19 September 2024 – Tax Justice Aotearoa welcomes the findings of new research by Victoria University’s Max Rashbrooke, which demonstrates that high earners in New Zealand are lightly taxed compared with those from other developed countries.
“We commissioned Max Rashbrooke to do this research because whenever there is talk of introducing some form of tax on capital gains or wealth, the argument is that it will lead to the flight of the well-off from New Zealand,” says Glenn Barclay, chair of Tax Justice Aotearoa.
“But his work suggests this is unlikely, because most would end up paying more tax in other comparable jurisdictions, were they to leave. In fact they could easily end up paying twice as much.
“Rashbrooke’s work is also in line with previous research on upper-spectrum tax rates in New Zealand, which has shown that our tax system asks very little of its highest earners.”
Rashbrooke’s research looked at someone earning five times the average wage in New Zealand – around $330,000 – and the equivalent high earners in nine other developed countries. The countries chosen include the ‘Anglosphere’ nations that have similar political systems, including Australia, Canada and the UK, and five European countries.
Using data from 2023 OECD research, Rashbrooke’s work shows that if the $330,000 income was a conventional salary, the total tax payable in New Zealand would be around $108,000, or 33%. Even on that basis, this notional high earner would face higher rates in the other selected countries, ranging from 37% to 55%.
For many high earners, though, much of their income is capital gains (money made selling assets like shares and investment properties), which is not taxed systematically in New Zealand. Following OECD modelling, Rashbrooke looked at how much tax someone on $330,000 would pay if their income were half salary and half capital gains. In New Zealand, because of the absence of capital gains taxes, they would pay just $45,000, or 14%.
Almost every other country in the OECD, by contrast, taxes capital gains, though sometimes at lower rates than salaries. As a result, someone earning five times the average wage in those countries, if their income were half salary and half capital gains, would pay tax rates of between 26% and 44%.
The New Zealander on $330,000, who as above was paying around $45,000 in tax, would pay another $41,000 if they faced Spanish rates of tax on higher earners, another $50,000 if taxed at Australian rates, and a startling $98,000 extra at Danish rates.
“In other words, this research shows that a well-off New Zealander would pay roughly twice as much tax, or far more than that, if faced with the tax rates that are applied to high earners in other countries,” Glenn Barclay says.
If New Zealand high earners are also high net wealth individuals, they would also face significant inheritance and net wealth levies in most comparator countries. New Zealand is a notable outlier, by developed country standards, in that it does not tax capital gains, inheritances or net wealth in any systematic fashion.
“This is a very useful piece of research,” says Barclay. “Last year, the IRD’s research on high-net worth individuals showed that the wealthiest people in this country pay a lower rate of tax than people stacking shelves in supermarkets.
Rashbrooke’s research complements that work, by showing that high-income people would be paying a lot more in tax if they faced other countries’ income and capital gains taxes. And, given the range of taxes on wealth paid in those countries, they would pay still larger amounts of tax overall.
“It is time that we grasped the nettle of progressive tax reform, and looked not only at different taxes such as a capital gains tax but also at making our income tax regime more progressive,” says Barclay. “Even here we lag behind comparable countries.”
Note on methodology
The research uses OECD data to look at the taxes paid by a notional individual earning five times the average wage in New Zealand and in nine comparator countries: Australia, Canada, the UK and the US; and Belgium, Denmark, Germany, Norway and Spain. The first four countries have broadly similar political histories and institutions to New Zealand and the remaining five are European countries to which New Zealand has traditionally compared itself. The data are derived from a recent OECD paper, ‘The taxation of labour vs. capital income’.
Using 2021 data, the notional New Zealander on five times the average wage would have been earning around $330,000, which is well within the range of salaries paid to public-sector chief executives and is lower than those paid to the chief executives of New Zealand’s largest companies.
Rashbrooke’s research, following OECD modelling, uses three scenarios for how this notional individual’s income might be generated: all of it as salary (taxed at standard income tax rates); all of it as capital gains (taxed at capital gains rates); and a 50:50 split between salary and capital gains (taxed half as salary and half as capital gains). These scenarios are important because, in general, capital gains and salaries are taxed at different rates. Since capital gains often make up a large proportion of top incomes, this disparity can have significant implications for the taxes paid by high earners.
The tax rates used are ‘effective’ tax rates (ETRs). That is, they represent the total amount of tax someone pays as a percentage of their total income.
