Opinion & Analysis
OPINION: There can be little doubt that politics significantly affects the shape of a tax system. Tax revenue is the lifeblood of government, as it provides the cash with which spending policies are funded. Never is that more apparent than in an election year.
The politics of tax raises its head in two main areas. Firstly, how much tax needs to be collected? That depends on the economic and social model that is desired. At one end of the spectrum are purist capitalist economies. For example, one source puts Singapore's total tax revenue at around 14 per cent of gross domestic product. In such countries, greater emphasis is placed on individual responsibility. At the other end of the scale are social democracies, such as the Nordic countries, where tax revenue is reported as being closer to 45 per cent of GDP. The implied social contract is that in return for high taxes, the government will deliver a high level of social services. New Zealand is said to be in the middle, with tax revenue at 34 per cent of GDP.
A second area of political interest in tax is how the tax burden is to be shared. Inland Revenue statistics show how this has changed over a ten year period. Sources of tax are summarised into three main areas, being individuals (including trusts), company tax, and GST. Smaller areas include lesser value types of tax, such as levies and duties.
The following table includes information from the Commissioner of Inland Revenue's annual reports for the years ended June 30, 2003 and 2013. It shows how much tax was collected and its source.
Individuals $19,209b $25,907b
Corporate $5,543b $10,447b
Other direct $3,38b $3,054b
GST $7,467b $14,008b
What's immediately apparent is the increase in the size of the total tax take.
What's less easy to see is how the proportions have changed over the years. The share paid by individuals fell from 53.5 per cent in 2003 to 48 per cent ten years later. Over the same period, the share paid by companies increased from 15.4 per cent to 19.4 per cent, and the GST take increased from just under 21 per cent to more than 26 per cent.
With a "broad base low rate" philosophy, it will be interesting to see how this blend of taxes will be debated and whether new taxes, such as a capital gains tax, ought to be added into the mix.
Personal tax rates are also usually a hot tax topic and a key area of political difference. More than ten years ago, the Labour government added a surcharge to the tax rate applying to income over $60,000 per annum. More recently, a National government removed it.
Even so, Inland Revenue statistics show that in 2002, the top 10 per cent of earners paid around 44 per cent of the individual tax take. By 2011, after National's tax changes, they paid around 45 per cent.
At the other end of the scale, the lower half of earners paid around 12 per cent of individual taxes in 2003. In 2011, they paid just over 10 per cent.
The amount of tax paid by individuals is also affected by "bracket creep". That's where increasing incomes put earners into higher tax brackets because the thresholds aren't adjusted for inflation. It's an area that should be more regularly addressed.
As this election year progresses, tax will be at the forefront of political debate. Already, we have seen Labour's recent announcement on the withdrawal of their policy for a tax free threshold and the removal of GST on fresh foods. Let's hope politicians remember the six principles of a good tax system: promoting growth, fairness, revenue integrity, affordability, simplicity and overall coherence.