This post would be much better if I actually had the numbers it needs. But I’m posting it anyway, because I’m not afraid to look like an idiot on the internets.
This story from Radio NZ was mentioned on the radio news as I was waking up this morning. It included a quote from Roger Douglas, from the economic-uberliberal ACT party. I can’t recall the numbers he cited (can anyone find ’em? I just listened to another news broadcast and they didn’t repeat this story) but it was along the lines of “the top (small)% of earners pay (much bigger)% of the tax”.
Keep that in mind and review this graph from No Right Turn, that shows almost half the wealth of NZ is concentrated in just 10% of the population:
This makes clear that Douglas is keeping the other half of the equation covered. With such great wealth concentration, it doesn’t seem nearly so problematic that there’s tax concentration. In fact, isn’t tax concentration exactly what we should expect from a well-functioning system?
And as a complete aside, I love the saga of Bob, the limited-English Chinese youth who ran away from home and slept rough in Otara – the roughest, toughest, scariest-to-us-white-folks place in NZ – where he was befriended by a Samoan youth and taken in by that family. And they decided to call him Bob.
Faleto’a, who already has seven sons, welcomed him into her family. “This is my beloved son Bob,” she told Campbell Live. “I love him just the same as my boys.”
This, when tensions between Asian and Pasifika ethnic groups in Auckland are rising. It’s just a good reminder that people are basically awesome.
Keith Ng did a good post on this, earlier in the year, with interactive pie charts and everything: http://publicaddress.net/default,6414.sm#post6414
Points:
1. A few people pay most of the tax because a few people make most of the money.
2. Yes, wealthy people pay more than their “fair share”. This is because we have a progressive tax regime, just like pretty much every country in the world.
3. Many countries — such as Australia — have _more progressive_ tax regimes than we do (where “more progressive” means “more unfair”, if you are inclined that way).
Repton: so, if we really want to “catch up” with Australia, maybe we should be taxing the higher income brackets more, rather than less? I like this.
That “fair/unfar” thing always rankles me. I’d like to know when “fair” was ever a component of how much anyone got paid. Is anyone ever paid a higher wage because their job is harder and/or more crucial to the public good?
I would have thought “fair” was closer to “making sure everyone is able to get by,” rather than “making things easier on people for whom it’s already relatively easy.”
I’ve never quite understood why tax breaks for the rich is a vote-catcher, when almost nobody is rich. Is there some subtext involving people planning ahead for when, in their wish-fulfilment dreams, they might magically become rich?
Can I just point out that we don’t have wealth tax in NZ, rather we have income tax?
Using wealth figures to justify arguments about relative taxation is unhelpful, I feel.
Repton – Keith is a very clever chap. I must look at that post one day on a computer that will actually display the pies.
Pearce – your last para – I’ve long wondered about that, as have many people, because it could be the central question of modern politics. There’s a great essay on the subject at the Edge, by Jonathan Haidt, who basically points at morality: http://www.edge.org/3rd_culture/haidt08/haidt08_index.html
Scott A: yes, wealth =! income, but they correlate reasonably well, surely? Anyway, this isn’t really an argument so much as pointing at two pieces of communication I encountered within 24 hours and how one changes the meaning of the other (at least, that’s how I see it)
“yes, wealth =! income, but they correlate reasonably well, surely?”
Nope, hence part of the problem within our tax system. Those with the most wealth can legally distribute money through entities such as trusts and companies to reduce tax.
Similarly those wealthy due to property have all sorts of built in advantages to reduce the tax they pay on their other income.
Wheras your salary or wage earner is the one paying the tax through their PAYE.
Add to that the Working For Families tax credits; which means families with children have their tax reduced, if not turned into a net transfer from the state back to the individual, and you begin to see why there’s a strong sense that our tax system is borked.
I’m not opposed, per se, to income tax cuts if they help reduce the incentive to restructure one’s income to avoid higher rates of tax, but I’m not sold on GST increases to pay for that. I’d prefer a capital gains tax on investment properties and, of course, a financial transaction or some kind of Tobin tax.
