Page 8 – Tax, ideology and international comparisons
Taxes and politics
People ask three big questions about taxes. Who will the state take money from? How much will it take? What will it spend it on?
The size and impact of taxes, and what governments spend the money on, have varied enormously over the decades. The introduction of the welfare state in the late 1930s was a watershed. Until then taxation mainly involved taking money from people to fund activities such as law and order, or defence. Infrastructure was usually funded by borrowing.
Since the 1930s, the fundamental dynamic has shifted in stages to a situation where the state primarily takes money from some people and gives it to other people. In the 2006/7 year most government expenditure (funded mainly by taxes) went on social security and welfare (29%), education (14%) and health (14%).
National party promises of bigger tax cuts contributed to its win in the 2008 election.
Do high taxes harm the economy?
Low taxation lobbyists quote research that suggests high taxes reduce economic growth. Supporters of greater government investment point to Scandinavian countries which have much higher tax rates than New Zealand, and prosperous economies. Successful economies can have higher taxes and higher government investment (for example Sweden, Finland), or lower taxes and lower government investment (USA, Korea).
How heavily are New Zealanders taxed?
Within the OECD, a grouping of thirty developed economies, New Zealanders are just above average in the amount of tax they pay. This is measured as the ‘tax burden’: the percentage of the total tax take to GDP (the total value of services and products a country produces in a year). New Zealand’s tax burden has been 30% or above since 1980. Between 1995 and 2005 New Zealand’s tax burden rose 1%.
Labour-led governments have taxed more heavily than National-led governments – but not by much. Since 1980 the tax burden as a percentage of GDP has averaged 34.8% in the years when Labour was in office, and 33.8% when National was in office.
The Department of Tāke
In Māori the name of the Inland Revenue is Te Tari Taake. The Inland Revenue Department chooses to spell Taake with its long vowel marked with two ‘aa’s rather than one ‘ā’ with a macron, to distinguish it from the English word ‘take’.
New Zealand’s tax system
New Zealand has a relatively simple tax system when compared to other countries. There are very few tax incentives and other loopholes that complicate the tax systems in other countries – incentives, which are meant to encourage desirable behaviours, can also create opportunities for tax avoidance and increase the administrative costs of collecting taxes.
Tax makes up the majority (around 95%) of government revenue. In 2007 government’s taxation revenue came from:
- income tax from individuals – 44%
- GST – 20%
- income tax from companies – 17%
- other indirect tax (e.g. customs duties) – 9%
- other tax (e.g. ACC levies) – 6%
- other income tax (e.g. tax on investment income) – 4%.
From 1 April 2009 individual income tax was paid as follows:
- 12.5c per $1 on income up to $14,000
- 21c per $1 on income between $14,001 and $48,000
- 33c per $1 on income between $48,001 and $70,000
- 38c per $1 on income $70,000 and over.
In 2008 the company tax rate dropped from 33% to 30%.
GST of 12.5% is paid on almost all goods and services. There are only a few exemptions to this, such as renting for domestic accommodation and financial services.