# OnPoint by Keith Ng

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### Table 6.2: 'Rich pricks' & Others

No, and I'm sick of writing about it. So, here are some interactive pies I prepared earlier. The angle shows income distribution (the broader the slice, the greater their share of the total income). The area shows tax distribution (the bigger the slice, the more they contribute to the total pool of income tax). If this doesn't make sense to you, compare the NZ graph with the equal income and flat tax graphs. Under a flat tax system, it looks like a normal pie graph, so all the distortions show the progressive tax system at work.

You can also click on each slice to break them down further. (Click outside the pie to zoom back out.) You need Flash to see this properly. You can get Flash here

The points are:

* Rich people have a very big slice mainly because they have a very broad slice. That is, they pay a lot of tax because they make a lot of money. Duh.
* Rich people get taxed more on their income (their slice sticks out more). That's because we have progressive tax systems. Duh.
* How progressive? At the top end, New Zealand's tax system is less progressive than Australia. Rich pricks in Australia pay more than they do in New Zealand, both proportionally and in absolute terms.
* At the bottom end, New Zealand's tax system is *far* less progressive than Australia. If you zoom in to the bottom 50% (i.e. Click on it), you'll see that Australia curves in very quickly – that's because the first \$6,000 of income is tax free, which means that poor pricks pay very little tax.
* On top of this, Australia's bottom 50% have a bigger share of the total income. This is not a tax issue, nor about the income disparity between New Zealand and Australia. Income is more equitably distributed in Australia, even before tax is taken into account.

It's not some kind of tricky accounting. Australia has a tax-free bottom bracket, and at the top end, it goes all the way up to 45% (New Zealand's top rate is 39%). Australia's tax system is simply more progressive. This means it's low income earners who have a tax incentive to move to Australia, and 'rich pricks' who don't.

This idea that the

brain-drain is all about (or anything about) tax is just crap.

The other claims about New Zealand having an uncompetitive tax system are tougher to unwrap.

Does NZ have the third highest rate of personal tax in the OECD? Sure, if you don't count social security contributions. What social security contributions? Oh, right, New Zealand doesn't have that because we just pay it – i.e. Fund the welfare state – out of normal taxes. People in other countries pay a separate social security “tax”, a bit like the way we pay ACC separately.

It's a big chunk of the bill – when you include it for some countries and not for others, it's an entirely skewed picture, and doesn't represent what people actually pay, and what they take up.

Likewise, when our corporate tax rate is compared with other countries, it's never really comparable. Sure, we have “the third highest rate of corporate tax in the OECD”, but we also give these things called imputation credits. They're coupons for tax that's already been paid, so that shareholders get credit for tax that the company has paid, and don't have to pay it again.

Other countries don't have imputation credits clip half the tickets on each end – once when the company earns a profit, and again when that profit is doled out to shareholders. Of course, when you just look at this system and count half of it, New Zealand's rate will seem high by comparison.

So, does it mean that we should have a more progressive tax system? No. It means we should stop drawing simplistic conclusions from one-line statistics in op-eds.

Grump.

Notes:
* The graph uses 2007 IRD data because I could only get 2007 data for Australia, so it will be slightly different from the op-ed,

which cites 2008 numbers, I think.
* I was going to put UK stats in there as well, but they've aggregated their stats into a handful of very large brackets, which means it's impossible to extract accurate information on a granular level. If anyone has it (i.e. UK income and income tax distribution broken down by percentile, or by small income brackets) and don't mind sharing, I'd love to chuck it up too.
* This was going to go up two weeks ago, but the visualisation took longer than expected, and then Google vs China kinda took over. Here's the interview with Wammo:

### 42 responses to this post

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• And (back on my hobby horse) other countries also have state taxes - for example Oz funds state education/police/etc that we fund through our income taxes using state payroll taxes - in essence your employer pays a 5-6% flat tax on your income before you see it - this is equivalent to a 3-4% increase in personal tax rates (but it's also essentially an increase by 5-6% in actual income - employees are more expensive in Australia than NZ because of this)

(Similarly in California I paid a marginal 10% state income tax - equivalent to a 6-7% increase in my federal rate)

I think you have to include this stuff if you want to compare our tax rates with Australia's in an apples vs. apples sort of way

Dunedin • Since Nov 2006 • 2623 posts Report

• Hmm, yes and no.

