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Dr Bryce Wilkinson: How do “we” fairly tax the rich?

Last week, Inland Revenue Minister David Parker gave a speech titled “shining the light on unfairness in the tax system”.

His speech defended an Inland Revenue investigation into the “tax paid by the wealthiest New Zealanders relative to their economic income”. He is proposing a Tax Principles Act in this context.

Parker assured us that this was in the interests of fairness, not envy. Yes, really.

In arguing that the tax system should probably soak the rich more, he asserted that:

  • New Zealand’s income tax system is not progressive;

  • New Zealand is not a highly taxed nation;

  • Wealth is being concentrated “into the hands of an ever-smaller cohort at the very top”.

All three assertions look false. First, on the facts, it is progressive. The top 3% of income earners in 2020 earned 18% of taxable income and paid 26% of the income tax collected. Research has found that the tax system remains progressive, even after factoring in GST.

The average income tax per person in the 3% group was $77,000 compared to a median payment of $4,100. How much more grasping would a ‘fair’ tax system be?

Second, New Zealand is a relatively highly taxed nation. Of 64 countries with a population of at least two million and a reasonably high GDP per capita, 39 had a lower tax to GDP ratio than New Zealand. Outside Europe, only Brazil and Israel had a higher ratio.

Third, on Statistics New Zealand’s estimates, the top 1% (and 5%) owned a smaller proportion of total wealth in 2021 than in 2015 (or 2018).

An article in the latest Sunday Star-Times by Max Rashbrooke presumed to ask, “How do we fairly tax the rich?” It appears that the “we” are a political majority who are not rich.

Apparently, “we” see no conflict of interest in this. Rashbrooke suggests it is fair that “we” should hit the rich with a more comprehensive capital gains tax, a wealth tax, and for good measure, an inheritance tax.

Of course, ‘we’ set the thresholds sufficiently high to exempt ourselves. “We” can be predatory because Rashbrooke assures us that the rich have few emigration options. That is how we like it.

Fair outcomes cannot be expected from an unfair process. Majoritarian plunder is immoral.

A single income tax rate has greater constitutional appeal. Redistribute through the welfare system.

Bryce is a Senior Fellow at The New Zealand Initiative, and also the Director of the Wellington-based economic consultancy firm Capital Economics. Prior to setting this up in 1997 he was a Director of, and shareholder in, First NZ Capital. Before moving into investment banking in 1985, he worked in the New Zealand Treasury, reaching the position of Director. Bryce holds a PhD in economics from the University of Canterbury and was a Harkness Fellow at Harvard University. He is a Fellow of the Law and Economics Association of New Zealand.

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