Who shoulders the burden of New Zealand's tax bill?
Tuesday, 5 February 2019
They say the only two certainties in life are death and taxes. Last year, the second of those certainties represented $80 billion in revenue for the government, with 45 per cent coming from individuals.
When you're talking those sorts of numbers, everyone has a view on tax: How much it should be, who should pay more or less, and what it should be spent on. These are important conversations, and I'm glad the Tax Working Group's upcoming report is seeing more discussions about tax taking place.
The National Party has added to the debate by proposing that income tax rates be indexed to inflation to stop bracket creep (or fiscal drag). I decided to have a look at the distribution of taxpayers across the various income tax brackets to determine how the burden of tax has shifted over time.
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Income tax brackets were last changed for the 2011 tax year, and were set as follows:
10.5 per cent on income $0-14,000
17.5 per cent on income $14,001-48,000
30 per cent on income $48,001-70,000
33 per cent on income $70,000+
Using public tax data from Inland Revenue, in 2011 around 26 per cent of earners paid the lowest tax bracket of 10.5 per cent, while 49 per cent of earners were in the second-lowest tax bracket of 17.5 per cent. Around 14 per cent of the taxed population paid the third highest rate, and 11 per cent paid the top tax rate.
That burden of tax has changed a lot since 2011. Using 2016 data – the latest available from Inland Revenue – the proportion earning in the lowest tax bracket has decreased to 22 per cent, with 46 per cent now paying the second-lowest rate. Those paying the third-highest tax bracket made up 16 per cent of the taxed population.
The largest shift in the five years since the last income tax changes was the proportion of people earning at the highest tax rate. The share of the taxed population earning over $70,000 a year increased from 11 per cent to 17 per cent of the population.
So, what could the income thresholds have looked like if we locked in the distributional share of tax across the taxed population? In other words, if the share of the population who paid each bracket of tax in 2011 was applied to the 2016 data, the tax brackets should have been:
10.5 per cent on income $0-17,000
17.5 per cent on income $17,001-57,000
30 per cent on income $57,001-83,000
33 per cent on income $83,000+
Although this approach is not exactly the same as the indexing proposed by National, it provides another way of understanding what has happened to the tax burden as the income thresholds have remained the same while the economy has forged ahead.
The lack of change in tax brackets since 2011 has created a revenue windfall for the government as earnings have risen in subsequent years.
The Tax Working Group is potentially a good catalyst for getting us, as a country, to have a much deeper conversation about tax and how we think the system should be set out. But the Tax Working Group had so many more things that it couldn't talk about than what it could examine. For example, viewing tax and welfare in isolation from each other makes little sense. We need to have wider conversations about how we want the tax system to be, who should pay what, and where all this money should go.
Brad Olsen is an economist at Infometrics. This is his personal opinion.