Why does a minimum wage worker pay a higher tax rate than a rich lister?

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I know you all will have taken an interest in the government’s Tax Working Group which put out its interim report last month and is now taking further submissions before issuing its final report in February.

My father spent his entire working life in the Inland Revenue Department so perhaps I should know a bit more than most about tax but I don’t. I was as uninterested as most until I came across an article mentioning in passing the regressive nature of GST. A bit of searching and I found the astonishing situation where the lowest income families spend three times as much of their income on GST as the highest income families. So I’ve taken an interest since then.

It’s been said that taxation is the only thing that separates civilisation from barbarity so how are we doing with the tax working group? Are we moving closer to civilisation or closer to barbarity?

Let’s look at how things are now. A worker on the minimum wage getting 40 hours per week (if they are extremely rare and lucky) will pay 14.7% of their income in income tax and on average 14% of their income on GST. That’s an effective tax rate on their income of 28.7%.

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What about a rich lister?

These are the people with over $50 million in wealth as assessed by the National Business Review. According to the IRD half the rich listers declare incomes of less than $70,000 for tax purposes – in other words they don’t even get into the top income tax bracket. At the same time their wealth increases exponentially year by year – the top 150 last year had average increase in wealth of $35 million each – most of it in untaxed capital gains.

These rich listers come into the top 10% income bracket so on average they pay less than 5% of their income on GST so the effective tax rate of most rich listers is somewhere less than 5% of their income.

There will be other bits of tax here and there the super-rich pay on dividends etc but by any measure the tax they pay as a proportion of their income is peanuts compared to workers on the minimum wage.

Let’s take this a step further. Working class New Zealanders pay higher tax rates in proportion to their income than the middle class or the wealthy.

If those on the lowest incomes pay the highest tax rates that means the average Maori or Pasifika taxpayer pays a higher proportion of their income in tax than the average Pakeha family – or the average beneficiary pays a higher tax rate than a rich lister.

This situation is in stark contrast to what most people will think because National and Labour politicians tell us repeatedly that the top 10% pay a disproportionate amount of the total tax – but they never tell us the percentages of tax people pay in relation to their income.

The highest-salaried income earners pay the largest dollar amounts of tax because they receive massive salaries – and the gap in earnings is increasing inexorably as we speak.

Politicians always ignore the vicious, pernicious effects of GST – Labour politicians especially because it was Phil Goff – the champion of the wealthy – who introduced GST as part of Labour’s slashing of high income tax rates and shifting the tax load onto low-income earners.

The counter argument is that when we look at how the government spends taxation collected it has the biggest benefits for those on the lowest incomes and therefore the fact the lowest income earners pay the highest tax rates is cancelled out by the way the government spends tax.

This narrative immediately paints those on the lowest incomes as passive recipients of the generosity of the wealthy. It makes them lesser citizens because we are told again and again that their tax contribution is negative – they receive more in benefits than they pay in tax. But again this always ignores GST.

Through cynical politicians and a tax-illiterate media we are swamped with messages that top income earners pay the most tax; that beneficiaries are bludgers; the unemployed are useless druggie layabouts; low-paid workers have only themselves to blame for not moving up the ladder and that the whole burden these people constitute is carried by the rest of us. Labour is as bad as National in driving wedges into working class communities along these attack lines.

So when things go wrong this carefully constructed mindset enables the wealthy to be bailed out while the lowest income earners get screwed.

Here’s a comparison from the global financial crisis:

In New Zealand the wealthy investors in South Canterbury were bailed out to the tune of $1.7 billion in a 10-minute discussion at a cabinet meeting while out in the world of work it was a different story.

Meanwhile when I was working for Unite Union in Auckland at the time of the GFC we had a member who was the receptionist at Goldman Sachs. The company was hammered in the crisis and the local branch were told they had to look at all their costs and make cuts where possible. Where did Goldman Sachs start with their cuts? With their lowest-paid workers. Our member was called to a meeting where she was told her job – she was paid $21 an hour – was to be contracted out – and it was. The company who took over the contract offered her job back to her at $17 an hour.

A last word on tax and how contrived public perception drives the difference in how the courts treat welfare fraudsters compared to tax fraudsters.

Lisa Marriott from Victoria University has detailed the difference between the two.

MSD Fraud amounts to $30.6 million annually compared to IRD’s minimum estimate of $1.2 billion in tax fraud annually (although it may be multiples of this!) However while 1000 welfare beneficiaries are prosecuted, just 60 to 80 tax fraudsters are brought before the courts each year.

For an average level of offending of $76,000, 67 percent of welfare fraudsters received a prison sentence while for an average level of offending of $229,000, just 18 percent of tax evaders received a prison sentence.

You will recall a recent case in Christchurch where someone who owed IRD $381,000 was prosecuted and paid back just $205,000 with the rest written off alongside a bit of home detention.

The comparison speaks for itself and it is largely unchallenged because the narrative established by politicians and uncritically reported by the media is so pervasive.

So what do I see as the solutions to the tax situation?

The important message is that our tax system is broken. It is broken in plain sight.

New Zealand has gross and increasing inequality in incomes and wealth. The wealthiest are creaming it at the expense of the rest of us.

Those on the lowest incomes pay higher proportions of their income in taxation while tax for the wealthy and super-wealthy is essentially a voluntary activity.

There are numerous ways to redress the gross imbalances in our broken tax system. I am suggesting four changes to make a strong start to bringing fairness and balance to our tax system.

I should point out before I do though that the tax working group has already ruled them out (most of you will probably be relieved to hear this…)

We shouldn’t have expected anything different. When the government brings Michael Cullen and a group of so-called tax experts – who earn massive incomes by advising companies how to reduce their tax liabilities – we can predict the outcome.

The TWG spent 194 pages explaining that while the tax system is unfair the rich don’t like paying tax so there’s not much they can do about it aside perhaps from a half-baked capital gains tax.

Here are four things they could have done to begin the rebalancing of tax:

 

  • Firstly institute a Financial Transactions Tax (set at around .01%) on all money going through our banking system. This won’t be noticed by people in their day to day living but will bring in significant sums of money from the corporate sector and speculators who move billions in and out of New Zealand regularly as they speculate on the value of our dollar. This tax would replace GST – a particularly vicious tax on low incomes.

The FTT I am proposing is a broad-based tax, set at a low rate. It would be particularly easy to collect through the banking system.

It would have the added value of reducing speculation in the New Zealand dollar (the 10th most traded currency in the world) which in turn would reduce our dollar’s value and increase income for the goods we sell overseas.

  • Secondly, a comprehensive Capital Gains Tax which would tax the unearned income of the wealthy and the super-wealthy. Wage and salary earners can’t avoid tax. Wage and salary earners are taxed on every dollar we earn and every dollar we spend. Why does the same not apply to the wealthy and super-wealthy?

It is important the income from ALL sources (including capital gains such as property values, shares and dividends) is brought together as taxable income for the purpose of assessing income tax.

  • Thirdly, we need a much higher top tax rate – currently we have one of the lowest in the world. Why should corporate CEOs pay just 33% income tax on their vastly-inflated salaries when much more is demanded in other countries? (eg Denmark 55.8%; Australia 49%; USA 46.3%; France 54%; UK 45%) I realise the government has refused to allow such a recommendation as this but the TWG should signal the need for this issue to be addressed urgently by the government.
  • Fourthly, an Empty Homes Tax be applied to vacant homes. This would be similar to Vancouver’s Empty Homes Tax where 1% of the property value is paid as tax in years when the home is unoccupied for four months or more.

More details are here: 

This tax would bring more vacant properties onto the market (33,000 homes in Auckland were empty in 2016 while people live in cars, vans and under bridges) which would ease rental costs as well as new house prices. It would be a positive, appropriate response to the current housing crisis.

Gareth Morgan says he owns eight I think it is houses in Wellington but he doesn’t want tenants living there because he says they just dirty the carpets. He can do this because we have no effective tax on capital gains which he says we need.

15 COMMENTS

  1. People are still fuzzy about why The National Part jihad,so hard for tax cuts for the rich.

    The National Party basically wants to undo everything Michael Joseph Savage did, as long as their is money in the bank, the Government works and so does domestic programs. So they have to bankrupt government so that they use that as excuse to take away protections and government over site, with the ultimate goal privatizing the tax system, welfare and health. The eventual goal is to return New Zealand to 1929 and have government only function as an arm of wealthiest 100 families and multinational corporations.

    Two points I’d add:

    1. Change the way brackets are calculated – rather than an arbitrary number of dollars, I’d set it to multiples of the median wage, so that it’s easier to adjust for inflation.

    2. One of the first and most important exemptions that has to go is the family home exemption, which hugely benefits the upper and upper-middle classes. Getting rid of it outright would be political suicide; capping it at, say, double the median home price, would go a long way, while at the same time encouraging developers to work on lower-cost, starter homes rather than McMansions.

    • I am pleased that the proposal of a Financial Transactions Tax gets a mention. I have seen the same figures mentioned in a Social Credit (I think) blog recently. Perhaps the penny is starting to drop.

    • Considering there have been seven tax cuts since 1986, Mark, the only way governments can now raise revenue for health, education, housing, roads, et al, is by raising indirect taxation. National did it with ACC, gst (despite promising not to), various government charges, prescription fees, as well as petrol excise taxes spread over three years. That is the irony of personal income tax cuts; the money for services most New Zealanders expect has to come from somewhere.

      In this, Key was 100% right; it ain’t coming from pixies at the bottom of your garden.

      • There are only a few tools the Government has by which to raise Revenue, these are Taxation, Sale of State Assets or Offshore/Internal Borrowing.

        In NZ we have been giving Tax Cuts to the wealthy, and increasing GST for the poor. We have sold $26.5 Billion of State Assets in recent years, some for a pittance to their cronies associated with the Government, ie BNZ which was sold for a song.

