In New Zealand, personal income tax rates went to a high of 69 cents in the dollar in the late 70s/early 80s until the Fourth Labour government came crashing in with a hiss and a roar and made changes that are reverberating to this very day. One of them being the major changes to our tax system. They standardised indirect tax and introduced an across-the-board tax on goods and services that is GST. It started at 10% and went up to 12% and is now 15%.
Tax incentives were removed, personal income tax rates were simplified. At the time, there were just two personal income tax rates, 24 percent on income, up to $30,000, 33% above that. The introduction of GST was sold as a tax that would get those who didn't pay it. It would collect those in the black economy, those who took part in cashier's drug sales, that sort of thing. You know, they might not pay tax, they might not declare income, but they had to buy stuff. And once they bought food and once they bought cars, that sort of thing, then they had to pay GST on it.
But even then, when it was introduced, it was slammed as a regressive tax, hitting those who had to buy the basics the hardest. It was interesting that David Lange, towards the end of his life, had a great deal of regret about how New Zealand had changed with the introduction of his government. It wasn't him leading the charge so much —he was the public face of the changes— it was Roger Douglas and Rogernomics that caused the greatest change. He said for those who wanted little personal involvement with government, those who did not want government in their lives, it was a fantastic thing. But for the uneducated, disabled, the disadvantaged, it was an absolute tragedy. And there was, I think, much regret towards the end of his life as to the changes that he had been a part of.
New Zealand's tax system is widely regarded as a sensible one, in as much as you have to have taxes —that's how governments raise revenue and that's how they pay for the roads and the schools and the hospitals and the police and the like— it's straightforward, there's little room and little need for tax avoidance. The international tax competitive index rates 38 OECD countries on the best tax environment for investment, as well as for workers and for businesses and New Zealand ranks third in that because it is so straightforward.
But again, it comes down to the least unfair tax system. I think there are always going to be people who feel that they are hard done by when it comes to the taxes they pay. They feel that they pay too much. They pay a disproportionate amount of their income towards tax, while others aren't pulling their weight. And then you also look at the way governments use your money. That was one thing that really ripped my nightie during the Labour Government’s last six years. We're getting up early, we're going to work, we're doing our bit, and they were squandering tax money, just burning it at a rate of knots with very little to show for it. You're always going to get people who say no, the government is spending money on projects I don't agree with it, I don't want my tax going to that. But I think the last government, the last Labour government, really took it to the nth degree and that's when you start resenting paying taxes. You don't want that in a society.
Can you tax your way to a fairer society? I really don't think you can. You can certainly create an environment where those who cannot work, who need assistance get it. You can create an environment where it's easier for people to do business, to get work, for businesses to do well. I think the more you make it complicated and try and right inequities, the more room there is to evade tax to avoid paying it altogether. GST, most countries have it because it is a way of addressing the black economy – is that enough justification to maintain it?
Kerre McIvor, is a journalist, radio presenter, author and columnist. Currently hosts the Kerre Woodham mornings show on Newstalk ZB - where this article was sourced.
Tax incentives were removed, personal income tax rates were simplified. At the time, there were just two personal income tax rates, 24 percent on income, up to $30,000, 33% above that. The introduction of GST was sold as a tax that would get those who didn't pay it. It would collect those in the black economy, those who took part in cashier's drug sales, that sort of thing. You know, they might not pay tax, they might not declare income, but they had to buy stuff. And once they bought food and once they bought cars, that sort of thing, then they had to pay GST on it.
But even then, when it was introduced, it was slammed as a regressive tax, hitting those who had to buy the basics the hardest. It was interesting that David Lange, towards the end of his life, had a great deal of regret about how New Zealand had changed with the introduction of his government. It wasn't him leading the charge so much —he was the public face of the changes— it was Roger Douglas and Rogernomics that caused the greatest change. He said for those who wanted little personal involvement with government, those who did not want government in their lives, it was a fantastic thing. But for the uneducated, disabled, the disadvantaged, it was an absolute tragedy. And there was, I think, much regret towards the end of his life as to the changes that he had been a part of.
New Zealand's tax system is widely regarded as a sensible one, in as much as you have to have taxes —that's how governments raise revenue and that's how they pay for the roads and the schools and the hospitals and the police and the like— it's straightforward, there's little room and little need for tax avoidance. The international tax competitive index rates 38 OECD countries on the best tax environment for investment, as well as for workers and for businesses and New Zealand ranks third in that because it is so straightforward.