Are there stats showing the total distibution of income? Looking through the data available on the Department of Statistics website, I can find plenty on median wages, but nothing on actual distribution of income.
“Repton: so, if we really want to “catch up” with Australia, maybe we should be taxing the higher income brackets more, rather than less? I like this.”
Personally, I’d love to see us copy Australia by instituting a tax-free threshold. e.g. no one pays any tax on the first $10,000 of their income. Of course, we’d have to pay for it somehow. Top tax rate? GST? I don’t know. Moot point anyway, since National aren’t considering it.
“That “fair/unfar” thing always rankles me. I’d like to know when “fair” was ever a component of how much anyone got paid. Is anyone ever paid a higher wage because their job is harder and/or more crucial to the public good?”
Well, “fair” is tricky.
Is it fair that I* pay 37% tax and you only pay 33%?
Is it fair that I pay $30,000 tax a year and you only pay $20,000?
Is it fair that a tax cut gives me an extra $100 per week, and you only an extra $30 per week?
Is it fair that I get $50,000 a year after tax, and you only get $30,000?
By choosing your viewpoint, you can argue that just about any tax system, or any tax change, is “fair” or “unfair”, depending on your desired bias.
* all numbers here are made up.
Morgue,
I’ve got an interesting insight into this living in a country like Switzerland, doing a tremendous amount of my work with the US and coming from NZ.
In Switzerland tax the majority of your tax burden is charged by your local authority. This means that across the country the tax you pay on exactly the same income fluctuates wildly. It is literally possible on exactly the same income to pay less or more tax than your next door neighbour if they live in a differnt local authority area.
Question: which is the richest canton in the country? The one with the highest or the lowest taxes? And conversly, which is the poorest canton in the country, the one with the highest or the lowest taxes. Of course the richest canton is the one with the lowest taxes and the poorest is the one with the highest taxes. Surprising? Hardly. You cannot escape the final conclusion that people are greedy and will do whatever the can to maximise their income. And when I say the canton with the lowest tax is the wealthiest, I don’t mean a little heads and shoulders above the other cantons. The canton with the lowest tax is FAR wealthier than even the next closest canton. A phenomenal amount of wealth is located in this canton.
Which in turn means that even though the income per person is lower for this canton, the overall wealth vastly outstrips the nearest competitor.
So the point that Roger Douglas is making that because wealthy people are greedy and are going to look to maximise their wealth, we need to offer them low taxes, and by offering them low taxes you increase the wealth of everyone.
Switzerland is case and point and he is absolutely right.
Morally bankrupt? Sure.
I’m also pretty sure I know the answer to why lower taxes are a winner in the States. You need to understand the American dream. I mean really seriously understand it. The ability to work hard and make it from sweat and tears and the hope that you can ‘make it’ means that you aspire to be like those people that are rich and benefit from it (lower taxes or whatever). Making it means succeeding and getting into the upper eschilons and if that’s your goal, why would you do anything to jeopardise it? The upper eschilons exist because of the free market and lower taxes etc etc, and that’s your goal, so you support it. At least that’s my take on it, and I know enough lower income Americans or people living in the States to think that I’m pretty close to the mark.
Look to the rich to learn how to save.
Maybe I’m dense, but I completely fail to see how Kiwi in Zurich has come to the conclusion re: Roger Douglas’s point. How does offering the wealthy low taxes increase the wealth of everyone? Either I’m stupid and/or ignorant, or there’s a step missing in this argument.
Kiwi in Zurich will have to do a lot more than a simplistic example of Swiss cantons and low/high tax for me to accept a causal relationship i.e. the more a canton lowers tax, the richer the canton becomes.
Historically, there are significant differences between cantons, financially-speaking. Much is geographic. History and culture are also factors. If a canton is already wealthy, it can afford to decrease in local tax. Poorer cantons – for whatever reason – have no option but to raise funds to deal with higher crime, etc. by keeping taxes relatively high. It’s a vicious (or virtuous) circle.
Bottom line: it’s not just about tax. There are other factors in play, and if you don’t understand/appreciate this, just check to make sure you haven’t one eye closed and are holding a toilet roll up to the other.
KiZ, you still out there? Be interested to hear more from you on this.
Hey,
still here.
@ Robin. you’re right, it is a vicious circle. I’m not denying it, and most of the Swiss themselves wouldn’t deny it. The cantons are in a constant competition with eachother to reduce taxes in order to attract the wealth. Everytime a Canton takes steps to lower its tax its on the news and in the local rag. This is how much it is in the public’s consciousness. What you see is those cantons that can afford it, are in a constant drive to lower taxes. One (half) canton (Obwalden) came up with the ‘genius’ tax system of placing the tax structure on its head, i.e. the greater your income the less tax you pay as a percentage. A bold faced attempt to intice the rich to move there. Even for the tax conscious Swiss this was repugnant and the canton got sued in the Swiss Supreme Court and the tax system was ruled unlawful.
The wealthiest canton and the canton with the lowest taxes is Zug. Without wanting to be disrespectful, Zug is bascially the sticks, caught in between Luzern and Zurich, but in neither place. Luzern is beautiful. It is quintessentially Swiss, with all the stereotypes and beauty that such stereotypes have to offer. Luzern was the original tourist destination of the English aristocracy and remains that today of camera trigger happy Asian tourists with large credit cards. Zug doesn’t really have tourism to mention. On the other side you have cosmopolitan/cultural Zurich. Opera house, night life, Zoo, pretty much all that you’d expect of a decent sized city. Zug has nothing like this to offer. Crime is pretty much non existent across the region (to the extent that shops will leave stuff outside overnight because they know that no one will steal it). So given that in most areas that count, Zug pales against its neighbours, I”m extremely confident that I’m not being myopic (@Robin surely you could have come up with something a bit more tasteful than a toilet roll) by stating that people choose to live in Zug is because of the tax. I lived for 6 years in central Switzerland where Zug is located and it is well known within the whole of Switzerland as an internal low tax region and the Swiss themselves know that people choose to live there for tax reasons. In all the time I’ve lived here I’ve never heard someone choose to stay in Zug or move to Zug for any other reason. Indeed, I have a friend who actually lived in Zurich but came from Zug and continued to stay registered in Zug for the absolute maximum time he could in order to save taxes. The tax authorities are also aware of this because they know that people try to stay registered in Zug in order to save tax but actually in reality live outside the canton. Having lived almost al of my adult life in Switzerland, I think I understand the politics of the country and region to speak authoritively about it.
Another example if you’re so interested is the political frtustration and pressure that both France and Germany feel towards Switzerland. The G20 with support of Europe took steps to put Switzerland on the tax haven grey list (as opposed to black (bad) white (good)) as a tax haven that refused to deal openly. The main issue for France and Germany being that their wealthiest citizens move to Switzerland. The response of the politically incorret Swiss People’s Party is that if Germany didn’t tax its citizens so highly they wouldn’t move to Switzerland. Politically incorrect perhaps, but certainly containing some truth.
If it was just some random one or two people I might doubt or question the situation but when you look at the flow of wealth and people, it’s clearly in one direction. On the European scale it’s towards places like Switzerland and on the local scale it’s to places like Zug.
@ Pearce it’s simple:
Step 1: A person paying low tax on $1 million is still paying more tax than that person paying no tax at all because they live somewhere else and are paying tax somewhere else. For example, if a person chooses to pay tax in Australia rather than New Zealand, 100% of the tax is lost to NZ.
Step 2: The tax wealth is spread throughout the region/country etc. Referring back to Zug, the wealth is spread throughout the canton. Teachers for example are paid considerably more for working in Zug than they are in the neighbouring cantons of Luzern or Zurich and this naturally brings with it all the effects that having a wealthy economy brings by having that money pumped into the local economy. The local infrastructure is fantastic and the standard of living is extremely high.
