Dr Eric Crampton: Net tax

Stuff's Federico Magrin does a whip-round on the updated Treasury estimates of net fiscal impact by income decile.

An early version of that paper had been presented at a workshop last year January or February, but for whatever reason wasn't able to be released until after the election. Bit of a shame where there were a lot of claims floating around about who was paying how much.

The work uses 2018/19 tax and income data. Key charts:

Click to View

Households below the sixth equivalised disposable income decile receive more in transfers than they pay in tax. The sixth decile is a wash. The top four deciles pay net tax, with the bulk of the burden on decile 10 households who each contribute about $75,000 per household more in tax than they receive in transfers and government-provided services.

 
The tax and transfer system sharply reduces the Gini inequality measure. If you're hearing someone citing market Ginis in arguments for higher transfers, know that they either do not know what they are talking about, or are hoping that you won't understand what they're doing. Inequality in final income is much lower than inequality in market income.


Click to view

There wasn't space in Federico's column for everything that I'd sent through in response to his questions, so I'll include the full answers here (nothing wrong or misleading in how he presented anything; just like keeping track of what I've said about things).

Treasury’s work really helps us understand that tax and transfer have to be viewed together. It would be easy to damn GST or income tax for not being progressive enough, in isolation, for those who support a lot of redistribution. But where other countries rely heavily on a lot of tax exemptions or preferred tax status for particular groups to achieve redistributive outcomes, New Zealand largely does it through transfers and government-funded programmes. Tax and transfer, put together, sharply reduce income inequality as compared to inequality before taxes and transfers. And the work clearly shows that households in the top ten percent of earners bear a very heavy proportion of the cost of our tax and transfer system.

Treasury’s work relies on data from 2018/19. Since then, a new top marginal tax rate of 39% was introduced for earnings above $180,000, which will have increased the amount of net tax paid by top-earning households. However, inflation will have pushed a lot of lower-earning households into higher tax brackets, reducing progressivity at that end of the distribution. Finally, overall government spending on transfers increased substantially. In 2018/19, government was not in massive structural deficit. In 2024, we are. Far fewer households will now be net taxpayers, because far more government spending is being covered by debt that will fall on future taxpayers.

The tax and transfer system is redistributive by design. Households that are outside of the workforce or that are on lower earnings receive direct transfers to increase their income, and government provides a lot of services in-kind that those households would not be able to afford on their own if they had to pay for them. We all have different views on fairness, and mine is no better than anyone else’s. But what I don’t think is fair is commentary around tax that points to differences in before-tax income as reason to increase taxes and redistribution, while forgetting just how much work the tax and transfer system already does to reduce inequality and poverty.

[And, in response to request for clarification:] You will often hear commentators point to the amount of income earned by the top 10%, and use that as justification for higher tax rates. But that ignores the effects of taxes and transfers that are already in place. Treasury’s work provides that better context. People can come to different views on how much redistribution is enough, but they should at least start by understanding the extent of existing redistribution from the current tax and transfer system.

Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE