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

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%.

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 10^th 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.