, and 1 weeks vacancy equate to a 2% rise in new rental to compensate for this lose in cash for that financial year, and many land lords subsidies rentals for good tennants. I know what poor tennants are like chasing arears in rent, property maintenance and the general hassel.

    • RedLogix 20.1

      It is not a given that rentals would increase, pure speculation, as when interest rates move rentals tonot follow this trend.

      Most mortgages are for fixed rates at fixed terms, so they do not all expire for all landlords at the same time even when variable rates increase. Moreover the interest portion of the mortgage is a deductible cost, so the landlord is not under immediate pressure to recover it and can usually wait until the tenant leaves before raising the rent. (The average tenancy is around 12-18 months, and many landlords find it the most painless way of dealing with the issue.) Therefore the link between interest rates and rents is not so very obvious.

      But if Land Tax, an RFRM equity tax, and depreciation is cut from the LAQC model, then this will directly hit the cash flow of most landlords more or less in the same time frame, and most will react to cover the increased costs.

      A minority, those with very cash flow positive properties that they have held onto for a decade or more, will be able to absorb the extra costs and not increase rents, but their fortunate tenants will be much less inclined to move … and the landlord can only rent the place once.

      • Herodotus 20.1.1

        So they have in hindsight if these new reforms go ahead paid to much for the property and their gearings are not manageable, (Similar to forestry and tradable Carbon credits.) If the properties were brought on -ve equity, there is a case that it was not brought for rental incomes BUT capital gains. Thus the onwers should be subject on disposal of paying Cap Gains (As if anyone would own up to that). Many property investment coys will not openly state this but there is a strong inferral at the presentations I have been to as the motivation and business case on purchasing is in on Capital Gains.

        • RedLogix 20.1.1.1

          Well if you want to apply a GGT go right ahead.. but apply it across the board to ALL instances where something is purchased with an intent to resell for a profit. Like shares, commercial, industrial and farm property…why just pick on residential rental investors?

          The fact is that if you hold onto a property long enough.. 8-12yrs these days it should become cash flow positive.

          • Herodotus 20.1.1.1.1

            It does apply to shares if you are trading in them. But yet people who trade daily also do not disclose any of their success to the IRD, the same should apply to those who trade inthe other avenues you have mentioned.
            IMy comments do not just pick on residential rental “investors” according to the wording of the law their income should be disclosed as taxable.

            • RedLogix 20.1.1.1.1.1

              So all this begs the distinction between a trader and an investor.

              If I’m trading in cabbages/shares/whatever on a daily basis, then I pay tax on my profit, ie income after costs.

              If I’m trading in my labour then I pay tax on my income before costs, ie the food, shelter and transport that are essential to my existence.

              If I’m a farmer who sells his property when he retires (after decades of relatively low cash flow and re-investing heavily in adding value to the place) … should I pay tax on the ‘capital gain’? And how is that ‘gain’ calculated, before or after costs, and in real, nominal or market adjusted dollars?

              These distinctions are long-standing and real, but they rather hurt my head when I start thinking about where they all come from.

              • SPC

                I am a fan of a CGT paid by farmers when they sell up.

                There would need to be another arrangement for farms owned by Trusts who would avoid a CGT liability sale.

                Much of the “investment” by farmers is in maintaining the business and this accounts for low tax on their after cost income. The rising value is not the result of such “maitenance”. No more than maintaining the condition of a rental property is the reason the land around it goes up in value.

                As for a CGT itself – that could be done on the basis of no inflation adjustment (in which case a lower tax rate should apply instead). Note that we tax interest income despite much of this being compensation for annual inflation – meaning there is a case for a reduced tax on interest for the same reason.

                PS

                A farmland CGT could fund CRI’s – Agriculture Research, and Fast Forward and provide funding for environment work – water resources and clean waterways.

    • snoozer 20.2

      “It is not a given that rentals would increase, pure speculation,”

      Take it up with Grimey

    • Zaphod Beeblebrox 20.3

      Hard to see how that won’t happen. Remember we are about to enter a housing crisis as nothing is being built at present. The property investment market is likely to be hit so thats unlikely to change.

      Housing NZ are being starved for funds so no help from them.

      Same number of tenants looking for less houses/apartments with landlords and/or property company getting reduced income = higher rents.

      If interest rates go up expect these effects to be compunded.

      • burt 20.3.1

        Zaphod

        Perhaps you missed this a few days ago;

        Stuff: 14/01/2010 – Building consents hit 18-month high

        Building consents for new homes rose 3.1 per cent in November to reach their highest level since May 2008, according to Statistics NZ.

        The number, which excluded consents for new apartments, follows an 11 per cent jump in October, but remains some way off the highs experienced in mid-2007.

        “Although the trend for new housing units has been increasing since March 2009, it is still considerably lower than the levels seen before mid-2007, “said business statistics manager Louise Holmes-Oliver.

        Sure it’s not all boom times again, but it is a long way from nothing is being built at present.

