If we think about our taxes one at a time, we might think one thing. But if you consider them all together, a different picture emerges.

Combinations matter, and can make complex things either better or worse than the sum of the individual parts. What’s that? You want a folksy introductory example? OK:

Do you like chorizo? How about asparagus? And sorbet? Yes? Then you’ll love my new chorizo and asparagus sorbet! Wait, where are you going…

Government is like that, too. You can have a set of individual policies that look really neat by themselves, but when you put them all together they turn into an unattractive mess.

I think our tax policy exemplifies this pretty well. The individual component parts are designed in particular ways, often with a powerful individual justification:

  • Our GST has no exceptions because that is very efficient;
  • Our income / social security tax has low rates and few exceptions for efficiency and to provide powerful incentives for entrepreneurship;
  • We have no capital gains tax as a further incentive for entrepreneurship;
  • Our corporate tax is designed with few loopholes and with full write-offs against personal taxes to maximize efficiency and minimize distortion.

Considered separately, these reasons can be compelling. But when you examine the tax system as a whole, you see that our system has become dangerously unbalanced. Consider the chart below, which combines data on New Zealand’s OECD rank in two important aspects of each of the four taxes I mention above. Most of the raw data are available in my book on this stuff. Australian rankings are also provided for comparison.

(Certain combinations of these two elements favour low income earners relative to high income earners, others to the converse. Most of the orderings in the chart should be fairly intuitive, with one exception. I rank large GST-style consumption taxes as being good for high-income people, and small ones as good for low-income people. This is because, whether you think of the GST as regressive or flat – see recent debate here and here and here and here – GST serves to flatten out the overall tax system, because most other taxes are progressive. The bigger the GST, the flatter the overall tax system, which – speaking relatively – is good for people with high incomes.)

The chart shows that New Zealand’s combination of tax policies is relatively very favourable to people with high incomes, and relatively very unfavourable to people with low incomes. Across the board, New Zealanders with low incomes are asked to shoulder a greater proportion of the tax burden than are low income earners in other similar countries. And almost across the board, high income people are asked for less. 

In contrast, Australia has a more diverse range of tax policies – its income tax policy is very favourable to high income earners, while its consumption tax and consumption tax policy is more favourable to low income earners.

Some might argue that this logic of combinations is helpful, but that my particular analysis is problematic because it doesn't combine at a high enough level. Why stop at “tax policy?” Why not examine “public policy” instead?

I do not have the data to do that broad task systematically, but thinking about it even casually confirms that something is amiss in New Zealand.

In order to balance out a tax system that is, relative to other countries, very favourable to people with high incomes, we would need a delivery system for public services that was not at all favourable to people on high incomes. But that is clearly not the system of service delivery we have in New Zealand. A few examples:

  • Our system of additional family support (Working for Families) does not give family-based support the poorest families - those on benefits, but does support families reaching quite a long way up the income scale.
  • Our policy on retirement income does not provide for asset tests or means tests, meaning high income people will get a public pension in New Zealand when they might not in some other countries;
  • Our public schools are of a high enough quality to be attractive to high income families (more so than, say, the UK or Australia), and New Zealand does not have income-tested fees for public schooling, either.
  • Our tertiary education system features a generous student loan scheme, benefitting students who disproportionately come from high income families with billions of dollars of interest-free money. New Zealand tertiary education also has a relatively minor role for need-based scholarships to cover the costs of study, policies that usually benefit people from modest income families.

These are major elements of our public service delivery, and in combination do not appear at all to be lined up to cater to low income people at the expense of high income people. High income New Zealanders are included in most forms of public services, often on better terms than they would receive in many other OECD countries.

So, what is to be done? When things as complex as “tax policies” or “government policies” are out of balance, there are myriad possible ways to address it. At a really broad level, we could more narrowly target social services, or increase some taxes on high income people, or do both to a more mild degree. For a long time, New Zealanders have been clear on what they prefer when given that particular choice. When offered the tradeoff between cutting back on public services or raising taxes, New Zealanders are more interested in keeping their public services inclusive and relatively free from user pays than in keeping current tax levels.

Comments (6)

by BeShakey on April 05, 2012
BeShakey

Just a note that in Australia the move is towards limiting public services, tax writeoffs etc to the most well-off (making their system more progressive).  This degenerated into a debate about whether households earning $150k+ (putting them in roughly the top 10% to 15%) are 'rich'.

