Why does the top 10% paying more tax? (An interactive story)

15:10 May 21, 2014 61

I don't understand why National's is trying to get everyone to want tax cuts. And I don't understand how he can get away with this bullshit "12% of households pay 76% of net taxes" line.

"Net taxes" is not a real thing. These are the official tax statistics published by the IRD. "Net taxes" is not among them, nor should it be, because it's estimate of a bunch of arbitrary measures, put together for entirely political ends.

So, I've put together the IRD tax statistics from 2003-12 into this interactive data visualisation, to look at whether the top 10% pay a disproportionate amount of tax, and why.

61 responses to this post

First ←Older Page 1 2 3 Newer→ Last

Eric Crampton, 15:43 May 21, 2014

A few points worth noting:
- 2003-2012, average after-tax income is up 50% plus or minus a bit across all income cohorts. "Oh, the system's only helping the rich?" Decile 2 had higher percentage growth in after-tax income than Decile 10.
- A default start point in 2008 makes after-tax income gains for Decile 10 look disproportionately large; the top end had far less growth 2006-2008 than did the middle. Basic story is that the rich guys tanked more in the recession than did others, and consequently had a bigger upswing in the post-crash. If you want to net the tax-change effects from the recession effects, you're better looking at a 2006 or earlier start date.
- Note too that some of the income gains in the higher deciles will be due to the reduction in the top marginal rate: labour supply does respond a bit here, and some income that previously was hidden in companies isn't worth hiding at a 33% rate. I doubt this means that we'd have huge income gains were top tax rates to be lowered further, but there'd be some.
- The share of tax paid by top earners' going up would be irrelevant, but for the very relevant fact that Labour opposed the tax shift on grounds that the rich would wind up paying less in tax. The drop in top decile income tax, in percentage terms, is much smaller than the drop in other deciles' income taxes, though a full analysis here would definitely require adding in the GST effects.

The New Zealand Initiativ… • Since Nov 2009 • 17 posts Report
Glenn Pearce, 15:56 May 21, 2014

Are you being intentionally ironic with your graph labels leaving out the very word that Key is claimed to have left out?
"Share of Taxes" vs "Share of Income Taxes"
"Net Taxes" vs "Net Income taxes"

Auckland • Since Feb 2007 • 504 posts Report
Brent Jackson, 16:51 May 21, 2014

Fantastic work Keith. Clearly laid out and explained. When talking about increases and decreases, Tax Rate most certainly does not equate to Tax Amount.
Oh, and anybody who's put off by the phrase "interactive data visualisation", don't be. It comes with a handy-dandy slide show that explains things in 8 easy steps. Go on - give it a go.

Auckland • Since Nov 2006 • 620 posts Report
Keith Ng, in reply to Glenn Pearce, 17:05 May 21, 2014

Are you being intentionally ironic with your graph labels leaving out the very word that Key is claimed to have left out?
Ha, no. It got too confusing with Income vs Income Tax vs After-Tax Income.

Auckland • Since Nov 2006 • 543 posts Report
Rob Stowell, 17:11 May 21, 2014

- 2003-2012, average after-tax income is up 50% plus or minus a bit across all income cohorts. “Oh, the system’s only helping the rich?”
Spans two govts – hard to tease out effects of policy changes in that timeframe, plus the GFC.
But the data should include WWF(?) Significantly raised after-tax income for many in the lower deciles. Fairness or dead rat, it’s definitely a factor in raising after tax income for some.
Yes, the lowering of income tax across the board under National has increased after-tax income across the board. But it was accompanied by an increase in GST. Every rise in the rate of GST – (completely off these charts, but touted to be the main factor keeping National’s tax cuts ‘fiscally neutral’)- is regressive. It increases the proportion of total tax paid by lower deciles.
So there’s that, sitting underneath the data like a malignant octopus :)

Whakaraupo • Since Nov 2006 • 2120 posts Report
Keith Ng, in reply to Eric Crampton, 17:37 May 21, 2014

