John key says Labour's tax package will make high-income earners "not welcome in New Zealand". Where might they be more welcome than here?

In this morning’s news, the Prime Minister is quoted talking about Labour’s tax package, to be formally released on Thursday. He said:

“The answer from Labour is that if you are a top personal [income] taxpayer, your tax is going up, you're certainly paying more in capital gains tax and frankly, you're not welcome in New Zealand.”

All indications from Labour are that yes, top earners will be asked to pay a little more income tax, and those earning capital income will, for the first time in a long while, be asked to pay some tax on those earnings.

But what of Key’s last, dramatic claim, that these new elements would make top earners “not welcome in New Zealand?” How does he get to that? Certainly the news article had no facts to back up Key’s claim. In the past, however, he has talked vaguely about “tax competitiveness” to justify these predictions of doom.

Here are some pertinent facts about tax competitiveness for high-earners:



The table above gives statistics for three types of income commonly earned by high-income people: wage income; capital income; and dividend income. It shows that New Zealand taxes all three of those forms of income more lightly than do any of the other countries on the list.

Australia, Canada, Ireland, Britain, and the US all tax high wages, capital gains, and dividends more heavily that New Zealand does. Many of these differences between New Zealand and the rest are not even close – New Zealand’s taxes are substantially lower.

If John Key is determined to measure a person’s welcome in New Zealand only through tax rates, then the conclusion is clear. High income earners are more “welcome” here than in any of the country Mr Key aspires us to be like. Labour’s reported tinkering with the income tax scales and probable capital gains tax are not going to change these rankings.

John Key is wrong, even according to his own measure.

The CGT discussion so far has been a bit surreal. Labour starts a debate about tax policy, traditionally a strong area for National and ACT. In response, National becomes a fact-free zone and ACT retreats into an internecine war over the appropriate degree of their race-baiting.

Why are they both unwilling or unable to engage on taxes? I do not know, but I am interested to find out.

Comments (19)

by Dave Guerin on July 12, 2011
Dave Guerin

Rob, it's misleading to say that there is no capital gains tax in NZ. If you are trading shares or property, you are liable for and should be paying tax - it is not as clear cut as in some other countries and not well enforced, but there are taxes in place.

by Matthew Percival on July 12, 2011
Matthew Percival

It's not the only misleading aspect of this article.

New Zealand's top individual tax rate kicks in at $70,000NZD. At what rate do the other top tax rates kick in?

Also, your table does not take into account indirect taxes such as GST. For instance what portion of GST is paid by the top 10% of earners in NZ versus the UK?

You need to look at the total tax take from individuals on say $100,000, $200,000, $300,000 and then compare the total tax burden across the same countries.

For what its worth though I'm in favour of a tweaking of the rules surrounding the purpose test. It makes no sense to me that someone can purchase a rental property, make taxable losses and then pay no tax on the capital gain.

It's blatantly obvious the reason they've purchased the property - its not to make rental losses (why would anyone in their right mind purchase an asset they know is going to make a loss?). Its to make a capital gain and that gain should be treated as taxable income.

by Rob Salmond on July 12, 2011
Rob Salmond

Dave - I am not being misleading when I say we do not have any capital gains taxes. Here is the latest OECD report on Capital Gains Taxes which, noting your point, nevertheless declares that gains from share trading and property investmenrt attract "no taxation" (see p 43). The fact that we do raise anything much in terms of revenue from existing provisions is another giveaway.

by Rob Salmond on July 12, 2011
Rob Salmond

Matthew - You have a number of questions. I do not know the exact answer to your question on consumption taxes. And it is certainly true that New Zealand's overall consumption tax is larger than any of the others'. But that tax is not levied mainly on rich people, unlike the ones in my table, which is why GST does not belong there.

You are right that the trigger point for the top rate differs from place to place. Thanks for pointing this out, as this is important insofar as it affects tax paid (see below).

The income tax comparisons I provided above were taken straight from OECD calculations, which means we can be very confident in them. The OECD has not published the 100k, 200k, 300k comparisons you want.

As it happens, I have developed a calculator that does those calculations, but I present them to you with the disclaimer that this is the product of one guy with an excel file, and so there could be (hopefully small) errors.

Here are the comparisons, all in terms of overall all-in income tax rates, using PPP forex comparisons from May. Note these figures do not compare directly with the "tax wedges" in the table. Tax wedge figures would show a bigger gap between New Zealand (which does not charge employer-paid social security accoding to OECD definitions), and most of the other countries (which do).