Also, it'd be interesting to know the effect of the student allowance scheme (which is targeted towards low income families) on the overall tertiary education system.  I have no idea what the answer is, but it has the potential to make that sector progressive.

by Andrew R on April 05, 2012
Andrew R

Keep these articles up and I will have to buy the book!

 Good stuff. 

by Jacob Toner on April 05, 2012
Jacob Toner

Your argument is that New Zealand's tax arrangement, in comparison to other OECD nations, is more favourable to those on high incomes, and that therefore we ought to change our suite of tax policies. However, you haven't advanced any argument that having a lower tax burden on the wealthy is negative, and therefore someone could use the same data you have presented to make exactly the opposite argument, that NZ tax policy is desirable because of the lower burden on the wealthier in comparison to other nations.

The problem with using only relative measures is that it means the consideration of tax policy is only considered against that of other nations. Is there no universal desirable configuration? Or can we only determine our domestic tax policy with consideration of international trends?

by Rob Salmond on April 06, 2012
Rob Salmond

@Jacob: You make a good point in that this post was more about comparing data than making a principled argument. There is evidence countries with lower tax burdens overall have higher growth over the short-term, but that short-term trend does not appear to play out over the long-term. As Jeff Sachs notes in Commonwealth, the argument that low tax generally, and low tax on the wealthy in particular, leads to better outcomes would imply that low tax developed countries like the US and Ireland and Australia and New Zealand should have superior long-term outcomes to the high tax (and especially high tax on high earner) countries in Northern Europe. The evidence shows no such distinction, and in fact shows a trend the opposite way when you look at measures of human welfare that go beyond simple material possessions.

On your second point, there is a lot of work on "optimal tax policy" but there is no agreement there, emaning there really is not a "universal desirable configuration." Different Nobel-winning economists have used optimal tax theory to propose tax rates on high earners that range from 0% to 70%. Not much help there.

by Andre Terzaghi on April 06, 2012
Andre Terzaghi

I'm curious about any data that shows even a short term correlation between low taxes and high growth.

Recently in a moment of extreme boredom I looked up the US top tax rates and compared them with growth rates for the time period immediately following, and it was pretty obvious any correlation would be very weak. Just eyeballing the curves, I would guess an analysis would give a very weak positive correlation between high taxes and high growth. With a bit of discreet cherry-picking, and "controlling for other factors" I think I could make the data support any argument I wanted. But what I found very striking and relevant to the current situation in NZ is the period before and including the Great Depression-ie big tax cuts a few years before the crash, low taxes and low growth for the few years after the crash, then a big hike in tax immediately followed by a big jump in growth.And the big jump was well before any WW2 spending could have had any effect.

So all this tells me the top marginal tax rate is an almost negligible part of the growth question. And just a quick glance around (devoid of any kind of actual rational analysis) at which countries and areas seem to be doing well at the moment, a few things seem to pop out: emphasis on education gives good results, valuing technical professionals (doctors, scientists, engineers etc) gives better results than valuing financial and administrative professionals (managers, accountants, lawyers etc), an explicit governmental focus on lifting the incomes of the low end is very helpful to growth (which seems pretty self-evident, the more people there are with spare money to spend, the better for business).

So your data here has helped make the argument very strong in my mind: in New Zealand we have gone way too far in trying to make the lower income part of the population "pay their way", and we need to lift those incomes asap. And the government is the only obvious way to do that, by raising top tax rates and decreasing bottom end rates. After all, what's better for a business: a profit of 1 million taxed at 30% or a profit of 2 million taxed at 50%? I'm dead against soaking the rich just for the sake of it, but we need changes if we want our aspirations to become more achievable, and everyone except the rich have already been squeezed to near the limit.

by Jacob Toner on April 06, 2012
Jacob Toner

@Rob - I probably wasn't that clear in my original post that I wasn't necessarily disagreeing with your conclusion, just that I am not sure that this data alone paints a compelling picture that New Zealand's tax arrangements place too light a burden on those with the highest means. I know debates rage about what fair and effective tax arrangements should look like, and they will probaby continue eternally because at the end of the day some of these decisions come down to values rather than hard empirical facts about what is "best".

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