2020 Elections: Everything You Ever Wanted To Know About Tax But Were Too Afraid To Ask

Tax can be confusing – it seems to have its own special language, and politicians have a habit of saying things quickly and authoritatively about it that may not make much sense. So let’s clear that up and see how New Zealand compares.

The biggest fiscal promise from a major party so far in this election comes courtesy of Labor.

They want to raise the highest tax rate in New Zealand, for people earning more than $ 180,000, from 33% to 39%. What does that mean? What it doesn’t mean is this: Let’s say you have a rich aunt who makes $ 200,000 a year and says “Jacinda wants to raise my taxes to 39 percent.” No, this is not how taxes work.

New Zealand, and most of humanity, has something called a progressive income tax. The word progressive in this context has nothing to do with leftist political types who call themselves “progressives.” It simply means that as you earn more money, you progressively pay an increasing tax rate.

Taxes are set as parentheses, sometimes called bands, where a certain amount of income has a fixed tax rate. New Zealand currently has four tranches and the Labor Party wants to add the new higher tax as a fifth tranche. According to the party, only two in every 100 New Zealanders earn more than $ 180,000 a year.

New Zealand’s first tax bracket is set at 10.5 percent, from $ 0 to $ 14,000. That means all New Zealand income up to $ 14,000 is taxed the same amount. If you make $ 20,000 or $ 1 million this year, you are paying 10.5 percent of the first $ 14,000 you make.

As you move up the category, the tax rate increases. That’s the part where people get confused. A group does not apply to all of your income, it applies only to the money you earn in that range.

Under Labor’s plan, his wealthy aunt would pay an additional 6 percent income tax on money he earns above $ 180,000. With your salary of $ 200,000, your tax bill would increase by $ 1,200.

His effective tax rate, which is the average amount of taxes the government takes from him for every dollar he earns, would rise from 28.46 percent to 29.06 percent under the Labor plan.

What do the other parties want to do?

National has yet to announce its tax plan, but the party’s finance spokesman, Paul Goldsmith, has made it very clear in recent weeks that he will only support a plan with taxes as low as current or lower.

Goldsmith has been highly critical of Labor’s plan to create a new tax bracket that will apply to about 2 percent of the population. “The last thing the economy needs in the middle of a recession is higher taxes,” he said after the Labor plan was unveiled.

Speaking at RNZ last week, Goldsmith said he was in favor of progressive taxes, but offered a different definition of what progressive means. According to the National spokesperson, a system where the rich pay more taxes than the poor is progressive.

According to Julie Cassidy, professor of law and tax at the University of Auckland, that is not entirely correct. What makes a tax progressive is not that a rich person pays more than a poor person in general, it is that a rich person pays a higher percentage of their income in taxes. The rich, because they have more money, almost always pay more taxes than the poor.

There is a regressive tax. It is a tax that punishes the poor because they end up spending more of their income on it than the rich. New Zealand has a regressive tax that you probably paid today. It’s called GST.

New Zealand has one of the most unforgiving GSTs in the world. While many countries exempt staples such as milk, bread and vegetables from the tax, New Zealand does not. That means someone who earns $ 14,000 and takes a loaf of bread pays as much tax as someone who earns $ 100,000. For the rich, that tax is a peanut. For the struggling single parent, those extra GST pennies are tough.

In the late 1980s, the Labor Party was considering moving to a fixed income tax, where everyone paid the same tax rate. That would fit Goldsmith’s definition, but it wouldn’t be progressive. By global standards, that’s a pretty far-right idea. The workers’ tax cut campaign practically ended there and the flat tax never happened.

To make you really smart about taxes, let’s talk about Margaret Thatcher in a short paragraph. The former British Prime Minister came up with a tax idea for local rates that was so radical that many Britons still hate it to this day. It was poll tax, the idea that not only should everyone pay the same tax rate, they should pay the same amount of tax. If you were a millionaire or poor, you would write the same check to your advice. It existed for a few years, it was extremely unpopular.

And the smaller parties?

Act has put forth a plan to eliminate New Zealand’s middle tax bracket, so that all income from $ 14,000 to $ 70,000 is taxed at 17.5 percent. There is currently a 30 percent range for earned income between $ 48,000 and $ 70,000. The plan would reduce government revenue by approximately $ 3 billion annually. The party has promised to make up the shortfall by cutting things like support for KiwiSaver and contributions to the New Zealand superfund.