 

At income of 100k:

NZ: 23.9%

Next lowest: 24.4% (UK)

Average of Aus, Can, Ire, UK, US: 28.0%

 

At income of 200k:

NZ: 28.5%

Next lowest: 31.6% (Aus)

Average of Aus, Can, Ire, UK, US: 33.8%

 

At income of 300k:

NZ: 30.0%

Next lowest: 34.9% (UK)

Average of Aus, Can, Ire, UK, US: 36.4%

 

 

by on July 12, 2011
Anonymous

Great article Rob - definitely not misleading at all! It's a shame that the debate over CGT has turned to scare-mongering from the National Party.

Gareth Morgan also wrote a great article in support of CGT- http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10737829

 

National changed the income tax rates on the basis of having a "fairer" tax system. To have a truly fair system those people who are asset rich must also be required to make their contribution!

by Tim Watkin on July 12, 2011
Tim Watkin

So just to be clear, our total income tax rates for those earning $100, 200 and 300k are the lowest in the OECD? Or have you only chosen some countries?

And here is a list comparing consumption (and other) taxes between countries. If someone wants to take that and run with it, they can expand on Rob's work...

by Rob Salmond on July 12, 2011
Rob Salmond

Tim

Good question. With the disclaimer that my figures are based on one guy with an internet connection and a copy of excel:

1. There are some newer, lower income OECD countries with lower tax rates than New Zealand, including at top income levels. The Czech Republic, Mexico, and Slovakia are three examples.

2. But among the high-income OECD countries we typically compare ourselves with (ie. EU-15 + Norway, Switzerland, Iceland, US, Canada, Japan, Australia, New Zealand):

At 100k, NZ has the lowest overall all-in tax rate and the 2nd lowest marginal tax rate on the final dollar;

At 200k, NZ has the lowest overall and marginal rates

At 300k, NZ also has the lowest overall and marginal rates.

To reiterate, I do not present these as definitive results. I would be happy, however, to submit my Excel file to someone for verification if it helps.

by Dave Guerin on July 13, 2011
Dave Guerin

Thanks for the reference Rob, but I don't have access to that OECD file. Happy to accept your quote, but not that the OECD's view is 100% correct.

I was pointing out the rule around trading and here is the link to the IRD's rules around rental property trading http://www.ird.govt.nz/property/property-common-mistakes/investment-becomes-dealing/ and the 2010 annual tax return guide (on p.34 of http://www.ird.govt.nz/resources/a/2/a207288042068a89b1f7f14fc1b24342/ir003g-2010.pdf) notes that:

 

"Income from the sale of non-FIF (FIF=Foreign Investment Fund) shares or other property

The profits are taxable if you bought:

–– and sold shares or other property as a business

–– shares or other property for the purpose of resale

–– shares or property to make a profit."

So again, I'm not arguing that the current regime is well enforced or comprehensive, but the OECD is wrong to argue that it is non-existent. I'd usually rely on OECD data too, but they're simply wrong if they're absolute about it.

Personally, I support a CGT, including on "the family home".

 

by Matthew Percival on July 13, 2011
Matthew Percival

I think the point is best summed up by Tim's link

"Comparison of tax rates around the world is difficult and somewhat subjective"

Whilst higher earnings New Zealanders may pay less income tax that doesn't necessarily mean they pay less tax overall. For instance GST is higher in New Zealand than Australia so I would expect that all things being equal a high earning New Zealander would pay more in GST than their Australian counterpart.

How much tax an individual pays does depend to a certain extent on their consumption habits. So making comparisons is as Wikipedia suggests "difficult and somewhat subjective".

Exchange rates also have to be factored in and this would also likely create a difference. Three years ago someone earning $100,000 NZD was earning $55,000 USD. Now they are earning $82,000 USD.

I think this is a tough point to prove and that there are stronger arguments in favour of a CGT than this one.

by Rich on July 13, 2011
Rich

The UK top rate of 39.8% is wrong. The top rate is 50% over GBP150k. There is also NI payable by the employee at approx 12% below GBP43k and 2% above. And NI payable by the *employer* at 13.8%.

So the true top marginal tax rate ($ recvd by employee / $ spent by employer) is around 64%.

[Similarly, Australia has state payroll taxes, medicare levies and compulsory super which you may not have included].

