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With the recent report into how much our high-net-worth New Zealanders are contributing to the tax take, the conversation has tended to centre on fairness.
Fairness is clearly important, especially when we are staring down the barrel of a recession, which could negatively impact on the economy and the tax take. So, it also becomes critical that the Government is getting value for money using our taxes, because wasteful spending increases the burden on taxpayers while dragging down our economic performance and pushing up inflation.
Every year Baker Tilly Staples Rodway calculates Tax Freedom Day, the hypothetical day when New Zealanders have paid off their tax bill in full for the year and get to keep the rest of their earnings tax-free. With this year’s date forecast for May 22, we’re collectively paying two more days’ worth of taxes than last year before.
It’s particularly notable that the tax paid by individuals has increased by 10.57 per cent from just over $51 billion to nearly $57 billion. That’s ahead of inflation, with wage and salary increases dragging individuals into higher tax brackets.
Addressing bracket creep could dramatically affect New Zealanders’ quality of life and even their ability to fulfil dreams and aspirations. This is why adjusting our income tax brackets can no longer be deferred – and if not addressed in this Budget, it may end up playing a major role in the next election result.
When the income tax brackets were last set a decade ago, the intention was for the then-top tax bracket (kicking in at $70,000) to capture only the highest income earners. However, the 33 per cent top rate now applies to people who were never intended to be included. For example, junior nurses can now expect a starting salary of $66,570, very close to the threshold, while first-year police receive nearly $82,000 including subsidies.
The irony is that doing nothing about this issue over time effectively creates a flat tax by default, where a significant proportion of the nation’s income is being taxed at 33 per cent. Also, as Prime Minister Hipkins acknowledged, the existing settings don’t always incentivise hard work, a concerning problem given New Zealand’s low productivity.
Yes, shifting income tax brackets will undoubtedly be expensive, so there needs to be some willingness to consider new taxes to offset that cost. The New Zealand tax system primarily relies on income tax and GST to fund the Government. There are signs that the GST tax take may come under pressure as spending drops, with around half of New Zealand’s mortgage holders due to roll off fixed rates within the next 12 months. There is no GST in interest rates and the nation’s households will be spending more of their incomes on servicing their mortgages, meaning something else needs to make up the shortfall.
One option that seems increasingly likely is moving the trust tax rate from 33 per cent to the top 39 per cent income tax rate. There are reported to be up to half a million trusts in New Zealand. But it’s unlikely that trust beneficiaries are all earning more than $180,000, which is the level at which the 39 per cent rate kicks in for individuals. Should the rate be adjusted, we can expect people may question whether they should be holding any investments or assets in trusts, and let’s not forget that there are many valid non-tax-related reasons for a trust.
A Capital Gains Tax or CGT is also back on the agenda. However, a CGT is not a reliable source of tax revenue, something especially apparent with property prices now in decline. The other option being talked about is wealth tax, although exactly what form this might take is unclear. We should also bear in mind the implications if the so-called wealth being taxed is tied up in a family business or a farm.
However, as the Prime Minister also acknowledged, the current tax brackets are the Government’s most reliable way of increasing its tax take. When more Kiwis fall into higher tax brackets, there’s more money in the Government coffers.
Which introduces the elephant in the room – that Core Crown expenses have risen from $80 billion in 2018 to an estimated $129 billion in 2023. Welfare spending has increased off a pre-Covid base of $26.6 billion in 2020 to an estimated $39 billion for 2023. Meanwhile, this year’s Tax Freedom Day calculations showed that the cost of finance for government departments has added three days’ worth of tax to our calendar. While expenditure in some areas has been increasing remarkably, those extra tax dollars don’t appear to be getting much more in terms of results.
It seems almost every day we hear concerns from teachers and doctors, and from social agencies helping our most vulnerable. These demands have people increasingly questioning how we as a nation can afford these things with our current tax settings. But also, at some point, the government has to address the issue of its appetite for increasing spending.
Fairness on tax means different things to different people. Most tax policy advisors and the general public would agree the best system spreads the burden so that everyone pays something rather than expecting some more than others to do most of the paying – whether a handful of very wealthy individuals or the increasingly squeezed middle.
There’s no single or easy answer to addressing the fiscal challenge. But, as Tax Freedom Day continues to move out, the question grows as to how we can afford to keep funding increasing government expenditure and whether some of it is being well-spent.
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