Another good example I’ve had a lot to do with: Bermuda. The country is a tax haven for insurance companies. It has no natural resource, it’s over populated and the beaches aren’t particularly unique when compared to the nearby Carribbean, but somehow this tiny little island nation is rolling in dosh. Same principle applies, 100% of lower tax paid by many is better than no tax at all. Like Switzerland, Bemuda is rolling is some serious dosh and only because they offer insurance companies low taxes. Like Zug which is riddled with corporate HQs, so is Bermuda.
I’m not for one second suggesting this is a moral way to run a country and its tax system. But from a macro perspective, if you assume that people want to increase their wealth (another example: the CEO of Ikea lives in Switzerland…Sweden also offers culture and low crime) and will choose to live where they can maximise their wealth, then from a total tax perspective, as a communitiy you want to tap into that source of tax.
I realise as a Kiwi myself it is contrary to the NZ sense of egalitarianism (and it bites) that under such a system the rich are getting richer , but everything I’ve seen of the world so far shows that the whole community benefits where the rich are allowed to do this. The question for me at least is whether you want to live in a country that espouses such ideals.
KiZ: Ah, I see. You’re talking about the trickle-down effect. I should have realised.
Pearce – I think KiZ is saying a bit more than that – sort of arguing that the choice is between trickle-down and not-even-a-trickle? I’m not sure that the argument holds for NZ, though, as I don’t think tax is a high-priority reason for people to choose between living (and paying tax) here or elsewhere. Isn’t there research somewhere on this? I can imagine people choosing to live in rubbishy Zug for tax, because all of Europe is still on their doorstep and they can get to Zurich and Luzern and further afield when they want to, but in NZ you’re either all the way in or all the way out.
I dunno, I find this both fascinating and confusing and I do have a lot of respect for KiZ’s sense of what’s what. Hmm.
Also, see Gordon Campbell on tax rates:
http://gordoncampbell.scoop.co.nz/2010/05/18/gordon-campbell-shifting-rationales-for-tax-cuts/
Morgue: I know, I was just using shorthand.
I was going to mount a fairly detailed argument, including the point you’ve not made about NZ’s geographical isolation, the fact that Bermuda’s miniscule population – considerably smaller than Lower Hutt – makes it easy to share those tax dollars around (both the isolation and the population size issues also relate to Zug specifically, which has less than half of the population of Bermuda and is a vital transportation node), as well as suggesting that if we actually wanted to go down the route that KiZ describes it seems to me that it would make a lot more sense to set up NZ as a tax haven for businesses rather than noodling around with income tax, but… I just couldn’t be bothered. 🙂
Population isn’t the problem for New Zealand, at least where tax is concerned. The Nz population is between Bermuda and Switerland: both successfully wealthy countries. Indeed, looking around the world at tax havens, they all tend to have small populations….Luxembourg, Lichtenstein, Bermuda, the Caymans, Switzerland, Monacco, Austria (to a certain extent). New Zealand’s small population is an advantage for tax haven status because there are relatively few people to spread the wealth around.
Imagine that your income is $50,000 per year and in Lower Hutt you pay $10,000 tax, in Upper Hutt $12,000 tax and in Porirua $15,000. Where do you move to? Assuming that you’re able, you and your friends move to Lower Hutt. You pay 50% less tax than you do in Porirua. Upper Hutt might not be a bad compromise, but Lower Hutt is definitely the prefered destination. In the same way, if you have a choice between one country and the next you’re going to move your business to the place where you can save tax. The cycle becomes more vicious because as the wealth increases the standard of living increases making the rich places more desireable and making the poorer places even less desireable.
