Taxing the rich

There was lots of talk about taxing higher income earners more in the election campaign. In particular:*

  • Labour said it would introduce a new tax rate of 39 cents in the dollar for income over 150k (currently 33 cents), and reduce to zero the tax rate on income below 5k (currently 10.5%).
  • The Greens proposed higher income tax rates at all income levels (including a 39 cent rate on income over 80k), except for those earning less than 10k, who would pay no income tax.

To some extent both proposals seem to be based on an argument that taxing those on higher incomes is fairer, and that at present the lowest income earners are too highly taxed. The Green party proposes to raise income tax for everyone except those earning less than 10k – so the justification for its proposal would presumably also be that higher taxes in general are useful and important to support other policy priorities.

It is worth noting though, that those on higher incomes already pay a lot more income tax than others. This is not just because they earn more, but also of course because the income tax rates get higher as incomes grow. The current tax rates start at 10.5% for incomes up to 14k, and go up to 33% for incomes over 70k. So anyone who earns more than 70k pays three times as much income tax for every extra dollar s/he earns than those who earn less than 14k.

It is interesting to see how these rates shake out in practice, i.e., applied to  incomes for real people. The Treasury releases the helpful “Facts for Taxpayers” with every Budget in May. From the table for the 2011 Budget, I have made this slightly simplified version of who earns how much and how much tax they pay.

Annual taxable income (Budget 2011)**

Number of people Amount of tax
(000) % (m) %
<10k 677 20 221 1
<50k 2519 75 6903 30
>50k 823 25 15907 70
>100k 164 5 6958 31

Some facts are immediately obvious:

  • Incomes are low – 75% of those who pay income tax earned less than 50k in 2011 – this is 2.5 million people out of total of 3.3 million taxpayers.
  • The tax system is quite progressive – i.e., the more you earn, the higher the proportion of your salary that you contribute. The 25% of people on more than 50k paid 70% of the tax in 2011. The 20% of taxpayers on less than 10k (which includes 244k people who have a zero income) pay 1% of the tax.

I had a look at the same numbers since 2002. These tables show the proportion of people in each band over time, and the proportion of tax they pay. If I had the genius of Keith Ng, I would do a data visualisation but sadly I do not.

Proportion of people in each salary band by year (%)

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Salary band
<10k 20 20 21 21 21 22 22 23 25 26
<50k 75 76 79 78 80 83 84 87 86 87
>50k 25 24 21 22 20 17 16 15 13 14
>100k 5 5 3 5 3 3 3 3 2 3

Proportion of income tax paid by people in each salary band by year (%)

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Salary band
<10k 1 1 1 1 1 1 1 2 2 2
<50k 30 32 36 34 37 39 43 45 45 47
>50k 70 68 64 64 62 60 57 55 54 53
>100k 31 29 26 29 27 27 25 24 24 24

We can see some interesting trends:

  • Incomes are growing over time – The number of taxpayers earning more than 50k grew 7% a year from 2002-2011. As a proportion, taxpayers in the more than 50k bracket have grown from 14% in 2002 to 25% in 2011.
  • Tax incidence is growing more progressive – Those earning less than 10k (including those with zero income) paid 1% of tax in 2011 – down from 2% in 2002. The proportion of tax paid by those on more than 50k is up from 53% in 2002 to 70% in 2011. Those on more than 100k pay 31% of tax in 2011, up from 24% in 2002.
  • National’s tax cuts in 2010 do not seem to have made the tax system more regressive. On the contrary, the porportion of tax paid by higher income earners has gone up from 64% in 2008 to 70% in 2011.

Presumably a lot of this extra progression (i.e., the higher and higher proportion of tax paid by those earning more than 50k) reflects growth in incomes over time. The number of people earning more than 50k has grown 8% a year since 2002, while the number of people earning less than 50k (including those who earn nothing) has fallen a gentle 1%.

We can try to compensate for this growing incomes effect by calculating the amount of tax paid per person across income bands. This is just the total income tax for each band, divided by the number of people in that band. The results are shown below.

Average amount of income tax paid per person in each salary band by year ($)

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002
Salary band
<10k 326 348 373 364 388 468 462 474 553 547
<50k 2740 2937 3246 3492 3753 3502 3491 3454 3393 3393
>50k 19328 20635 20917 24480 24884 25807 25679 25281 25030 24997
>100k 42427 49106 49975 56420 57407 63042 62294 62179 61915 58870

You can see that the average amount of tax paid has fallen across all income bands since National came into power in 2008. For those on less than 10k (which includes those with zero income), this is a continuation of a long trend – tax has fallen from 547 in 2002 to 326 this year.

You can also see the impact of National’s income tax cuts:

  • Those earning less than 50k (including those with zero income) have seen their tax fall from an average of $3492 in 2008 to $2740 this year.
  • The average income tax paid by those earning more than 50k has fallen from 25k in 2008 to 19k in 2011.

From this you can argue that most of the tax cuts, in an absolute sense, went to those who earn the most. So the total tax paid by those earning more than 100k has fallen 14k (from 56k to 42k) since 2008, compared with the total tax paid by those earning less than 50k falling by $500 (from 3.2k to 2.7k). But this is a direct result of the progressivity of the tax system – i.e., tax cuts mostly benefit higher income earners because higher income earners pay most of the tax.

As we saw above, in practice the proportion of tax paid by higher income earners has grown over time rather than fallen. And the tax cuts have been reasonably even spread – the average amount of tax paid by those earning more than 50k fell 21% between 2008 and 2011, compared with 22% for those earning less than 50k. Those earning more than 100k did a bit better – their average income tax bill fell 25% – reflecting the impact of removing the top tax rate.

You can download the data I compiled from the Treasury’s Key Facts for Taxpayers. I can send you the documents from 2000-2006 as well if you like (the 2007-2011 versions are on the Treasury website and the Treasury helpfully sent me the 2000-2006 versions). Drop me a line on twitter or use the contact form.

 

* There is a lot more to both parties’ tax policies than this – the focus here is just on income tax.

** The Treasury says that these numbers include tax on NZ Super and major benefits, and exclude ACC levies, Working for Families tax credits, and anyone under 15. Data is projected for the year ended March based on the Household Economic Survey from Statistics New Zealand. The Ministry of Social Development says that nearly all households earning under $70,000 a year are eligible for Working for Families. So I would expect that higher income earners would be paying an even higher proportion of tax
if these tax credits were included in the numbers.

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