Tax matters
08/02/10 12:00 Filed in: Columns
Article for Older & Bolder February 2010
The economist and writer J K Galbraith once sagely remarked that nothing is as conducive to social harmony as the screams of the rich as they pay their taxes. While he may have been exaggerating for effect, there is a kernel of truth in what he said. Whatever we may think about paying our taxes – and I have yet to meet anyone who is enthusiastic about doing so - we all like to feel that our tax system is fair and that all are paying their proper share.
A task force set up by the present National led government has just reported on our tax system and made a number of recommendations and so it is appropriate to ask the question: if those recommendations are followed will we end up with a system which is at least as fair as the one we have now. The answer to that, regrettably, is that we will not, particularly if the taxpayers in question are on modest incomes. That applies to the great majority of those aged over sixty five, over seventy five per cent of whom live on national superannuation as their sole source of income. Those who do rely solely on national superannuation will be only too aware that, thanks to the previous Labour led government, it moves with the average wage and is a percentage of it, but it is by no means a king’s ransom, and that ‘modest’ is an accurate description of it.
The reason why the changes proposed will further widen the gap between most older citizens and New Zealanders generally in the higher income brackets is because it is proposed to reduce the top income tax rate while increasing GST to 15%. There are several reasons why this will have a negative effect on low income New Zealanders.
The first is that income tax is a graduated tax. Those with high incomes pay proportionally more because they can afford to. This is part of what is regarded as fair in the egalitarian society New Zealanders are rightly proud to live in. GST on the other hand is a flat tax. A millionaire pays the same tax on the loaf of bread that they buy as a pensioner on a fixed income.
It is also important to be aware that transaction taxes such as GST are what are known as regressive taxes i.e. because the lower your income the higher the proportion of it you have to devote to the necessities of life you have to buy. The discretionary expenditure of those on lower incomes is reduced when GST goes up and so you can’t adjust the effects of the tax on your budget by buying less of something you don’t need in the way that a wealthy person can.
But most of all it is important to remember that when universal GST was introduced in the nineteen eighties, it was accompanied by a massive reduction in the top tax rate from 66% to 33%. This meant that the wealthy got a major windfall but those on the lowest incomes when this was translated down the progressive tax system got a mere five cents in the dollar relief while having to bear the brunt of the new tax. Those who complain about having to pay too much tax and demand a reduction seem to have forgotten that they have been enjoying the benefit of already having had one for the last two decades.
Ironically one of the justifications of that ‘reform’ was that it was a ‘better way’ of doing things. I didn’t agree with that at the time but there are alternative and better ways of running a tax system which were not canvassed by the current government review group. In my next column I’ll spell out what one of those might be.
The economist and writer J K Galbraith once sagely remarked that nothing is as conducive to social harmony as the screams of the rich as they pay their taxes. While he may have been exaggerating for effect, there is a kernel of truth in what he said. Whatever we may think about paying our taxes – and I have yet to meet anyone who is enthusiastic about doing so - we all like to feel that our tax system is fair and that all are paying their proper share.
A task force set up by the present National led government has just reported on our tax system and made a number of recommendations and so it is appropriate to ask the question: if those recommendations are followed will we end up with a system which is at least as fair as the one we have now. The answer to that, regrettably, is that we will not, particularly if the taxpayers in question are on modest incomes. That applies to the great majority of those aged over sixty five, over seventy five per cent of whom live on national superannuation as their sole source of income. Those who do rely solely on national superannuation will be only too aware that, thanks to the previous Labour led government, it moves with the average wage and is a percentage of it, but it is by no means a king’s ransom, and that ‘modest’ is an accurate description of it.
The reason why the changes proposed will further widen the gap between most older citizens and New Zealanders generally in the higher income brackets is because it is proposed to reduce the top income tax rate while increasing GST to 15%. There are several reasons why this will have a negative effect on low income New Zealanders.
The first is that income tax is a graduated tax. Those with high incomes pay proportionally more because they can afford to. This is part of what is regarded as fair in the egalitarian society New Zealanders are rightly proud to live in. GST on the other hand is a flat tax. A millionaire pays the same tax on the loaf of bread that they buy as a pensioner on a fixed income.
It is also important to be aware that transaction taxes such as GST are what are known as regressive taxes i.e. because the lower your income the higher the proportion of it you have to devote to the necessities of life you have to buy. The discretionary expenditure of those on lower incomes is reduced when GST goes up and so you can’t adjust the effects of the tax on your budget by buying less of something you don’t need in the way that a wealthy person can.
But most of all it is important to remember that when universal GST was introduced in the nineteen eighties, it was accompanied by a massive reduction in the top tax rate from 66% to 33%. This meant that the wealthy got a major windfall but those on the lowest incomes when this was translated down the progressive tax system got a mere five cents in the dollar relief while having to bear the brunt of the new tax. Those who complain about having to pay too much tax and demand a reduction seem to have forgotten that they have been enjoying the benefit of already having had one for the last two decades.
Ironically one of the justifications of that ‘reform’ was that it was a ‘better way’ of doing things. I didn’t agree with that at the time but there are alternative and better ways of running a tax system which were not canvassed by the current government review group. In my next column I’ll spell out what one of those might be.