Source: Better Taxes for a Better Future
New research reveals billions in lost tax revenue and growing wealth inequality in New Zealand.
A research report, endorsed by globally renowned French economist Thomas Piketty, released today shows that between 2021 and 2024 the very wealthy* in New Zealand paid an 8.1% effective tax rate, less than half the rate of the median-wealth adult of 17.4%.
For every dollar of tax paid on the income of middle New Zealanders, the very wealthy paid only 47 cents on their income.
“For most working New Zealanders, what you earn and what you’re taxed on are very nearly the same thing. For the very wealthy, whose income flows predominantly from owning assets, the gap between their income and what they are taxed on can be vast, and it can be engineered.
Roughly two-thirds of the comprehensive income of the very wealthy is never taxed, and what is taxed is mostly taxed at the companies tax rate – the combination of which decreases their effective tax rate,” said report author Tayla Forward.
“…Had the very wealthy earned the same balance of taxed and untaxed personal income as the median, the group would have paid about $605m more a year over 2021-2024, and the same calculation applied to the larger group of the top 1% would have generated an additional $7 billion a year in tax revenue.”
This research sheds light on how this works, how this is costing New Zealand billions in foregone revenue and increasing wealth inequality, and what can be done about it.
*a smaller, richer subset of the top 1%; equivalent to the 311 wealthiest families studied in the IRD’s 2023 research project.
See below for more comment and key points
BACKGROUND
In 2023, research conducted by the Inland Revenue Department (https://www.ird.govt.nz/-/media/project/ir/home/documents/about-us/high-wealth-research-project/hwi-research-project/final-report-april-2023/report-high-wealth-individuals-research-project.pdf?modified=20230423203807) gave radical new insight into the tax paid by high wealth individuals in New Zealand. The survey data that underpinned that work have been destroyed, as per the privacy conditions surrounding their collection, and the legislation that enabled it has been repealed by the current Government.
This new report reconstructs and extends the insights of the original report, using publicly available sources, and was supported by Tax Justice Aotearoa (https://www.tjanz.org/) and the Better Taxes for a Better Future Campaign (https://www.bettertaxes.nz/), as well as the World Inequality Lab, co-directed by Piketty.
COMMENT FROM REPORT AUTHOR, TAYLA FORWARD
“Since IRD’s 2023 report, the top personal rate returned to 39 percent in 2021, and the trustee rate was aligned with it from 2024. This research shows that while both changes were aimed squarely at the top, yet the gap between effective tax rates has widened. This is because income at the top is slippery; with our current tax settings, top incomes have the flexibility to move to avoid tax increases,” explained Forward.
“But those who earn their income as salary or wages don’t have the flexibility to move their income into lower-taxed forms. Had the very wealthy earned the same balance of taxed and untaxed personal income as the median, the group would have paid about $605m more a year over 2021-2024, and the same calculation applied to the larger group of the top 1% would have generated an additional $7 billion a year in tax revenue.”
“In the absence of policy reform, there is increasing pressure at the middle. If we take up tax reform actively we can relieve middle incomes by defining what is taxed in ways that can reach those with greater ability to pay.”
“If we’re going to address the problems with our tax system we need to look at our tax base, or in other words what we tax, not just the rates on existing sources of tax revenue. Taxing income comprehensively, including income from capital gains, would bring more of top incomes into view, but it is an incomplete solution” says Forward.
“Taxes on realisation-based gains can be deferred indefinitely and manipulated. This is why taxing wealth is a necessary and powerful complement, because it targets accumulated wealth directly rather than easily manipulated flows of reported income.”
COMMENT FROM BETTER TAXES, KATE STONE
“This new research shows not only that changes to income tax rates since IRDs 2023 report hasn’t addressed the increasing gap between the tax rates of the very wealthy and the middle New Zealander, but also the impact of not fairly taxing the very wealthy on increasing wealth inequality. As the endorsement of this work by Thomas Piketty highlights “the bottom 50% of the population barely owns 3.5% of aggregate net private wealth, while the top 10% owns 68% of the total.” said Kate Stone, Better Taxes for a Better Future Campaign.
“Successive governments have made choices about our tax system that have led to the wealthy paying lower effective tax rates than middle New Zealanders, increasing wealth inequality and forfeiting billions of dollars in much needed revenue. Revenue that would pay for more nurses, teachers aides and emergency housing. This is not inevitable. The question is whether the political will to do so can be assembled before the costs of inaction become even harder to address.”
Key points
The very wealthy pay less than half the effective tax rate of middle New Zealanders: Between 2021 and 2024, the very wealthy paid an effective tax rate of 8.1%, compared with 17.4% for the median-wealth adult. For every dollar of tax paid by the median-wealth adult, the very wealthy paid just 47 cents.
The current tax system allows wealth inequality to grow: The top 10% own around 68% of NZs net private wealth, while the bottom 50% own just 3.5%. Low effective tax rates allow the wealthiest to accumulate and reinvest more of their wealth/returns, further widening the gap.
Billions of dollars in potential tax revenue is being missed: Had the top 1% ‘s household income been as taxable as that of the median-wealth adult, the report estimates an additional $7 billion a year in tax revenue between the 2021-2024 period.
Raising existing income tax rates alone will not fix the problem: The very wealthy have great flexibility to shift income between personal, trust and company structures, while most wage earners have little ability to change how their income is taxed.
A fairer tax system could help ease pressure on the average New Zealander: Reforming what we tax, rather than relying solely on changes to tax rates, could ensure those with the greatest ability to pay, contribute more towards the public services New Zealanders rely on.
Endorsement
“Tayla Forward demonstrates how unequal New Zealand really is. According to her latest estimates, the bottom 50% of the population barely owns 3.5% of aggregate net private wealth, while the top 10% owns 68% of the total. Very well documented, highly rigorous, the work by Tayla Forward uses state-of-the-art research methods. A must-read”
Thomas Piketty, author of Capital in the 21st Century, Professor of Economic and Economic History at the Paris School of Economics, and Co-director of the World Inequality Lab
About the report author
Tayla Forward (Ngāpuhi), is a researcher in economics and political economy, Fellow of the World Inequality Lab, postgraduate at the Paris School of Economics, and research associate at Victoria University of Wellington and the University of Canterbury.
This report was supported by Tax Justice Aotearoa and the Better Taxes for a Better Future campaign, the World Inequality Lab, the Paris School of Economics, and the Royal Society of New Zealand Mana Tūāpapa Future Leader Fellowship.
Better Taxes for a Better Future is a coalition initiative supported by over 25 organisations. We aim to promote ideas for better taxes for the public good and a better future for everyone in Aotearoa New Zealand.