Richest Kiwis pay about half as much tax on the dollar as the average New Zealander

Wednesday, 26 April 2023

• IR study finds wealthiest Kiwis pay about 10% tax, once all income and GST is included.

• For the average Kiwi, the figure is about 20%.

• The Treasury says wealthiest 1% own more than a quarter of the country’s wealth.

• The findings are expected to trigger a debate about tax reform.

The wealthiest New Zealanders pay on average​ only 8.9% tax on their income, according to a long-awaited study of 311 rich-listers conducted by Inland Revenue.

Revenue Minister David Parker said the low tax rate was explained by the fact they received about 80% of their income in form of capital gains, much of which was earned through trusts and companies and which was often untaxed.

A separate Treasury study, also released on Wednesday, estimated that the average Kiwi effectively paid 20.2% tax on their income, once GST and benefits they received from the Government were taken into account.

The equivalent effective tax rate for the wealthy individuals studied by Inland Revenue, with government benefits and GST included, was 9.4%, meaning that – most commonly – they were effectively paying less than half as much tax on every dollar they received in income as the average New Zealander.

The Treasury study also estimated that the richest 1% of New Zealanders together owned just over a quarter of the country’s wealth.

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There has been speculation that Parker hopes the revelation on how much tax the wealthy pay on their income will increase the public’s appetite for a broader tax on capital gains or a wealth tax or inheritance tax.

However, Parker said he wanted “to be clear today that I am not announcing any new tax policy or tax switch”.

Labour’s tax policy would be announced before the election, he said.

“While views differ on what constitutes a fair tax system, they need to be grounded in real facts and real data,” he said.

“For the first time, we now have that real data, thanks to this report.”

Unlike his predecessor Jacinda Ardern, Prime Minister Chris Hipkins has not ruled out proposing a comprehensive tax on capital gains if he is re-elected.

Like Ardern, he has also not ruled an inheritance tax or some other form of wealth tax.

A Tax Working Group chaired by Sir Michael Cullen reported in 2019 that New Zealand was unusual among developed countries in the extent to which it relies on taxes on wages to fund government spending.

However, lobbying against tax reform appears to have already resumed.

A report commissioned by tax consultancy OliverShaw and released last week acknowledged that the effective tax rates people paid varied greatly depending on their sources of income.

But OliverShaw principal Robin Oliver suggested that people could take comfort from the fact that people with higher incomes generally still paid more tax than those on lower incomes.

ACT Party leader David Seymour also jumped in ahead of the report’s release, saying “no-one has ever taxed their way to prosperity”.

Inland Revenue’s report was based on a survey of 311 of the wealthiest New Zealanders and their closest relatives, who had an average family “net worth” of $276 million.

Their effective income tax rate of 8.9% between 2015 and 2021 was a median average, meaning as many people in the sample paid a higher rate as paid a lower rate during that period.

Despite the survey being compulsory, the tax department said it had a response rate of “about 90%”.

It reported last year that it had not heard back from 14 of the rich-listers who it instructed to participate.

Parker said IR’s report was not about attacking the very wealthy, but said in response to questions that he did intend to fix the tax system.

“I am on record as saying we need a fair tax system,” he said, acknowledging he had voiced support for a comprehensive tax on capital gains in the past, but adding that was “not necessarily the best or only solution”.

“You have to look to countries like the US to find extremes that are similar to ours,” he said.

Inland Revenue project director Felicity Barker said the United States Council of Economic Advisers found that the 400 wealthiest families in the US paid tax at the effective rate of 8.2% “so quite similar to our findings”.

National Party finance spokesperson Nicola Willis noted that IR’s research showed that in 2017 the wealthiest New Zealanders had an economic income of $1b but that “soared to a staggering $14.6b in 2021 as Finance Minister Grant Robertson’s policies took hold”.

That was a direct result of the Government’s decision to allow the Reserve Bank to “print tens of billions of dollars through its extended quantitative easing programme” and a massive blow-out in its own spending, she said.

“David Parker can keep flogging the dead horse of a capital gains tax as much as he likes, but it doesn’t change the fact that the main driver of inequality under Labour has been its own economic policies,” she said.

National leader Christopher Luxon said Labour was “softening us up for a tax grab”.

He indicated he believed that the dollar amount of income tax paid by the wealthiest 2% was “entirely fair”.

Tax Justice Aotearoa spokesperson Glenn Barclay said he was not surprised by IR’s findings.

“But having said that it's always shocking to actually see the figures.”

The Government had to act on them by reforming the tax system, he said.

“We think that it's an imperative that the opportunity that this research provides us with is acted on.

“We were will certainly be asking the Government to step up and at the very least introduce a capital gains tax, and ideally look beyond that to a whole raft of other reforms.”