- 2003-2012, average after-tax income is up 50% plus or minus a bit across all income cohorts. "Oh, the system's only helping the rich?" Decile 2 had higher percentage growth in after-tax income than Decile 10.
Yeah, but Decile 2 aren't full-time workers or even beneficiaries, so I'm not sure how to interpret this. Also, I'm not actually saying the system's only helping the rich - I'm just saying it's crazy and wrong to take the top 10%'s increase in income as a sign that they're overtaxed.
- A default start point in 2008 makes after-tax income gains for Decile 10 look disproportionately large; the top end had far less growth 2006-2008 than did the middle. Basic story is that the rich guys tanked more in the recession than did others, and consequently had a bigger upswing in the post-crash. If you want to net the tax-change effects from the recession effects, you're better looking at a 2006 or earlier start date.
As above. Agree that some of the post-2008 growth can be attributed to rebound, just saying that it's effect on tax take should be seen in context of income rebound. As an aside - some of the pre-2008 movements are due to fiscal drag as well. Can be quite clearly seen in the tax rates.
- Note too that some of the income gains in the higher deciles will be due to the reduction in the top marginal rate: labour supply does respond a bit here, and some income that previously was hidden in companies isn't worth hiding at a 33% rate. I doubt this means that we'd have huge income gains were top tax rates to be lowered further, but there'd be some.
Yes yes, and it generated $1b of additional revenue for the government. Would be nice if this was testable - but it's not. Goddamn economics.
- The share of tax paid by top earners' going up would be irrelevant, but for the very relevant fact that Labour opposed the tax shift on grounds that the rich would wind up paying less in tax.
But they are paying less in tax, when measured in a) absolute terms, b) as % of income, c) versus the status quo at the time of the tax switch. The only measure that's pointing the other way is tax share, which is a product of income changes as well.
The drop in top decile income tax, in percentage terms, is much smaller than the drop in other deciles' income taxes, though a full analysis here would definitely require adding in the GST effects.
Again: Income changes! Their total income tax has not fallen as much, not because their tax rates haven't fallen as much, but because that fall in tax rate was offset by a rise in income. That was my main point!

Auckland • Since Nov 2006 • 543 posts Report
WH, 06:24 May 22, 2014

Fantastic work Keith - this is a really helpful way to present this information.
Paul Krugman often notes that those at the top end of the income distribution pay more income tax primarily because they receive much more income than everyone else.
If I'm reading you right, you've shown that the top 10% of New Zealand's earners took home 34% of the nation's income in 2012 - and paid 47% of all income tax.
The 13% difference between the two numbers is explained by progressive marginal tax rates.

Since Nov 2006 • 797 posts Report
Sacha, 06:45 May 22, 2014

What;'s the likely regressiveness of GST including the latest increase?

Ak • Since May 2008 • 19745 posts Report
WH, 08:57 May 22, 2014

Do the IRD's figures include capital gains (such as increases in the value of investments) as income?
If they don't (on the basis that many kinds of capital gain aren't taxable income), the figures may understate the share of national income going to the top 10%.

Since Nov 2006 • 797 posts Report
Matthew Poole, in reply to WH, 10:17 May 22, 2014

Do the IRD's figures include capital gains (such as increases in the value of investments) as income?
No, because capital gains aren't income. If they were, they'd be taxed.

Auckland • Since Mar 2007 • 4097 posts Report
WH, 10:58 May 22, 2014

capital gains aren't income. If they were, they'd be taxed.
I'm not sure that's right.
Capital gains are already taxed in a large number of jurisdictions, including the UK, the US and Australia. The US-based Tax Policy Center states that:
Capital gains are generally included in taxable income
There is an interesting IRD paper on the desirability of augmenting our income tax system with a capital gains tax here. The first sentences of chapter two state:
A tax on [capital gains] would be part of a comprehensive economic income tax as capital gains form part of economic income. Such a tax on comprehensive economic income is sometimes referred to a Haig-Simons income tax

Since Nov 2006 • 797 posts Report
George Darroch, 11:14 May 22, 2014

Nice chewy viz, and it tells us something interesting. But you're missing the GiST of the story.

WLG • Since Nov 2006 • 2264 posts Report
Kumara Republic, 11:41 May 22, 2014

And I'm interested to know how much of the top decile's tax gains goes towards razor wires and concrete barriers. Or even bulletproof trucks.

The southernmost capital … • Since Nov 2006 • 5446 posts Report
Paul Campbell, 11:54 May 22, 2014

Capital gains are already taxed in a large number of jurisdictions, including the UK, the US and Australia.
yes NZ’s pretty unusual as a 1st world country that doesn’t tax capital gains.
For example in the US all capital gains are taxed by default at you marginal tax rate, just like any other income. They do have a “capital gains tax” but what that is is a LOWER tax rate for some capital gains (in particular capital gains that are held long term, you have to register the holding with the IRS).
(and an exemption for certain capital gains on a family home)

Dunedin • Since Nov 2006 • 2623 posts Report
AndrewH, 12:53 May 22, 2014

Or, paraphrasing the results in the historical messaging of the wealthy:
"Waaah, our tax rate is too high, it's stifling investment/innovation etc. Reduce tax and the benefits will flow to society" (receive tax cuts, bank the cash)
"Waaah, our tax rate is too high as a percentage of tax take"..........

Wellington • Since Nov 2008 • 33 posts Report
Paul Campbell, 13:02 May 22, 2014

I have to keep reminding people we have comparably low taxes in NZ for the rich, I lived in California for 20 years, I paid a 10% higher marginal rate than I do here in NZ (43% including state tax). Australia's top marginal tax rate is 45% (plus ~5% state payroll tax). In comparison our top tax rate is 33% we also don't pay tax on capital gains.
The rich have it good here, don't believe them when they whine

Dunedin • Since Nov 2006 • 2623 posts Report
AndrewH, 13:05 May 22, 2014

Paul - absolutely. Appropriate response to the whining - "oh FFS, get a life".
Though I'm truly grateful that Keith take the time/effort to provide the visualisation to support this response!

