For and against: Could a flat tax ever work?
Wednesday, 19 June 2019
If Act got its way, we'd all be paying a flat tax rate of 17.5 per cent on our income.
The party has unveiled its tax policy, which would do away with our current stepped system of income tax, and replace it with a single band.
While it's unlikely to get traction - National has said it opposes the idea - the idea has sparked some debate about whether a flat tax could ever work in New Zealand.
FOR
Act leader David Seymour argues that a flat tax would promote a 'culture of aspiration and create opportunities for all New Zealanders'.
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'There is no fairness in 5 per cent of taxpayers paying a third of all income tax. It is wrong that if a person's income doubles from $50,000 to $100,000 their tax bill triples.'
He said the current system of four different income tax rates, starting at 10.5 per cent for income up to $14,000 and reaching 33 per cent for income over $70,000, created enormous complexity.
Seymour is right that a flat rate of 17.5 per cent would leave many people better off - particularly at the top of the scale.
Those on a $100,000 a year would end up with $6420 extra in the hand. People on $150,000 would benefit by $14,000.
Eric Crampton, chief economist at the New Zealand Initiative, said there was some evidence that lower tax rates would get more people into the workforce.
'Lower effective marginal tax rates can increase labour supply, but we should be cautious not to overstate effects here.'
He said tax structures tended to affect big, one-off decisions, such as whether to migrate to New Zealand in the first place, or whether to shift overseas.
But he said it was not necessarily the case that only the higher-earners would benefit.
'There's been a lot of reporting that many earners would see an increase in total taxes paid under a 17.5 per cent flat tax because the higher tax on earnings under $14,000 would outweigh the reduced taxes paid on earnings over $48,000,' he said.
'But many earners that are in that group will be secondary earners in households where a primary earner will enjoy a more substantial tax cut. So if we then consider a household where one person is on more than $100,000 and the second person is on $40,000 there would be an increase in the tax paid by the second person but it would be dominated by the tax cut enjoyed by the first person.'
It should not affect the decision of people earning less to work more, he said.
'The marginal tax rate doesn't change for that person, but the tax collected on earlier earnings does. So it should not have any effect on the second person's hours worked, conditional on that person still finding it worthwhile to be in work, but will have some likely minor effect on the higher-earning partner's labour supply. And if we think about migration decisions as being about how the household as a whole fares, it could have effects on decisions by families with a higher skilled worker to move to New Zealand.'
Kiwibank senior economist Jeremy Couchman said a flat tax system would be simpler and remove fiscal drag.
AGAINST
If you're paying less tax, you have to be prepared to give something up.
Act would fund the change by axing the Provincial Growth Fund, raising the pension age, removing fees-free study, cancelling the Winter Energy Payment, capping Working for Families and ending government contributions to KiwiSaver.
'The Crown gets a very large proportion of its revenue from income tax payments from high income earners,' Crampton said. 'If your ideal government includes a lot of redistribution, including programmes like fees-free study that are very poorly targeted if you think redistribution should mostly help poor people, then you shouldn't be a fan of flat taxes. They simply cannot raise the amount of money necessary for a large redistributive state.'
He said research indicated that primary earners were not very responsive to tax rates, so it should not be assumed that people would automatically start to work more if they were taxed less. 'At least not in the shorter term in deciding how many hours to work.'
A flat tax would mean less redistribution to lower-income people, too. Someone on the minimum wage working 40 hours a week would be $980 worse off.
Median-income earners would pay an extra $500 in tax.
Commentator Jessica Berentson-Shaw, of thinktank The Workshop, said it was difficult to invest in creating and maintaining public services with a structure such as the one Act was suggesting.
'What we tend to see is an inevitable crumbling of the foundations of strong community resources as we lack the means to maintain them for everyone's benefit. Super, for example, takes the lion's share of welfare investment, without an effective taxation system how do we continue to support elderly people to stay out of poverty? Let alone help families with children thrive?'
She said the conversation needed to move to a wealth tax.
Tax commentator Terry Baucher said it was hard to see what benefit there was to lower-income people from a flat tax system. He said it was an odd argument that suggested taxing lower-income people more would encourage them to work more - but that higher-income people needed lower tax rates to become more productive.
He said a true flat tax system had not worked anywhere else in the world. 'There's an attractive simplicity to it but there are a lot of tradeoffs that have to be made to get it to work.'