Are we being fairly taxed?
Opinion & Analysis
New Zealand prides itself on being a relatively egalitarian society but if some academics and politicians are to be believed we are now just kidding ourselves.
Labour deputy leader David Parker says that as an immigrant nation with cheap land, New Zealanders came from a very equal past.
There is no doubt income inequality has widened in the past three decades, he says. "We moved from being in the best 40 per cent of Organisation for Economic Co-operation and Development countries to the worst 30 per cent, an enormous change at a time when the OECD was getting worse."
Leftwing British academics Richard Wilkinson and Kate Pickett stirred up the pot in May, when they delivered the Sir Douglas Robb lectures to packed auditoriums at Auckland University.
Professor Wilkinson said that in the 1980s, the chief executives of the top 350 companies in the United States were receiving on average 30 to 40 times the income of the average production worker, but by the 2000s they were getting 200 to 300 times as much. The same trend was evident in New Zealand, he said.
"The sense of progress I grew up with, the feeling class status and inherited wealth made less difference, is declining. Now we are recreating dynasties; families whose children will not have to work for generations."
Which all leads to a debate around who pays what on the tax front and what is fair?
The Treasury estimates that New Zealand households earning more than $150,000 a year, which are the top 15 per cent of households by income, will pay 49 per cent of income tax this year. Prime Minister John Key asked in May if top-earners weren't already paying enough tax. "How much is enough? Because it's a pretty good question."
Good it may be, but it was not a question Key was keen on answering himself, passing that task to Revenue Minister Todd McClay.
The facts point to New Zealand having one of the least "progressive" tax systems in the world, meaning the least geared to redistributing wealth and income from the rich to the poor.
Not only is the top rate of income tax of 33 per cent the seventh-lowest in the 34-member OECD, but there is no tax-free threshold for people on low incomes and no inheritance tax, gift tax and general capital gains tax to redistribute wealth.
On top of that, New Zealand is the only OECD country where GST is levied on all domestic purchases, including food. Sales taxes such GST are regarded as "regressive" because the less well-off are said to spend a higher proportion of their income.
Labour's solution to redress the balance is a 15 per cent tax on capital gains, excluding the family home, and a 36 per cent tax on income over $150,000. Parker says it is the capital gains tax, which he notes is "polling better than the Labour Party", that is the bigger of the two policies. It would raise 10 times as much money as the increase in the top rate of income tax, over time, he says.
But McClay says taxes are only one part of a bigger picture that to him looks fair.
The level of inequality in the economy is determined not just by tax but by differences in pre-tax income. Policies such as New Zealand's minimum wage, which is high by international standards, should even-up the ledger.
McClay says any discussion on equality also needs to take into account the benefits system, including Working for Families.
Taken together, households with an income of $50,000 or below are net recipients of the tax-and-benefit system, he says.
Add it all up and the statistics are indeed nuanced. An OECD report found the average income of the top 10 per cent of New Zealand households was eight times that of the poorest 10 per cent of households in 2011, after taxes and benefits. The average ratio across the OECD was higher at 9.6.
But using the more complex "Gini-coefficient", a mathematical formula favoured by researchers to measure across-the-board inequalities, New Zealand comes out slightly "worse" than the OECD average, with a higher level of income inequality than most continental European countries, though lower levels than Britain and the United States.
The implication is the extremes of inequality are not as great in New Zealand as the OECD average, but that inequalities are more widespread.
Professor Pickett, who told Auckland University she would impose a 100 per cent inheritance tax if she could, says the National Government could legitimately claim income inequality hadn't got markedly worse under its watch.
"From the early 1980s up to around 2000, you had a dramatic rise in income inequality mirroring what was going on in the United States, Britain and many other countries," she says.
"Since then, your levels of income inequality have wobbled up and down a bit. Your current Government can probably claim things haven't got worse in the past couple of years but no-one has done much to unpick that massive rise in inequality."
Wilkinson says people tend to worry about the impact any such "unpicking" may have on economic growth, but research suggests greater equality is actually good for growth. The International Monetary Fund came to the same conclusion in February, saying it seemed "to drive higher and more sustainable growth". It appears chief executives won't give up their day jobs and stack supermarket shelves if they are taxed more.
People don't earn high incomes in a vacuum, Wilkinson says. "They can only these sums only if there is a good system of law and education and transport systems; modern production is a co-operative enterprise."
Whereas we may have hopped off the boat as relative equals, Parker's fear is that higher-than-average income inequality and the lack of a capital gains tax are combining to drive a wedge between us over generations.
Wealth tends to be distributed much less evenly than income, but Parker says there is a dearth of data on wealth inequality in New Zealand precisely because of the absence of taxes such as inheritance tax. "We have very poor wealth statistics."
The bulk of Wilkinson and Pickett's research has involved identifying a causal link between inequality and social ills such as poor health, crime and community disengagement.
For Pickett, greater equality appears as much an environmental issue as an economic one in the face of societal challenges such as global warming.
"Equality and sustainability go together hand in glove," she says. "Greater equality leads to greater social cohesion and people in more equal societies are better able to act together for the common good."
She signed off the Sir Douglas Robb lecture series by saying: "We hope that in maybe 20 years it will be as embarrassing to be seen to be greedy and out-for-yourself as it is now to be seen to be a racist, homophobic or misogynist."
The utilitarian argument for equality is that, as individuals, we buy things that are most important to us first. Assuming people are equally capable of getting enjoyment from material things, enjoyment from income is therefore highest when they are evenly distributed.
McClay says neither arguments are ones he has put a lot of thought into. "The focus for the past four years has been helping New Zealanders through some of the challenges the global financial crisis has sown," he says.
"We think an equal society is one where people do have opportunity through education and in jobs. The tax system has to be fair to those who earn less and also to those who run businesses and may earn more. I think we have got the balance about right for the moment."
The relatively high level of tax compliance in New Zealand is evidence that most people see the current system as fair, he says. "What we do know is where people see something as unfair, they either won't comply or will look for ways to not meet their obligations."
The tricky question for Parker, is why, if New Zealand's egalitarian foundation is slipping away and people see that as unfair, voters have returned right-of-centre governments so frequently since the big rise in income inequality in the late 1980s.
He says Kiwis are clinging on to the belief that we live in a relatively egalitarian society, long after the fact.
Back to McClay: should we judge governments, in part, by their record in moving toward greater equality, even if we might not agree on the pace at which that could or should occur?
It seems not. "I think efforts should be put into increasing people incomes. Growing the economy is probably more of a focus for us coming out of a very deep recession," he says.
- Sunday Star Times