I looked at who pays how much tax (after National’s 2008 tax cuts) before. The 2012 figures from the Treasury are now out, so the latest numbers are below. One thing I always think is interesting about that is how skewed the income tax base is. More than a third of the income tax is paid by the 6% of income tax payers with the highest incomes. The 20% of taxpayers with the lowest incomes pay only 1% of the tax – a combination of their low incomes and low tax rates (most notably the 10.5% rate on incomes under 14k).
||Number of people
||Amount of tax
Clearly part of the reason higher income earners pay more tax is because they earn more money. But unfortunately the figures don’t specify what proportion of income was earned by each group, so we can’t line up income against tax and see how skewed incomes are, or how progressive the tax system is. And the figures also do not include anything about the distribution of cash benefits (most importantly tax credits, superannuation and welfare payments) – although there has recently been published some info on this that I come back to below.
I think that in a modern welfare state, if there is a big misalignment between those who pay the tax and those who receive the benefits, it can be very hard to restore a more sensible balance. In the crudest sense, those who receive the benefits vote for their continuation, and those who pay for it could be powerless to change the situation. Or it could be skewed in other ways, with the powerful able to control the political environment to prevent changes that would require them to shoulder a greater fiscal burden, or those who do not fund the government losing interest in the process of government itself . And all of this is even more of a challenge if there isn’t sufficient transparency about who is paying for what, and who is receiving the benefits.
More broadly, I think we can look at the welfare state as a more or less shared set of agreements and understandings about what one has to give, and what one gets in return. Citizenship isn’t really a mercantilist trading arrangement – at least I don’t think it is for most people – but this kind of analysis is interesting because I worry that it can undermine the basic trust that underlies society if some people feel that others are getting too much of a free ride, at either end of the income spectrum.
Around the world
It is interesting to try to get these New Zealand statistics in context. There is some easily available evidence from Australia, Ireland and the United States. For comparison with what follows, for New Zealand in 2012, the 54% of the population earning less than 30k NZ pay 12% of the tax.
We can start with a picture from Australia, from here
A little hard to interpret, but if you follow the proportion of taxpayers on the bottom of the chart out to the right, you can see that the lowest income 50% of taxpayers earn around 25% or so of the income and pay about 15% of the tax, although this does not include taxpayers who earn nothing at all (which, for reference, is 8% of taxpayers in New Zealand). So it looks fairly similar to New Zealand.
The Irish situation seems to be much more skewed. From these figures you can see that the 54% of the population earning less than 50k Euros earn 21% of the income in total and pay only 3.1% of the income tax.
And, perhaps no surprise given the general story on the skewedness of incomes there, but the United States is even more skewed on these figures, with the 50% of the population earning less than 32k US earning 14% of the income and paying only 2% of the tax.
A summary table.
Which would cause you to think that the best place to have a low income is the United States, at least as far as income taxes are concerned.
One note of caution amongst the many that are probably justified. These figures do not include consumption taxes (i.e., GST), – I assume that this would flatten the distribution somewhat because people on lower incomes save less money and therefore pay proportionally more consumption tax. And they do not include taxes on investment income or property – I assume that this would skew the distribution in the direction of higher income earners, since I assume they are the ones earning the most from their investments, but I don’t know this for sure – maybe low income retired people are also living off their investments to a large degree.
I just saw recent media coverage that talks about effective tax rates in New Zealand including the impact of tax credits and welfare programmes. The IRD reckons “high net worth individuals” (who have more than $50m bucks) pay around 34% tax on their personal incomes, and around 28% when other income taxed at lower rates was included. As for those on more modest incomes:
The parliamentarians found it was more difficult to calculate an average tax rate for middle income New Zealanders, but an indicative comparator for someone on an average wage was 17.9 per cent, although Working for Families entitlements would reduce the average net tax rate to 8.4 per cent for a single-earner parent with one child, or 2.3 per cent with two children.
That is to say, if you have a modest income and children, you pay almost no tax thanks for the tax rebates available for having children. As the Parliament concluded, when Working for Families rebates are included near half of all households:
effectively pay no net income tax, and roughly 40 to 50 percent of total net income tax is paid by those in the top 10 per cent income bracket.
Interestingly, the Treasury has recently noted that the total tax paid by the highest income earners fell when the top tax rates were put up in 2001, presumably because high income earners could structure their affairs to dodge the higher taxes. It will be interesting to see the numbers redone subsequent to the cut in the top tax rate in 2008.
Given all that, one would expect common cause between those who pay for the welfare state against those who benefit from it. But it is particular interesting that this income group conflict is not how it plays out in politics, which is to say that people do not line up on these issues in accordance with their economic interests. I note, for example, Niall Ferguson’s recent statement in the Reith Lectures that all young Americans would be members of the Tea Party if they knew what was good for them (because they face having to pay in the future for all of the entitlements the baby boomers created effectively for themselves).
In practice we see particularly young people voting against their economic interests all the time. One random example: there were students in the streets of Paris protesting against public sector pension changes that would reduce the contributions that those same students would have to make to future pension costs. This far and no further, they cry. We have come to raise our taxes. Odd.