The New Zealand tax system – facts, figures and global comparisons

 This post contains some basic information about tax in New Zealand, and is intended as a general resource for debates on the subject.

Life is tough at the bottom

Between 1985 and 2005, New Zealand had the biggest increase in income inequality in the OECD (OECD, Growing Unequal, 2008). Whereas someone in the richest 10% had typically earned 5-6 times as much as someone in the poorest 10%, they now earn closer to 9 times as much (MSD, Household Incomes in New Zealand, 2019).

With income (and wealth) more concentrated at the top, there is less to go around for others. In the core OECD, New Zealand has the seventh highest rate of child poverty, defined as children living in households with less than half the typical income. On that measure, one child in seven lives in poverty. In the best-performing countries, like the Czech Republic and Denmark, that figure is just one in 20 (https://data.oecd.org/inequality/poverty-rate.htm).

Among adults, 60% of New Zealanders are ‘economically vulnerable’, defined as lacking sufficient liquid assets to sustain oneself at the poverty line for three months (OECD, Inequalities in Household Wealth, 2018). This is one of the worst rates in the developed world.

This poverty and insecurity creates terrible social problems: poor physical and mental health, homelessness, struggles at school, loss of trust in society, wasted talent, and so on.

An upside-down tax system

Tax is one tool governments can use to reduce poverty and inequality, and enhance fairness. It can fund income support and retraining programmes for those down on their luck, as well as housing, health services and schooling that are especially important to those on low incomes.

But the New Zealand tax system doesn’t do a very good job of this. For a start, it requires poorer New Zealanders to pay an unusually large amount of tax. GST is levied on virtually everything they buy, and overall makes up an exceptionally large proportion of the country’s tax take: 30%, as opposed to 20% in the typical OECD nation.

New Zealand also levies tax on every dollar people earn. Many other countries have a tax-free band at the bottom. In Australia, you don’t pay tax till you earn over A$18,200; in the UK, the figure is £12,570.

At the other end of the scale, New Zealand’s tax system does not require a very large contribution from its wealthiest citizens – at least compared to what would be asked of them in other developed countries. This results partly from the ‘Rogernomics’ tax-cutting drive in the 1980s and 1990s, and can be seen in at least three areas.

1. Income taxes on wages and salaries

New Zealand’s top marginal tax rate, 39%, is low by developed-world standards. The top rate is over 50% in many Scandinavian countries (Sweden, Denmark, Finland) and Japan; over 45% in many European countries (Netherlands, Belgium, France, Ireland); and over 40% in Anglophone countries like the UK and Australia. The top rate in New Zealand was over 60% for the half-century between the mid-1930s and the mid-1980s (TJA, ‘Reforming Income Tax’, 2020).

2. Gaps in the income tax system

New Zealand does not levy taxes on income taken as capital gains (except in a few cases e.g. via the bright-line test). In 2019, New Zealand was the only one of 35 OECD countries without a capital gains tax (RNZ, ‘New Zealand is Joining the Modern World – Academic’, 2019). As 70% of capital gains go to the wealthiest 20%, the latter often pay very low tax rates.

For instance, if someone earns $1m in salary and pays $300,000 in taxes, that’s a 30% tax rate. But if they also earn $2m in untaxed capital gains, their income is $3m and their taxes are still $300,000, so they are only paying 10% tax overall. In fact, if (accrued) capital gains are counted as income, New Zealand’s wealthiest adults (those worth over $50m) pay on average just 9% of their income in tax, less than a minimum-wage worker (10.5%) or the average person (22%) (Inland Revenue, High-Wealth Individuals Research Project, 2023). Multi-millionaires, in other words, pay a lower tax rate than people working on supermarket checkouts.

In addition, many countries levy taxes on gifts or inheritances, recognising that they are an irregular form of income (on the economic definition that income is any increase in savings plus consumption, over a given period of time). The US and the UK both have estate taxes, albeit they only affect the wealthiest few percent. Ireland has a lifetime capital acquisition tax, in which the first €300,000 of gifts received in a lifetime are tax-free, but gifts over that amount are taxed. New Zealand had an estate tax for a century or so, but abolished it in 1991.

