Max Rashbrooke. Photo: Supplied / Hagen Hopkins
One of the country's leading experts in inequality says the government has a dilemma on its hands after Inland Revenue revealed a "deep unfairness in the tax system".
Its new report found the effective tax rate for the wealthiest New Zealanders is less than half what the average person pays, thanks to "increases in the value of businesses, property and financial portfolios they own or control" - in other words, capital gains.
"Unlike almost every country in the developed world, we don't tax capital gains even though capital gains are income, just like my salary is income," senior associate of the Institute for Governance and Policy Studies at Victoria University of Wellington Max Rashbrooke told Checkpoint on Wednesday.
Between 2015 and 2021, the country's richest individuals and families - those with a wealth exceeding $50 million - paid a median effective tax rate of just 9.4 percent, the report said. That was less than half what "middle wealth" Kiwis paid - despite the supposedly progressive tax system.
"Our citizens like tradies, nurses, school teachers, hospitality workers, hairdressers, cleaners, engineers and small business owners all pay a much higher effective tax rate than their wealthier fellow Kiwis," said Revenue Minister David Parker.
"It's showing there's this fundamental unfairness in the tax system" - Victoria University of Wellington's Max Rashbrooke
While it had long been suspected the wealthy had ways of legally minimising their tax income, the scope of it was unknown until now. Rashbrooke said the disparity was surprising, with the top 400 or so people having "more wealth than the poorest half of the country combined".
"It's confirmed that if you're wealthy, there are a lot of ways that you can avoid paying what most people would regard as your fair share of tax. There are lots of ways of minimising your contribution to the collective pool of tax revenue."
David Parker Photo: RNZ / Angus Dreaver
According to the Treasury website, those receiving income that put them in the top 3 percent in 2019/20 paid 24 percent of the tax. The top 5 percent paid 31 percent.
Rashbrooke said that was simply because they "get a huge amount of the income in the first place".
"That measure is only a measure of inequality - it's a measure of how bad things are. The real measure of people's contribution is, what share of their income are they paying in tax? And the report shows it's only about 9 percent for the wealthiest New Zealanders."
Parker and Prime Minister Chris Hipkins played down the chance of making any changes to the tax system in this term. Parker said the report would "enable future discussions on tax policy to be based on solid evidence".
Previous leader Jacinda Ardern ruled out implementing a capital gains tax as long as she was prime minister.
"It's showing there's this fundamental unfairness in the tax system," Rashbrooke said. "Whether that will actually lead to change in practice, is another question.
"It would obviously lead you down the path to say a capital gains tax, but Labour has bad memories of its last attempt to try to bring that into law. So whether they want to go there isn't clear."
The party now faced a dilemma, he said.
"Either they do something about the issue and then have a big fight about tax, or they don't do anything, and they have to say, 'We've identified this huge problem and we're going to do nothing about it.'"