        Our Offshore Borrowing has risen from $10 Billion to $90 Billion under the John Key Governments.

        • The Nats agenda is/was clear to those who were interested in looking and questioned the lies being promulgated by the National PR machine from off shore advice.

          The fools who accept what national said at face value are our problem and National know well what they can gt away with.

          The problems National create for NZ during office take years to undo and many become impossible to undo.

  2. … and its still not possible to get a serious debate on the Reserve Bank creating our currency, instead of the private banks. What’s the problem?

    • It’s fascinating going through what money production is and what people with power over money production tend to do and it turns out that every one from Roman emperors to every mid-evil prince and King and queen or who ever, they debase there currency which is away to gain money for themselves. Of course this is ethically wrong.

      The advent of central banking and debasing across the board that paper money allows, originally debasing coins meant you’d melt it down and put a bit less silver in it or what ever, and some one that’s really careful and can look and see what’s going on, well they can switch to a better money and / or keep the good ones. With paper money it’s a little different because you just print more of the paper money and that debases all of the currency at the same time so it’s a lot more uniformed.

      When you’ve got central banking and debasement it causes a lot of people to think of money a lot more than they ought to. The argument being modern society thinks way to much about money. For the last hundred years there’s been all of these markets that has cropped up as a result of fiat money for example the entire FOREX exchange market with trillions of dollars traded back and forth and these are all middle men who aren’t really providing anything other than liquidity on both sides. It used to be all on the gold standard from 1875 to 1910 so it was all just math back and fourth because it was all the same money represented by gold, basically. That allowed for a lot of prosperity because there wasn’t any taxes on trading money. Now there is taxes on trading between currencies.

      Taxes are a thing because central banks want there own monetary policy so they can print at there own rate. That’s kind of crazy but that’s one way in which we have to think more about money. Another way in which we have to think more about money is that there’s no more “sound money” anymore so you’ve got to keep up with inflation because you’ve got to keep up with debasement so we come up with all these investment professionals who’re people who’s job it is to keep up with inflation or try to beat inflation in ideal conditions but at the very least keep up with inflation.

      The CPI (consumer price index) numbers is supposedly like 1% or 2% and that’s complete fiction. If you look at how they calculate CPI and how they’ve got quality adjustments and things like that can totally fudge the numbers any way they want. Basically they say it’s 1% or 2% but the actual monetary supply is more like 8%. And 8% is probably closer to what the CPI numbers are because if you look at a price like petrol 20 years ago we were paying a dollar a litre then $2 and now we’re heading towards $3. If it was only going up by the CPI numbers of 1 or 2 percent that wouldn’t be the case and we wouldn’t be paying premiums for diary products and all of a sudden house prices is like 10x’s the average yearly income. So it’s complete fiction.

      Apart of all these distortions that I eluded to previously is we have all these investment professionals and other things that try to keep up with inflation and they try and come up with these strategies for diversification and the only reasons these strategies exist is because there’s no stable store of value like gold for instance or more recently Bitcoin. But if you had gold which is a store of value even though it is a heavily manipulated commodity, but the point is you don’t have to think much about it, and when people put way to much thought into money they necessarily detract thoughts from other stuff and that’s kind of terrible for society.

      I think we rather much more think about how to make civilisation much better and how to make society better and how we do things in away that makes civilisation more efficient, more inventions, more entrepreneurialism, more innovation, more more more. Those are the things our minds ought to be going on. Instead so much thought and brain power of an entire population goes towards money. So it’s all just basically counterfeiting money. The really big problem that I eluded to is when you have a sovereign that decides what the money is then that’s what you get, centralisation and when you centralise so much to a single point of failure then that’s a problem. So Bitcoin and / or decentralisation (getting rid of a lot of bureaucratic red tape) and disintermediation (getting rid of a lot of middle men) has a lot of relevance that if applied correctly can prevent a lot of these bad behaviours that result from centralised money production.

    • Or how our Medicines are funded.

      Do you realise our health system is placed 41st on World Health Organisations rankings.

      Even economic cot case countries are well ahead of us.

      Take a look at this facebook group ” UNDERFUNDING OF MEDICINES BY PHARMAC and have a reality check as to how screwed up our whole health system is from YOUR GP to THE HOSPITAL to Your FUNDING OF MEDS.

  3. Sick, elderly, homeless, helpless, destitute … all to be solved as per United Nations directives signed by New Zealand in 1992 now being put into operation by those we trust to care for us and our children : hear for yourself how it is to be accomplished:
    https://www.youtube.com/watch?v=Zpw7Zhu3KiI
    As sirjonkey said, New Zealand – predator free by 2050. Ask yourself, are you and your loved ones useless or useful?

    • johnkey leaving NZ does make it slightly more predator free but many of his ilk remain fleecing the community as parasites well embedded in the financial system, that controls MSM and Govts.

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