 

by Rich on July 13, 2011
Rich

BTW Rob, that wasn't meant to criticise, more to inform and reinforce.

by DeepRed on July 13, 2011
DeepRed

Also to be factored in is Australia's extra layer of state-level government.

The CGT proposal also doubles as wedge politics.It's a bit like the British punk movement crashing the disco in 1976 - it rattled the establishment and led them to think civilisation would collapse, but the punks were vindicated by history.

by MJ on July 13, 2011
MJ

Though comparison is subjective- some comparisons are more correct than others.

The overriding narrative that has been allowed to run rampant unchecked by facts (as kindly pointed out in the title) is that high taxes are forcing people overseas.

No mention is made of better superannuation schemes and security, unionised work forces with higher wages or economies where people can trust their savings to the productive sector because there are regulations in place and their share market has a better record than ours.

And for example that Australians seem to prioritise jobs (see last budget), buying houses (a 7grand grant to buy a first house in Queensland I believe) and having children- with the baby bonus. Again things that never come into the debate, but do factor into  people's decisions.

And as this post points out- our taxation is not excessively high in comparasion.

So once again although all comparisons are subjective, the narrative we've been allowed to accept as the main one is that we are being hurt by excessive taxation. As we starve an anorexic public sector and severely reduce the capacity of the state the reverse may be true.

by Flat Eric on July 13, 2011
Flat Eric

Two minor points:

The article doesn't consider tax rates in Asia or the Middle East (worked in one, now in the other).  NZ is uncompetitive with both these growing regions and there may be more of a risk you lose people there than to older OECD economies with the same problem (need more tax to pay for social services).

Also, the debate on CGT seems to have quickly glossed over the reason why one might be needed - because the nation is spending more than it earns.  Bring in a CGT if you want (it won't put me off returning since I'm not rushing back either way to pay taxes) but where's the focus on where the money is being spent?  Or do people just assume its fair to tax your way to prosperity?  Again, it isn't the way in Asia.

by Frank Macskasy on July 17, 2011
Frank Macskasy

The answer from Labour is that if you are a top personal [income] taxpayer, your tax is going up, you're certainly paying more in capital gains tax and frankly, you're not welcome in New Zealand.” sez John Key.

And yet, our ever-smiling Prime Minister himself returned to New Zealand?

 

Dave - The IRD also has this reference to selling of rental properties; "

What happens when you sell your investment property

"Generally, you don’t need to pay tax when you sell your investment property except for any depreciation recovered. However, each time you sell a property it is important to consider if you are still a residential investor or are now a dealer." - http://www.ird.govt.nz/property/property-selling/

 

It is this confusion which, it seems, needs to be clarified. A capital gains tax will certainly sort this out.

 

SPM,

"Or do people just assume its fair to tax your way to prosperity?  Again, it isn't the way in Asia."

I'm reminded of an old Cold War era joke, SPM:

 

Q: What is the shortest list in the world?

A: Political refugees tunneling their way in to East Berlin.

 

I might offer the same joke - but with the geography altered. Because as delightful as the "taxation paradise" must be in Asia, we've yet to see a boatload of Aussie or Kiwi refugees heading to Malaysia or Hong Kong or where-ever in Asia.

 

Of course, the flow of money isn't dependent on quality of life nor taxation. It is dependent on investment opportunities and return on capital. Which, I think, will not be affected one iota by a CGT. It certainly hasn't harmed Australia, that country which our Dear Leader so lovingly refers to in his constant emulation.

 

"Also, the debate on CGT seems to have quickly glossed over the reason why one might be needed - because the nation is spending more than it earns. "

 

Dave, that remark might be better addressed to those who actually hold the purse-strings; the current government. When Labour left office, they were posting surpluses and had paid off most of our sovereign debt: http://www.treasury.govt.nz/government/financialstatements/yearend/jun10...

 

There are probably a myriad of reasons why Labour has sought to propose a CGT. A need to pay of $16.7 billion in debt accrued by National's  "fiscal wizards" is one. A need to fund Labour's policies is another. A need to close a glaring loophole in our tax laws is a third reason. And a need to reduce non-productive investments (funded  by overseas borrowings)  in property that does nothing except create housing "bubbles", push prices out of reach of our children; create unnecessary inflation; and puts us further into debt.

 

But I'm sure you already knew that.

 

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