According to Cassidy from the University of Auckland, New Zealand shouldn’t cut tax brackets, it should add them. The country has very few tranches and income levels are too low, he said.

“If you look at our tax rates, the top rate is $ 70,000. These tax rates were introduced in 1986 and haven’t changed much since then. They haven’t changed with inflation either: $ 70,000 in 1986 was a good salary, it covers many today. of us, ”he said.

Looking at the existing brackets, he said it doesn’t make sense how big they are. Most contributors peak in the same group. “People who make $ 49,000 are very different from people who make $ 70,000,” he said.

Today’s politicians often say they want to “simplify the tax code” by removing the brackets. Forget about it, Cassidy says: The country shouldn’t be afraid to set more parentheses at higher rates for people who make much more money and lower them for people who make less money. Maybe try doubling the number of brackets to 10, she suggested.

As a case study, you can look at the United States in the 1950s. Generally considered a good decade for the economy, where the middle class was doing well, baby boom homes were cheap, and businesses were making big profits. The United States tax code had 24 brackets. It was a very progressive tax system under Conservative President Dwight Eisenhower, steadily increasing from a 20 percent tax on income under $ 19,000 (in current dollars) to a 91 percent tax on all income over $ 200,000. . That is not a typo. 91 percent. In the US In the 50s.

Does anyone have a plan to tax the rich that high?

No. In an economic debate today, all parties presented messages favorable to low-tax small businesses, except the Greens. The Greens have come up with a tax proposal they call an “action plan against poverty.”

Much of the attention has focused on the party’s call for a wealth tax. Unlike a tax on your annual income, a wealth tax is levied on the value of your assets. Taxes are generally quite low and are applied to homes or other important assets each year. Green MP Chlöe Swarbrick recently revealed that the most expensive thing she owns is her sofa, so she would be safe from the tax. The Greens want to collect 1 percent per year on assets worth more than $ 1 million. They say it would raise about $ 7.9 billion per year.

The Greens also want to create two new tax brackets. One would be set at 37 percent for income over $ 100,000 and the other at 42 percent for income over $ 150,000.

There’s one thing the Greens have proposed that has received little attention: They want the first $ 10,000 people make to be tax-free. This is one of those things New Zealand is a little weird about. Most of the countries we compare ourselves with do not charge any income tax on the very poor or the first part of the income someone earns.

In Australia it is called the tax-free threshold and goes up to $ 18,200. That’s right, you don’t pay any Australian income tax until you earn $ 18,201. In Canada, it is called the basic minimum amount and is $ 12,069. In the US it’s called the standard deduction and it costs $ 12,400 for a single person.

A struggling New Zealander earning only about $ 15,000 a year would pay 12.3 percent of his income to the government in taxes. A Canadian earning the same amount, after receiving GST reimbursement from the government, would end up without paying any income tax.

“I think it’s ridiculous that a kid doing a round of paper has to pay taxes for it. We need to have a tax-free threshold,” said Cassidy, who has spent most of her career analyzing taxes.

So what is a capital gain?

We need a final definition. You’ve heard the word capital gain a lot. That is the profit someone makes by selling a property or investment.

Countries treat capital gains differently. In some places it is just a regular income, in others it is considered a business profit. There is a special club for the few countries that do not tax capital gains at all. New Zealand is in that club, where income from your hands is taxed, but income from your money is not.

The goal of a tax system, according to Cassidy, is not just to raise money to run a country’s government. It’s also about creating equality. Progressive taxes, in theory, should make the rich a little poorer and the poor a little richer. History has shown that it is good business for everyone. The rich keep their heads, the poor see that their children are doing better.

How does New Zealand compare?

Well, not very good if you are poor.

The GST is punishing, the lower income tax rate is quite high and then there is the lack of a capital gains tax.

Cassidy says her college students look at the New Zealand system every year and compare it to others. “They do a report card on the tax system. Because fairness is so important to a tax system and New Zealand doesn’t have a comprehensive capital gains tax, it’s just devastating to our tax system. Look at a rich person. Who earns capital gain of $ 70,000 this year and a salaryman with a salary of $ 70,000. The salaryman pays 33 cents for his maximum earnings, the rich man does not pay anything. That is wrong, “he said. “That is wrong”.