        • Zaphod Beeblebrox 20.3.1.1

          Fair enough, things have improved slightly of late. Still 42 apartments for the whole of NZ does not sound a lot to me.

          Given what the budget is likely to do to landlord profitability you’d have to admit things are looking grim for the residential construction business over the next couple of years.

          • burt 20.3.1.1.1

            Zaphod

            No argument that things will change if tax is added to the property equation. The issue is investment will move to the vehicle with the best return and if tax takes away the current advantages of bricks and mortar over other classes of investment then its guess work as to what impact that will have.

            Arguably the top end of the property market will fall as the holding cost goes up, that might have some unexpected consequences on lower value property.

            Personally I think there is an element of breaking eggs to make an omelet in this situation because I think the tax base is far too dependent on individual income tax. However I don’t claim to know what will happen given;

            a) We don’t know which parts of the report will be implemented – if any.

            and;

            b) we don’t know for sure what response property owners and renters will have to the changes.

            • Zaphod Beeblebrox 20.3.1.1.1.1

              True, we won’t know the details until the budget, but you can see that the options for paying for the tax cuts which we need have been significantly reduced already.

              If they decide they can’t sell a GST rise politically (Maori Party are likely to oppose and ACT will want their pound of flesh so may be tricky), the only remaining three options involve property owners and renters footing the bill. No matter which combination of the three are decided it would be hard not to see a capital outflow from the the property investment/construction market.

              In the long term, this will be a good thing- but where will that leave their housing policy? Rising rents and accomodation shortages probably won’t be the best thing if you want to attract skilled workers.

              If they do embark upon this course, the government really need to reconsider their housing/development policies- hopefully RMA changes will allow shorter consent times than 2 years, public/private development opportunities, Housing NZ doing more probably all need to be considered.

              • Herodotus

                It takes 9+ years for a plan change to proceed if you are lucky if not like Long Bay a Generation !!!
                Subdivision consent can take 3+ years then you have local body consents etc.
                And no involvement by Cent Govt within the process unless Transit motorways are affected then you can build ramps, widen approaches etc to solve their problems.
                Then yuo have councils wanting all the infrastructure changes paid for. In some cases $50k per lot of Development cont, double glazing etc how do yuo then a make property available in a timely fascion and b make it affordable?
                Everyonee gives this lipservice support but when asked for action go missing!!!

  21. garethw 21

    There are some very good points to made about the possible changes in tax burden depending on the mixture/choice of options. But this is such appalling selective picking of the numbers to make your case that you lose any credibility to do so.

    The TWG made it very very clear that the changes in personal income tax would have to be made up from alternatives – the increase in GST wasn’t really one of these as the recommended cut in lower tax rates to compensate for it made it relatively neutral (+$200m I believe it was). For example, given the HUGE concentration of capital wealth amongst the rich, a CGT to offset the personal income tax changes would be very much progressive and in certain scenarios could see zero change to tax paid across the board; just the mixture of types of tax would change. Similarly land wealth is heavily concentrated amongst the rich, so a tax on land would hit them to offset the personal income tax changes. Alignment of rates would see the rich currently sheltering earnings in trusts and businesses actually make no gain as they’re currently being taxed at the lower rate anyway through their chicanery.

    NONE of which you mention. Your focus on only personal income tax is borderline ridiculous – what matters is what total percentage of all tax is paid for by the wealthiest vs the poorest. Their are permutations of the TWG’s options that could end up even more progressive and certainly stop the rich being able to shelter income or make out like bandits because they control capital, land and property but instead you spin the numbers in a bald-faced partisan bid to discredit something your party didn’t author.

    • RedLogix 21.1

      You make some reasonable points, but the scenario you paint ain’t necessarily so.

      It is true that CGT’s potentially hit the wealthy more than the poor, but as has been pointed out many times, CGT’s are complex (read expensive) to administer and not especially efficient.

      It is also true that aligning the top PAYE and Company tax rate superficially seems like a good idea… but you forget that just making the two rates the same won’t result in any more total tax being paid. In fact it’s unlikely to change anything, because even with the two tax rates the same, there are still advantages to having income sheltered in a company or trust.

      And I agree that superficially a Land Tax is a respectable idea, but it’s been suggested that will be exemptions for farm land, forests, Maori land and large trust holdings, i.e. land that falls below a certain $/Hecatare threshold. So again there will be many very wealthy for whom this will change nothing.

      As Matt McCarten puts it today in the Herald… the one idea that would reliably and efficiently tax the very wealthy, a financial transfer tax …. has gone completely unmetioned by the TWG. So much for their credibility.

  22. garethw 22

    Now see RedLogix those are all valid points worthy of analysis – you can explore the real affects of the different taxation methods across wealth “classes”, even if it is a little difficult.
    I just wish I had seen more such thought and honesty from those who oppose the Govt. Instead we get selective number and stat usage that would make the Republican Party proud!

    And I’m not advocating for or against any of the options presented in that report here (or options they may have missed), just trying to ensure we get a reasonable and honest debate about those options from all sides.

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