We recently published an article, The Tax Unfairness Paradox in Aotearoa New Zealand, showing that there has never been so much empirical evidence to demonstrate economic inequality and unfairness in the tax system in Aotearoa New Zealand.
Still, neither of the two major political parties has pursued meaningful change to address that inequity.
Evidence
Following the restructure of the economy on neoliberal lines, New Zealand’s Gini coefficient rose rapidly in the 1980s and 1990s. It fell in the 2000s due to the Working for Families package of tax credits (negative income tax) and a higher minimum wage. Following the global financial crisis, and a National government, it rose slightly before falling marginally under the last Labour government.
To be sure, the Gini coefficient does not necessarily reflect people’s lived experience of inequality. If government invests in decent schools, free school meals, libraries, museums, public transport, swimming pools and so forth, children from less wealthy families, in particular, do not necessarily experience inequality in ways that Gini coefficients may suggest. However, the current government is committed to slashing public spending.
For many New Zealanders, ownership of real property is the key to amassing wealth but in 2024, home ownership dropped below 60%, the lowest rate since 1945. The richest 20% of households own around 184 times the median household wealth of the lowest 20% – NZ$2,024,000 relative to NZ$11,000. The median net worth is NZ$397,000. The top 10% of New Zealand households hold around 50% of New Zealand’s total household net worth.
In contrast to wealth inequality, income inequality is far less than wealth inequality. As at June 2021, the annual household median income of the highest 20% of earners was roughly four times that of the lowest 20%.
Notwithstanding our observation about income inequality, 42% of millionaires pay tax at rates below those of the lowest income earners. While the wealthiest New Zealanders pay a disproportionately low amount of tax, around 12.5% of children suffer from material hardship.
Inaction
The Labour-led government (2017-2023) re-introduced a token 39% marginal income tax rate and curtailed tax benefits available to domestic landlords but refused to entertain a comprehensive capital gains tax (CGT), ignoring the advice of the Tax Working Group, the OECD, and the World Bank. It also ruled out a wealth tax contrary to Treasury advice.
The current National-led coalition has reinstated landlords’ tax privileges and readjusted income tax rates to provide some compensation for fiscal drag. As the country teeters on the edge of recession, these tax choices require significant austerity measures.
In this context, it is pertinent to note what New Zealand does not tax, as much as what it does tax. New Zealand has no comprehensive CGT, no social security taxes, no payroll tax, no national land tax or transfer duties, no recurrent wealth tax, and no taxes on capital transfers. It does, however, rely disproportionately on regressive goods and services tax (GST).
Ability to pay
Ability to pay is the fundamental principle of tax fairness. Horizontal equity requires all types of income to be taxed, and vertical equity requires greater amounts of income to be taxed at progressively higher rates. GST does not reflect ability to pay, but the benchmark does have pressing relevance to receipts of income, capital gains and transferred wealth, and holdings of wealth.
In April 2023, Sapere Research Group, the New Zealand Treasury, and the Inland Revenue published reports on tax equity and wealth in Aotearoa. We do not question the good faith or competence of the authors of the Sapere report but, because its methodology resists comparability with the complementary Inland Revenue and Treasury reports, we will not discuss it further.
Inland Revenue report
Signalling the Inland Revenue’s high-wealth individuals research (HWI report), then Minister of Revenue, David Parker, noted that little is known about the wealth held by those who have the most in New Zealand.
The highest net wealth captured in the House Economic Survey (HES), the primary data in New Zealand on asset holdings, was NZ$20 million, which indicated the maximum is out by a factor of hundreds. Therefore, a methodology was adopted that allowed collection of income, asset, and taxation data from the 350 wealthiest families. 11% of potential respondents refused to respond – with impunity.
The HWI report used data over a six-year period (1 April 2015 to 31 March 2021) and employed the concept of economic income (all the ways that people gain money) rather than assessable income.
According to the HWI report, the respondents had NZ$276 million mean estimated net worth, and NZ$106 million median. The median effective tax rate of the households from the study including all income sources was 8.9% and the weighted-mean was 9.8%. When GST paid was included, the median increased to 9.4%.
The HWI report shows progressivity in taxable income, with the wealthiest paying a higher rate of tax on their personal income than most people. This includes income from wages and salaries, interest, and dividends. The effective tax rates for the project population based on personal taxable income and personal tax was around 30% on a median taxable income of NZ$268,000.
But, personal taxable income is only a small proportion of the economic income of those wealthiest people (approximately 7%). Capital gains accounted for around 80% of economic income – these are likely to be untaxed. Furthermore, 67% of the economic income made by the wealthiest families in New Zealand is earned in trusts, either as capital gains on assets held by the trust or as trustee income.
Other sources of income for the respondents were derived from business entities they control and inheritances: 66 households declared receiving a significant gift or inheritance over the six-year period. This totalled NZ$411 million, with a mean value for those receiving gifts or inheritances of NZ$6.2 million. Without a gift or inheritance tax, these also remain untaxed.
Treasury report
The Treasury methodology facilitates estimates of wealth in smaller groups, including wealth held by the top 0.1% of the wealth distribution. Results demonstrate that considerably more wealth is held at the top of the distribution than the HES shows.
The Treasury report indicates that:
- wealth estimates using HES data are underestimated for the top 10% of wealth holders and overestimated for the bottom 90% of the population;
- the top 1% held 26.1% of individual net wealth, contrasted with 20.1% in the HES;
- the proportion of wealth held by the top 0.1% of the population was 8.3%;
- the median effective average tax rate reaches its highest level just below midpoint, where it is 20.6%;
- middle-wealth New Zealanders pay an effective tax rate of 20.2%, including GST, whereas the rate for the HWI report is 9.4%.
Concluding comments
Due to the inaction of successive governments, the wealthiest New Zealanders pay and will continue to pay around half the effective tax on their economic income as their middle-income compatriots.
Not only does the status quo impede the progressivity of the tax system, it is also likely to impose other economic costs by influencing the pattern of investment in the economy as people continue to invest in rental properties in order to earn tax-free capital gains.
What would Mr Ballance and Sir George Grey think? After all, they championed land value taxation as a means of ensuring equality of opportunity and access to land.
By the way, capital gains and inheritances are not “income”.
The classical way of looking at tree and fruit has real merit. All incomes resolve into the rent of land, the wages of labour or the returns to capital, as Adam Smith explained, following the Physiocrats.
The Haig-Simons income concept is just plain wrong. They were following Seligman and JB Clark in obscuring the difference between land and capital as factors of production.