But again, it comes down to the least unfair tax system. I think there are always going to be people who feel that they are hard done by when it comes to the taxes they pay. They feel that they pay too much. They pay a disproportionate amount of their income towards tax, while others aren't pulling their weight. And then you also look at the way governments use your money. That was one thing that really ripped my nightie during the Labour Government’s last six years. We're getting up early, we're going to work, we're doing our bit, and they were squandering tax money, just burning it at a rate of knots with very little to show for it. You're always going to get people who say no, the government is spending money on projects I don't agree with it, I don't want my tax going to that. But I think the last government, the last Labour government, really took it to the nth degree and that's when you start resenting paying taxes. You don't want that in a society.
Can you tax your way to a fairer society? I really don't think you can. You can certainly create an environment where those who cannot work, who need assistance get it. You can create an environment where it's easier for people to do business, to get work, for businesses to do well. I think the more you make it complicated and try and right inequities, the more room there is to evade tax to avoid paying it altogether. GST, most countries have it because it is a way of addressing the black economy – is that enough justification to maintain it?
Kerre McIvor, is a journalist, radio presenter, author and columnist. Currently hosts the Kerre Woodham mornings show on Newstalk ZB - where this article was sourced.
6 comments:
The question whether GST is paid by the consumer or the producer is only a question of how you look at it. When I give a bill to my clients the GST inclusive amount is the money they pay for my services. That is my gross income. Clients don't care where the money goes. They don't care how much goes to the government, to overheads, or personally to me. If that cost is too high they will go elsewhere. So from that fair cost for my services, I have to pay GST then income tax on top of that, which comes close to 50%.
I don't mind paying tax when the money is used wisely for health, education, defense and infrastructure but I do resent it when I have to pay for Iwi, gangs, useless public servants and people who can work but choose not to. That is what an unfair tax system is.
Fifty percent of NZers are net tax takers. So the conclusion drawn by these experts is that they should be exempt from consumption tax as well? GST, VAT, sales tax could be our only tax if we really wanted a type of “fair” tax system or indeed a simple flat rate income tax that applied to everyone without exception. But there’s nothing easier than riling up a voting public than increasing taxes on the “rich”. There’s a lot fewer of them than there are of us so into the sweet ooze of socialism-lite we wade.
The problem, as with other law, is that the advisers have skin in the game both directly as their business, and indirectly as concern for their own usually very well heeled circumstances, and of similar well heeled clients. Recommendations often seem to be deliberately flawed so that correction will generate yet more paid advice (classic example; the original MPA) Huge amounts of consumerism by kiwis is outside NZ, or is by others in NZ but escapes much GST here. Slogging all with a steep GST discourages rampant consumerism so is helpful for climate change. But if consequent savings are to be confiscated as wealth tax, gift tax or estate tax not a discouragement.
A fair tax system ??
Take a family on an income of $50,000.
They get taxed at 17.5% of their income.
However - all their income is spent on food, rent etc.
They pay 15% GST on all their spending.
So their TRUE tax rate is 15% plus 17.5% = 32.5%
A Fair system? No way !!
Doug, the 15% isn't "of income" but "add to prices" so your little sum is fatally flawed.
A more serious issue is that of what constitutes a household income which can be one wage or salary income or two. One person on say $80K pays more tax than 2 people on $40K each. I am of the opinion that the income for a married couple should be evened out between them for taxation purposes. This is particularly poignant where one of them is not in paid employment as this income-splitting would significantly reduce their tax bill.
Of course taxation is not fair. It's legalised theft. So Woodham is perfectly correct in saying the best you can hope for is the least unfair system. The IRD used to have a slogan "It's our job to be fair" which didn't last, presumably because too many people hurt themselves falling about laughing. But their heart was in the right place and as one inspector carefully explained to me, the fairness referred to the way IRD applied the tax law to different taxpayers and was not a comment on the law itself. The Courts have made this quite clear over the years. Which is a good segway into capital gains tax. The UN report quite correctly recommends we implement a CGT and while I am happy to admit I don't know their specific reasons, fairness should be high on the list. A recent IRD survey determined that high net worth individuals paid a significantly lower effective tax rate than your average middle income earner. As anyone with a professional interest in the matter knows, that has a lot to do with the exclusion of capital gains from the definition of taxable income. Any exclusion immediately opens the opportunity to game the system and the well-heeled always enjoy a good game. So with the assistance of clever (and expensive) advisors they structure their affairs to ensure they derive mostly, or only, exempt income. That means many, quite legally, pay less income tax than the average New Zealander. Inevitably that means the average New Zealander has to pay more, to allow Treasury to balance the books. And that's not fair, however you choose to apply the expression. Only by the imposition of a comprehensive realised capital gains tax can fairness be brought back into the income tax system. And if CGT manages to increase the total tax take after relief is given to middle-New Zealand, then that's a bonus.
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