Opinion: Tax is a powerful tool to prevent or reduce economic inequality. However, the way we collect government revenue in Aotearoa New Zealand helps perpetuate inequalities and provides insufficient money for public services.
Our tax system does not demonstrate compliance with Te Tiriti o Waitangi. Neither does it recognise wealth as a meaningful source of revenue: we do not tax assets, inheritances, or gifts (with some exceptions). And this is at a time when we need increased capacity to provide fundamental public services that deal effectively with a daunting range of economic, social, health and climate change crises, now and for the future.
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Aotearoa needs some essential tax commitments by political parties in 2023 for post-election.
Te Tiriti o Waitangi and tax
Historically our system has not demonstrated compliance with obligations under Te Tiriti. In effect Māori paid for their own colonisation through taxation and by transfers of land that amounted to unfair forms of tax. Consequent impoverishment and landlessness led to poverty for most Māori. This situation continues, with the median household net wealth for Europeans in 2018 being $138,000, compared with $29,000 for Māori.
Ideas on the future of tax policy that seek to honour Te Tiriti need to advance rangatiratanga, and also equity, as guaranteed in Articles 2 and 3 of Te Tiriti.
Our present tax system
In Aotearoa the government gets most of its tax revenue from:
* Individual income (PAYE, ie income that a person earns). This makes up a third of total planned government revenue in 2022-23.
* Business income – most companies pay a tax rate of 28 percent (about 13 percent of total government revenue).
* Consumption tax, ie tax levied on goods and services that are bought. New Zealand’s GST is 15 percent on almost all goods and services (20 percent of total government revenue).
Our tax system depends heavily, therefore, on income (salaries and benefits) and consumption. Wealth is not currently taxed (with limited exceptions such as local authority rates).
The lack of a focus on wealth
We have no form of wealth tax (other than rates). New Zealand is an extraordinary outlier in this sense: every other developed country, at the national level, taxes wealth, inheritances or property.
The bottom line of current tax design in Aotearoa is that some wealthy people pay a lower rate of tax than poorer ones. In 2021, 42 percent of people with more than $50 million were reported as paying income tax at rates lower (an average 12 percent of their income) than those on median annual incomes ($55,000-$60,000, who paid about 16-18 percent). Levels of poverty and inequalities are transmitted from one generation to another. These features of our current tax design seem incompatible with Te Tiriti.
And, given that critical sources of revenue are left untapped – wealth and most capital gains – government has less funding than it should to spend on the common good. The New Zealand government spends about 30 percent of GDP annually. Conversely, a number of Scandinavian governments spend more than 40 percent. In return, their citizens enjoy better public services and lower levels of health and social problems. New Zealand has many pressing social and environmental challenges, for which more revenue is required. These include inequalities, poverty, and health.
Let’s look at health
Tax policy helps drive the inequalities in income and wealth, and these generate inequalities in health and poverty. Their effect is compounded by the inadequacy of funding in investment in health services. A poor family is less able to afford good housing, with overcrowding leading to increased rates of illness. Poverty also leads to poor nutrition and the increased risk of poor health. In 2020 over 5 percent of working-age Pacific peoples, and 4 percent of Māori, had multiple long-term health conditions (eg, heart and diabetes), compared with 1.6 percent of the European/other group and 1.2 percent of the Asian group.
Specific tax policy changes for 2023
Here are some specific, concrete proposals to make our tax system fairer. They would be most effective with a new purpose provision in new tax law that would specifically reference compliance with Te Tiriti o Waitangi.
The changes are interlinked and would be mutually reinforcing:
1. A higher rate for those with high incomes. The top NZ tax rate is 39 percent on income over $180,000. In Australia, those with over AUD$180,000 pay 45 percent on the income over that amount. We propose a 50 percent tax rate on income over $150,000. To counteract any diversion of income into trusts or offshore accounts, greater transparency would help clarify the sources of money and those who benefit from it.
2. A net wealth tax. Wealth is an untapped source of government revenue. This could be redressed with a simple, low-rate annual levy on the wealthiest New Zealanders: Tax Justice Aotearoa proposes an annual levy of 2 percent on net wealth (ie, once debts are subtracted) over $2 million – eg, an annual $20,000 for someone with $3m in net assets. In 2021, 20 percent of Kiwi households had $2m of net wealth.
To curb attempts to get around the tax through asset-splitting, the annual levy would be supplemented by a tax on large-value gifts, including inherited gifts (those totalling more than $100,000) received over a person’s lifetime: that is, a gift and inheritance tax.
3. Openness in the tax system. The New Zealand public has a right to know who is paying what, when and how. That is the only way to ensure everyone is playing by the rules and tax avoidance is minimised. Improved disclosure and public access to tax-related information, along with independent standards to make sure this information is comprehensive and accurate, would provide greater transparency. A concrete step in this direction would involve a publicly accessible register of beneficial owners who benefit from companies or trusts. A further and related step would involve the reform of trust rules.
Doing something serious about intergenerational inequalities, poverty, and inadequacies in our health and other social services, requires a far greater focus on wealth as a source of government revenue. Without such a focus, election policies in 2023 that promise to address inequalities and provide increased capacity to fund public services, including comprehensive infrastructure development, and emergency preparedness, would have little chance of fulfilment. Tax polices need to change.
A longer version of this article appears on The Public Health Expert Briefing as part of a public health priorities series put out by the Public Health Communication Centre.