3. Wealth taxes

In addition to taxing income more thoroughly, most countries also tax wealth in some form. Some levy annual net worth taxes (Switzerland, Norway, Spain, Argentina, Colombia) on the wealthiest individuals. These taxes are usually levied at something like 1% of net worth. Switzerland’s generates revenue of c.1% of GDP (OECD, The Role and Design of Net Worth Taxes, 2018). Nearly all developed countries tax some more specific form of wealth, whether it be land, residential property or property in general. In the late nineteenth century, New Zealand had taxes on both property and land; today, local body rates are the nearest equivalent.

An insufficient tax take

The problem is not just that New Zealand’s tax system asks too much of the poor and not enough of the rich. It is also just insufficient across the board. New Zealand’s total tax take is around 32% of GDP, below the OECD average. Even setting aside Scandinavian societies with exceptionally large tax takes (over 45% of GDP in some cases), many European countries generate high revenues. Austria raises 42% of GDP in tax, the Netherlands 40%, and Germany 38%. Such countries get greater tax contributions from those who earn very high incomes, receive capital gains, or enjoy substantial property and other forms of wealth. Those revenues are then used to fund high-quality public services.

As New Zealand’s GDP is $345bn​ a year, its 32% tax take yields roughly $110bn annually for its public services (see below for details). If, however, it taxed at Austrian levels, its government would have another $34bn a year to spend; at Dutch levels $26bn, and German $21bn (https://data.oecd.org/tax/tax-revenue.htm).

Innovation economies are not low spenders

The countries often cited as innovation economies include Finland (tax take: 42% of GDP) and Sweden (43%). Both have capital gains taxes and Finland also has an inheritance tax. Overall their tax takes are far higher than New Zealand’s 32%.

It is true that Israel, another high-innovation economy, has a tax take of just 30%. However, Israel does have a capital gains tax. And across the public, not-for-profit and private sectors, it spends 5% of GDP on R&D (https://www.csis.org/blogs/perspectives-innovation/sustaining-israels-innovation-economy). Lifting New Zealand’s R&D spending (currently 1.4% of GDP) is unlikely to happen without substantial government investment. So New Zealand either has to raise taxes to match Scandinavian levels or cut quite a bit from other areas of spending – something that is hard to do without harming the poorest or eating into core services.

Where tax goes

Tax spending is sometimes portrayed as being dominated by low-value projects of interest largely to a Wellington-based bureaucracy. But although there is always room to improve how government works, New Zealand’s taxes are mostly spent in core areas like health and education, and spending is widely distributed across the country.

Of core government spending in 2020 of $108bn, just under three-quarters (74%) went on social security ($44bn), health ($20bn) and education ($16bn). In the former category, New Zealand Super was easily the largest spending item, at $15.5bn (Treasury, Financial Statements of the Government of New Zealand, 2020).

In geographic terms, research in 2013 showed that every region of New Zealand benefited from central government tax-funded services. Each Northlander, for instance, received $19,000 worth of public services delivered in their region. This $3bn total spending was equivalent to 4% of all central government expenditure, the same as Northland’s share of the population. Wellington’s $8.7bn ($17,700 per person or 11% of all spending) was similarly in line with their population share (NZIER, Regional Government Expenditure, 2013).

Opinions on tax

There is relatively little data on New Zealanders’ opinions on tax. However, data from the New Zealand module of the International Social Survey Programme shows a renewed interest in ensuring the tax system is progressive.

Q. Should the rich pay a larger share of their income in tax than others do?

                             1992    1999    2009    2019

Yes                      71%      60%      50%      68%

Neutral             27%      N/D      44%      31%

No                       1%        N/D      2%        1%

Source: International Social Survey Programme, multiple waves.

N/D = no data