Economy

NZ workers pay second lowest tax in OECD

New Zealand income earners pay a smaller share of their income on average than all but one other OECD country. In fact, if you include transfers like Working For Families, a family with one earner and two children will pay almost no net tax, the lowest rate in the OECD.

 New Zealand occupied the same position in both 2018 and 2017.

But the data, released in the OECD's annual Taxing Wages report, doesn’t tell the full story of tax in New Zealand. For one, it doesn’t include other forms of wealth or income like capital gains earned on property or shares, which are taxed in some form in most OECD countries, but not New Zealand.

The first measure the report looks at is the tax wedge, which is the total amount of tax paid by both employer and employee on a person’s income. 

The average worker pays less tax on their income in New Zealand than in most OECD countries. Source: OECD.

This is significant as many OECD countries, including the United States and the United Kingdom, charge separate social security taxes to fund things like healthcare and retirement benefits. In New Zealand, this money comes out of general taxation. 

On this measure, the average New Zealand worker pays 18.4 percent of their income in tax. This is half of the OECD average of 36.1 percent. Chile has the lowest rates, with workers paying just 7 percent. 

 But that only tells half the story, as many Kiwi income earners also receive some form of transfer payment from the Government, such as Working For Families tax credits. 

When transfers like these are included, a family comprising a single income earner plus a partner and two children pays just 1.9 percent of their income, less than ten percent of the OECD average of  26.6 percent. It’s also just a third of the rate paid by the next-lowest country on the list, Chile. 

When transfers like Working For Families are included, some workers pay almost no net tax. Source: OECD.

Part of the reason New Zealand’s taxes on income look so low by international comparison is the lack of any kind of social security taxes. For example in the UK, roughly a third of the tax wedge is income tax, with the there two thirds comprising both employer and employee contributions to social security.

Andrew Coleman of the University of Otago has long argued for bringing New Zealand up to international standards by incorporating some form of dedicated funding for retirement and social security into our tax arrangements. 

He was disappointed the Tax Working Group did not recommend any social security taxes as part of its recent report. 

“What amazes me is how the IRD, the Treasury, and the Tax Working Group continue to ignore international theory and practice when designing our tax arrangements,” he told Newsroom.

I am not opposed to them coming up with reasoned arguments as to why we should be different, but they seem to simply ignore the arguments,” he said. 

Independent Tax Consultant Terry Baucher urged caution when reading the OECD report. 

“It’s worth noting that the marginal tax rate on the average wage of $60,360 is 30 percent which is high by other standards,” he said. 

He also noted that people on the average income receiving tax credits would see the amount of money they received from the tax credits begin to diminish once they were earning above the abatement threshold.

“Someone with children who is on the average income, is above the working for families tax credits’ abatement threshold of $42,700 so they will be getting credits clawed back,” he said. 

It’s also worth noting, that while the OECD looks at the tax paid by the average worker, New Zealand has a relatively flat rates of income tax. This means that the average rate is relatively low for all income earners, whether they earn the average income or many multiples of that rate.

Many other countries have more progressive rates of income tax, meaning top earners pay much higher rates than people on the average income. 

This means that the tax system is not as redistributive as it could be, and is not tackling New Zealand’s rising inequality. 

While OECD data shows the income tax burden is relatively light in New Zealand, information from the tax working group shows just how heavily the Government depends on income tax, which comprises 40.2 percent of all tax revenue raised in New Zealand. That’s well ahead of the next largest contributor, GST, which contributes just 31.4 percent. 

Despite the low taxes paid by wage earners, the largest slice of Government tax revenue is from individual income tax. Source: Tax Working Group. 

But income tax is of course not the only tax individuals pay. Opposition finance spokesperson Amy Adams also noted that individuals are also hit by many other charges. 

“While the headline tax wedge looks low it does not represent the total tax burden for Kiwi families,” Adams said.

“When taking into account all forms of tax - including income tax, company tax, GST, local Government rates, petrol taxes and other excise duties New Zealand isn’t such a low-tax economy,” she said. 

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