How much tax are high-income people really paying?

Monday, 17 April 2023

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People earning the same amounts of income can face wide differences in their tax bills, a new report suggests.

Tax consultancy OliverShaw commissioned consulting firm Sapere Research to prepare a report on the effective rates of tax that the New Zealand tax and benefit system imposes.

An effective tax rate is the percentage of total tax a person pays measured against their total income.

The report comes ahead of the release of Government data on the country's effective tax rates, through Treasury and the Inland Revenue’s tax policy work programme research into high-wealth individuals.

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Earlier, it was reported that Treasury data showed the wealthiest New Zealanders paid 12% of their total income in tax, on average.

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But the Sapere report said households earning more than $500,000 a year would have an effective tax rate of 29% to 31%, if they were not receiving NZ Super. An older retired couple living in their own home with the same level of economic income had an effective tax rate of 6%.

OliverShaw principal Robin Oliver, former deputy commissioner of policy at Inland Revenue, said the report was commissioned out of concerns about the methodology of the Government’s work, which he said could give a misleading picture of the tax system.

The report noted that high-income earners often had more choice about how they earned money and were incentivised by the tax system to invest where tax was low. But high-income people earning money from the bank were paying much higher effective interest rates because they paid tax on the portion of interest that was only keeping up with inflation.

Someone who made money mostly through capital gains could have an effective tax rate near zero.

Low-income earners would usually receive cash benefits greater than the tax they paid, it said – sometimes by more than 300%.

The most variation in percentage of tax paid by people with the same income was among the lowest and highest earners, because at the top there were more people likely to benefit from untaxed capital gains, and at the bottom more people were receiving assistance.

Robin Oliver, former IRD deputy commissioner of policy and now tax consultant for OliverShaw.

The Sapere report’s key findings were that most of the tax collected from individuals in New Zealand came from “rich” taxpayers. The richer they were, the more tax they were likely to pay.

People earning between $70,000 and $180,000, 18.8% of all taxpayers, paid 42% of all tax. The 2.4% of people earning more than $180,000 a year paid 26.6% of all tax.

But the report found single people renting had the highest average effective tax rates, because they received no Working for Families help and did not benefit from capital gains.

It also showed there were inequities when lower-income earners faced significantly higher marginal effective tax rates due to their benefits and other support being abated as they earned more.

Oliver said the increase in marginal tax when someone shifted from the 17.5% to 30% tax bracket at $48,000 a year was also significant, particularly because that was not a large amount of income. “You're paying almost the top tax rate, that doesn’t seem right. But there’s no simple solution, there’s no vast amount of super wealthy people paying no tax.”

He said people who were worried about the tax system could take comfort from the fact that overall, as household incomes increased, so too did the tax paid.

“One of the questions asked is whether the very wealthy pay taxes at the same or higher rate than middle-income earners,” Oliver said.

“This research shows clearly that, whether you consider taxable income or other measures, such as economic income, the answer is: ‘Yes, they do.’ The key conclusion of the report is ‘average effective tax rates increase as the net real economic incomes of households increase’.

“However, when it comes to considering whom to tax, on what basis and at what rate, trade-offs have to be made between taxing all income at the same rate and other policy concerns such as providing assistance to lower income families and encouraging investment. Tax rules are the product of policy conclusions as to what is reasonable, workable, efficient and equitable.”

He said wealthier individuals generally derived a greater share of their income from sources other than wages and are encouraged to take advantage of the different tax rates payable on income from companies, trusts, property and PIEs.

“Thus, increasing the top marginal income tax rate will likely have only a modest effect on their effective tax rate.”

Oliver said the report showed the tax system was not broken. “It’s pretty stretched, given the amount of money the Government wants to spend but it’s not broken.”