Sure, it's a tax burden, but it's not something that comes out of their taxable income, so to compare it with a place that doesn't have payroll tax, you'd need to determine what income would be if the payroll tax was just income tax... and then you're on to purely theoretical territory.

Auckland • Since Nov 2006 • 543 posts Report

• Surely the attraction of Australia isn't the tax rates, it's just that incomes are higher? Which is much more of a hard job for the government (or indeed anyone) to do anything about.

I'd love it if we had the first 5 thousand tax free in NZ. It probably wouldn't help beneficiaries much, as their benefit would probably be adjusted to cover, but low income earners on minimum wage or similar would suddenly find an extra \$20+/week in their wallet, which would be big.

Since Nov 2006 • 6243 posts Report

• Great post, Keith. Unfortunately most of the debate in this country about tax never goes beyond the simplistic.

They're not taxes on income, but many countries (including Australia) have stamp duties and death duties, and capital gains taxes, whereas we don't. If you look at the overall picture we're not particularly heavily taxed.

West • Since Feb 2009 • 794 posts Report

• I agree it's a pain - but IMHO not including education/policing because it comes from a different tax isn't really that different from not including social security taxes - I think the US SS tax is actually harder to include because it stops after you've paid it on the first \$90k or so of your income - it only really applies to the poor and middle class.

I think it's pretty easy math to do:

Real Rate = (F + S)/(1+S)

(F=federal rate, S=state rate)

So if you're paying 15% federal tax and 5% fixed state rate - you're really paying 19%, on 45% you're really paying 47% (see how it affects the poor more)

In effect in your graphs it inflates each of the segments by 3-4% (depends on the state and the federal rate) and because it comes out prior to the income rates that are used to determine federal rates it doesn't change how many people are in each wedge

Dunedin • Since Nov 2006 • 2623 posts Report

• New Zealand's tax structure is really not all that far from a flat-tax, proportionately.

I tell people that, and they don't believe me, in part because the debate about this issue has been distorted by a small ideologically-blinded group.

Of course, there is redistribution on the other side of the equation, but tax take is fairly even across sectors.

WLG • Since Nov 2006 • 2264 posts Report

• Nice work, Keith -- lovely to see someone touch bases with reality in terms of the tax debate.

And bloody nice graphs, too!

Dunsandel • Since Nov 2006 • 1156 posts Report

• Would that small ideologically -blinded group include the nice Dr Brash ?
The use of Trusts at the higher levels would distort the figures as one income becomes one person AND a trust

Auckland • Since Nov 2006 • 314 posts Report

• but then so would things like the various tax free allowances in the US system - there you can write off the interest on your mortgage, your rates, cost of registering your car, .... it's also why, when I lived there, I filed a 20-30 page tax return ....

Dunedin • Since Nov 2006 • 2623 posts Report

• Brilliant work, Keith. Look forward to an update when the nex tax system is announced in the May Budget.

Would also be interesting to see the same treatment from the perspective of a small business owner employing staff, including all those costs of doing business that we have so few of compared with other nations. More complex, I know.

Ak • Since May 2008 • 19745 posts Report

• Would that small ideologically -blinded group include the nice Dr Brash ?

He's one of the dudes handing out blindfolds

Ak • Since May 2008 • 19745 posts Report

• I love actual facts. Thanks Keith!

Christchurch • Since Nov 2008 • 138 posts Report

• I love actual facts.

Me too. I'd therefore advise against reading the foolish "tax is theft" blustering on that Kiwibog thread.

Ak • Since May 2008 • 19745 posts Report

• Something that nobody I've read has commented on about the 2025 taskforce report is that since it proposes to raise our income to the level of Australia by drastically reducing our social spending, unless they plan somehow to force Australia to do the same, it will mean that out of that income we'll have to pay for things that Australians get for free, so in real terms we wouldn't catch up at all. (Quite aside from the broader social ramifications of that particular neoliberal recipe, obviously.)