Wellington • Since Nov 2008 • 33 posts Report
Rob Stowell, in reply to Paul Campbell, 13:37 May 22, 2014

I have to keep reminding people we have comparably low taxes in NZ for the rich,
Spot on.
And historical memory is even worse. Top tax rate in the UK in the 60s was something like 98%. The Beatles complained, but none of them starved :)
In NZ my dad, a university lecturer, paid the top rate of 65% (on a reasonable chunk of his income. ) He retired in ’85 so I don’t think he ever saw the top rate plummet under Douglas. (He didn’t complain- seriously thought it well worth it for social welfare, free health and education.)
<stating the bleeding obvious>
The Milton/Reagan/Thatcher/Roger-nomics of the 80s moved decisively away from high progressive income tax, to far lower rates, accompanied by (regressive) consumption taxes. It’s incredibly simple to correlate that with the end of the post-war period of relative income equality.
Tax wasn’t the only tool, but it’s by far the most obvious and political.
How much political ground has been lost is evident in that Labour in 1999 hiked the top rate back up to a very modest 39% (bracket creep helped increase their tax take considerably over their term.)
A NZ politician calling for a top tax rate of even 50% would get mocked and ridiculed. Never mind it was good enough for Holyoake and Muldoon.

Whakaraupo • Since Nov 2006 • 2120 posts Report
Rich of Observationz, 15:18 May 22, 2014

Functionally, capital gains are deferred income.
They aren't taxed in NZ because there is a political desire to feed the upper middle classes free, untaxed money. The IRD doesn't collect figures because they aren't taxed. You are only obliged to declare them if you are a property trader (something practically nobody is).

Back in Wellington • Since Nov 2006 • 5550 posts Report
Bart Janssen, in reply to Paul Campbell, 16:09 May 22, 2014

The rich have it good here, don’t believe them when they whine
They do have problems we* don't have - I mean really, you pay up front for a politician they should stay bought!

*As long as I can afford to buy whatever food I want at the supermarket I consider myself to be relatively rich - just not rich enough to buy my own politician.

Auckland • Since Nov 2006 • 4461 posts Report
Keith Ng, in reply to Sacha, 16:44 May 22, 2014

What;'s the likely regressiveness of GST including the latest increase?
Urgh. That is a very big question which I'm not in a position to answer.

Auckland • Since Nov 2006 • 543 posts Report
Keith Ng, in reply to George Darroch, 16:46 May 22, 2014

Nice chewy viz, and it tells us something interesting. But you're missing the GiST of the story.
Urgh. The Tax Working Group couldn't do it either.

Auckland • Since Nov 2006 • 543 posts Report
Keith Ng, in reply to WH, 16:46 May 22, 2014

Do the IRD's figures include capital gains (such as increases in the value of investments) as income?
Oh wait. Maybe this was what the TWG couldn't do. But anyway, yes - this is missing a huge section of income.

Auckland • Since Nov 2006 • 543 posts Report
Moz, in reply to Rich of Observationz, 16:51 May 22, 2014

capital gains ... You are only obliged to declare them if you are a property trader (something practically nobody is).
... because it's pathetically easy to convince the IRD that you're not. I got told by them at one point that if I flicked a particular property within 3 years they'd have to think about labelling me that way (trades in period per properties owned sort of rule IIRC). Easy enough, I held on to it and bought other, smaller properties with the new capital rather than "trading up". It was interesting that the IRD told me of the problem rather than waiting and swooping the way they do with peasants.
The language is, as always, revealing. People like John Key "earn" their capital gains, but those earnings are tax-free, unlike every other type of earning you can do.
I think lack of capital gains tax is a rort that needs to be stopped. Just like I've thought every year since I became aware of it.

Sydney, West Island • Since Nov 2006 • 1233 posts Report
Rich of Observationz, in reply to Keith Ng, 17:38 May 22, 2014

The only way they could find out would be to require major asset sales and purchases to be declared on tax returns, even if they didn't attract any tax.
I suppose stats/IRD could estimate a figure by looking at a sample of properties (e.g. from rating records) figuring out the beneficial owners and correlating that with their tax position to get the average capital gain for taxpayers in each income group. Not something you could do without governmental powers of delving, and even then not easy.
One estimate of the untaxed income would come from the dairy sector: $26mln in corporate and personal income tax during '09. With dairy exports in the $11bln range, that's a lot of unpaid tax.
Either farmers do it for love, or for the capital gain - I'm suspecting the latter.

Back in Wellington • Since Nov 2006 • 5550 posts Report