The report used OECD tax criteria and took account of Working for Families and other tax credits, and was based only on income, corporate and investment taxes. Photo: 123RF
The highest-income earners are paying their fair share of tax, according to new research.
The study, done for tax consultancy OliverShaw, has concluded the rich in New Zealand paid most of the tax collected, and the higher their income the more they paid; while the least well-paid often effectively ended up paying less because of the various tax credits and other payments they received.
The firm's principal, former deputy IRD commissioner Robin Oliver, said the report answered the question whether the highest earners paid tax at the same or higher rate as middle-income earners.
"This research shows clearly that, whether you consider taxable income or other measures, such as economic income, the answer is yes, they do.
"The key conclusion of the report is: average effective tax rates increase as the net real economic incomes of households increase."
Oliver said the tax system and the effective rates people paid were a reflection of the political and social choices made by governments to achieve redistribution of wealth, social support for lower income groups through such schemes as Working for Families, as well as funding of government activities.
He said a key issue was how to define income, whether it should include KiwiSaver earnings, government assistance, the rise in values of property and other factors.
But he noted the highest income earners were often in a better position to minimise their tax through investment in tax-friendly assets.
"Those who earn most also have most discretion about how they earn. Wealthier individuals generally derive a greater share of their income from sources other than wages and are encouraged to take advantage of the different tax rates payable on income from companies, trusts, property and PIEs (portfolio investment entity).
"Thus, increasing the top marginal income tax rate will likely have only a modest effect on their effective tax rate."
When Chris Hipkins took over as prime minister, he said the government should look at ways to make the tax system fairer.
Revenue Minister David Parker made a similar point almost a year ago, attaining data on the level of tax paid by wealthy people would be key to any future political debate on tax reform.
However, he told RNZ at the time Labour had no tax reform plans in place ahead of the election.
On the numbers
The OliverShaw report used OECD tax criteria and took account of Working for Families and other tax credits, and was based only on income, corporate and investment taxes, but not GST.
It showed the top two tax brackets for those earning between $70,000 and $180,000 a year and those earning above $180,000 made up 21.2 percent of taxpayers and paid 68.5 percent of income tax in the 2021 tax year. Those earning $180,000 to $300,000 constituted less than 2 percent of taxpayers, but paid 9.3 percent of income tax.
The report assessed that people with annual taxable income of $70,001 to $180,000 paid an average rate of tax of 23.9 percent; those on $180,001 to $300,000 paid 28.9 percent; and those on more than $300,000 paid 31.7 percent.
But taking into account various tax credits to find an average effective tax rate, the lowest taxed were retired, home-owning, high-income earners, while those paying the highest average effective tax rate were single, unemployed people in rented accommodation.
However, Oliver said all things considered the tax system was reasonably fair and equitable.
"You need a tax system which is relatively simple, rules that people understand, rules that people think are generally fair, what we've got is actually not too bad, but it's getting very, very strained at the edges.
"But real government expenditure is now becoming too high basically for the system to work."