Wellington • Since Jun 2007 • 7473 posts Report

• in real terms we wouldn't catch up at all

Depends which "we" they're tinking of - those who can already afford to buy their own health, education and so on?

Ak • Since May 2008 • 19745 posts Report

• "It's not some kind of tricky accounting. Australia has a tax-free bottom bracket, and at the top end, it goes all the way up to 45% (New Zealand's top rate is 39%). Australia's tax system is simply more progressive."

You've ignored the thresholds that those rates come into force.

Wellington • Since Aug 2009 • 8 posts Report

• You've ignored the thresholds that those rates come into force.

...which matters for those on low and middle incomes (hence, they're better off), but matters far less for those on high and very-high incomes - i.e. The highly skilled, highly mobile workers.

For workers at the top end of the income spectrum, effective tax rates are higher in Australia.

Auckland • Since Nov 2006 • 543 posts Report

• Guaranteed way to "close the gap with Australia"? Legalising WMD testing in the Ureweras.

The southernmost capital … • Since Nov 2006 • 5446 posts Report

• 2025 taskforce report... proposes to raise our income to the level of Australia by drastically reducing our social spending...

The theory is less public spending means more efficient private provision, which is more cost-effective and frees up resources for more profitable activities. Then we'll all be rich!

That's the theory, anyway.

Auckland • Since Nov 2006 • 543 posts Report

• Surely the attraction of Australia isn't the tax rates, it's just that incomes are higher? Which is much more of a hard job for the government (or indeed anyone) to do anything about.

In a nutshell: Yes.

I'd love it if we had the first 5 thousand tax free in NZ. It probably wouldn't help beneficiaries much, as their benefit would probably be adjusted to cover, but low income earners on minimum wage or similar would suddenly find an extra \$20+/week in their wallet, which would be big.

In a separate nutshell: Been costed. Too expensive. (Because you have to pay every single taxpayer \$20+/week.)

Auckland • Since Nov 2006 • 543 posts Report

• @ Paul C

the various tax free allowances in the US system - there you can write off the interest on your mortgage, your rates, cost of registering your car, .... it's also why, when I lived there, I filed a 20-30 page tax return ....

Same story in Canada, albeit with different write offs. Home improvement expenses. Public transport passes. University tuition fees. Contributions to a pension plan.

The taxes and "taxes" (levies, fees, etc.) on airline travel are horrendous, though. Your Auckland-Wellington equivalent flights in Canada are C\$300 return by the time you add all those.

Oil Patch, Alberta • Since Nov 2006 • 706 posts Report

• In a separate nutshell: Been costed. Too expensive. (Because you have to pay every single taxpayer \$20+/week.)

Obviously you'd want to pair it with the introduction of another tax, so you'd be revenue neutral.

WLG • Since Nov 2006 • 2264 posts Report

• Great article. I'm too simple minded to make any actually comment on it, other than i found it really clever and interesting.

South Wellington • Since Feb 2008 • 315 posts Report

• In a separate nutshell: Been costed. Too expensive. (Because you have to pay every single taxpayer \$20+/week.)

Yes, what George said. A percent or two at middle incomes would pay for it I would guess.

Also on my wishlist - income scales that slide up with inflation annually, so we don't have people creeping up the scales as their income goes up as money gets worth less.

Since Nov 2006 • 6243 posts Report

• Obviously you'd want to pair it with the introduction of another tax, so you'd be revenue neutral.

Problem is that the tax free bracket applies to everyone, so to offset it, you'd need to either tax the whole of the middle-class a bit more (which is politically unpopular), or you'd need to take a pretty massive punt at the rich, which is actually quite problematic because they can rearrange their affairs into trusts etc., and because they can just pick up and leave.

It's hard to explain when you have such a massive cost, and *by definition* 50% this tax cut will go to the top 50% of taxpayers, who don't particularly need it, and will barely notice it.

And because it's not the kind of shift that you can let fiscal drag do for you, because it's too damn big.

See what you've done? You've broken the nutshell.

Auckland • Since Nov 2006 • 543 posts Report

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