If the taxes are the same in Australia as they are in New Zealand. Where do you live? Probably Australia. Much better weather, more going on better quality of life (once you learn to deal with the Australians :D) and so on. This just continues to apply throughout the world. I’m not discounting family ties and friends and all the other factors that come into a decision to live somewhere, but assuming that all things are equal, then people are going to go where they can save money. If things are not equal….like crappy Wellington weather then you’re already starting on the backfoot. It isn’t a conincidence that 25% of NZ’s population lives in Auckland.
What New Zealand struggles with, and it is a huge struggle, is location. New Zealand is simply too far away.
In the same way, Morgue is right, the advantage of Zug and Switzerland, is that they both lie in the centre of Europe. While we live in a capitalistic world driven by the accumulation or wealth, how can New Zealand ever expect to compete if the taxes are the same or higher. The system we live in is driven by competitve advantage (hence the reason why we have a city like Dubai in the middle of a desert that can barely support life all things being equal). And the struggle for me as a Kiwi is whether we embrace such a system or not. Roger Douglas is suggesting we do through the mechanism of lowering taxes (and not just personal taxes, he’d support all taxes being reduced).
The reality of NZ losing many of its highly skilled and welath makers is something that I don’t think anyone can deny. For some of us familial bonds, friends etc are what draws us to stay home. For others….for too many others, the attraction of life overseas is too much. Having thought about this topic many times, I see the competitive advantage for NZ being it’s lifestyle and its Green image. In the world I live in, both of those things are hugely valuable, but they’re not enough by themselves to bring substantial wealth. As much as it pains me to say it, If you’re going to suggest that business leaders have to fly 18 hours from New York or 24 hours from Europe to get to NZ, you’re going to have to give them something more than just organic food, bungy jumping and tramping in the bush.
@Pearce:, where did you get the idea from that Zug is an important vital transport hub from? It sounds like advertising from a Zuger website. The city of Zug itself is a ‘through’ railway. Hardly a transport hub and people certainly don’t live in Zug to have great access to anywhere. The town of Arth Goldau which does belong to Canton Zug is more of a transport HUB in that it sits at the cross roads of the Milan-Paris and Zurich-Paris line. But Arth Goldau is not where the wealth in Zug lies. If Zug is nowhere, then Arth Goldau is nowhere within nowhere, even futher away from Luzern and Zurich than Zug the town is. Any logistical benefits that Zug offers are a direct result from logistik firms having their base there….which is tax related, not location related. Nearby Zurich is an infinitely more important transport HUB than Zug is.
I sincerely hope this does not come off as sounding arrogant. I do not mean to be, and for what it’s worth, I’m totally left wing Green by political persuasion and at heart, but this is the world I move in and what I observe. And I’m not suggesting for a moment that NZ try to indulge in this. What I love about NZ is that it doesn’t indulge in this constant pursuit of wealth and it is egalitarian, but at the same time, I do now understand the point that Roger Douglas and John Keys are making.
KiZ: You right. I concede, outclassed.
Besides which, I lost any right to participate in this discussion when I repeated something I read on Wikipedia (the transport hub).
I never did think you were endorsing this viewpoint, btw. My apologies if it seemed as if I was accusing. It’s been fascinating reading.
I don’t know that I concede. I definitely acknowledge I’m outclassed though 🙂
Basically I still need convincing about this bit:
“The reality of NZ losing many of its highly skilled and welath makers is something that I don’t think anyone can deny. ”
There’s a positive balance of immigration – lots of highly skilled people come to NZ, too. I don’t know if that’s enough to offset the losses. I’m also not convinced that the taxes are a big part of the equation for many people either coming or going; the other aspects of NZ (positive and negative) seem far stronger from where I’m sitting. Besides, aren’t NZ top tax rates already lower than in most other OECD places? If we’re setting ourselves up to compete internationally on tax grounds, I think we’re on a hiding to nothing.
But, as I say, I don’t have the weight behind this argument to really push it. Last word to KiZ, if you want it.
It has been fascinating reading, too.
@Pearce: lololol it so sounded like something out of Wikipedia! 🙂
I’ve really enjoyed this as well.