So internet, such beneficial

What’s the internet worth, economically speaking?

I recently finished a project on the economic benefits of Internet use for businesses in New Zealand, as part of a team with some other folks from Sapere.

It was funded by Google and Internet NZ under the Innovation Partnership. You can read the report here from the Innovation Partnership website. Or get a gander at the launch event slides.

There has also been some press, for example, in the Herald.

A cows plus strategy, and clustering

Some thoughts prompted by ‘The New Geography of Jobs‘, by Enrico Moretti

This book is a great description of the economic geography of the modern United States and an explanation of how it got that way. It is also a primer for policy-makers interested in how to ensure more good “innovation sector” jobs. Mr Moretti talks about how the “brain hubs”, like San Francisco, Seattle or Boston, came about, and what to do if you find yourself (like New Zealand and most United States cities), wanting to transform your local economy over time while avoiding the cul-de-sacs and mistakes that others have fallen into along the way.

Headlines

Mr Moretti divides cities into places with good jobs, those without, and the places that could go either way. “Good” jobs are involved in the innovation sector, which is loosely defined as high-tech plus any other occupation that makes intensive use of human capital and ingenuity. Places without good jobs are mostly declining or declined manufacturing centres in the Rust Belt where the book starts.

Wider economic benefits from innovation sector jobs are very big. Mr Moretti reports that for every innovation sector job, e.g., a new software engineer at the Googleplex, there are an additional five jobs created, two professional jobs (e.g., doctors, lawyers, teachers, nurses) and three non-professional jobs (e.g., waiters, carpenters, taxi drivers, shop workers). Most sectors in the economy have these multiplier effects but those in the innovation sector are particularly big. So while employment in the innovation sector will never account for the majority of jobs (at the moment it accounts for around 10%), it has a disproportionate and positive impact on the economy overall. Although Boeing employs twice as many people in Seattle as Microsoft, it ultimately creates fewer local jobs.

There is not just a jobs effect but also a big income effect. Everybody earns more in a brain hub than s/he does doing the same job in a Rust Belt city. Your neighbour’s skill level affects how much you earn, regardless of your own skill level. This result is not necessarily intuitive, but Mr Moretti (on page 99) says there are three reasons for it. First, skilled and unskilled workers complement each other: an increase in the former raises the productivity of the latter. Second, a better educated labour force encourages the deployment of new and better technologies, raising productivity. And third, the economic magic of human capital externalities, i.e., when people interact they learn from each other, and those who interact with better educated peers ultimately become more productive and creative.

The result holds for employees of all skill levels. So a college graduate in Boston, where 47% of residents have a college degree earns $20k a year more on average than a college graduate in Yuma Arizona, where 11% of residents have a college degree. But the biggest impact is for the least skilled. A high-school graduate in Boston earns 34k more a year than a high-school graduate in Yuma. Part of this difference, says Mr Moretti, is compensating for the higher cost of living in Boston. But using a nifty longitudinal dataset that follows the same individuals over time, he finds that the same individual can make a very different salary depending on how many skilled workers s/he has around.

Learning from history

The early part of the book charts the decline of American manufacturing jobs and the rise of jobs in innovation economy. It explains the hollowing out of the American labour market, as new technologies favour high-skilled workers, reduce the need for many occupations that call for medium-level skills, and have little effect on occupations at the low end of the skill spectrum: jobs that involve non-routine tasks have not been particularly hurt by computers.

Since every city, of course, wants to be a brain hub, the book also explains how brain hubs developed, by way of sketches of the development of Seattle, Silicon Valley and Hollywood. This part is particularly interesting because it goes back far enough in time to show what Seattle was like in 1979 when Bill Gates and Paul Allen moved their then fledging business there. They did this not for professional reasons but for personal ones. Indeed Seattle seemed like a terrible place at the time: The Economist had recently labelled it the “city of despair”. And especially compared with Abuquerque, New Mexico where Microsoft was founded and which already had the beginnings of what might have become a tech hub. Nevertheless, they moved to Seattle and the rest, together with the decisions of many others to set up shop there over time, is history. Jeff Bezos started his new firm, Amazon, in Seattle in 1994 because by then Seattle had the engineers, programmers and venture capitalists that he needed to get started.

The new picture of economic geography

I saw this picture recently on Twitter (created by Reddit user atrubetskoy). The blue areas are responsible for 50% of US GDP. So are the orange areas. Twenty three successful cities.

Mr Moretti talks about why this clustering happens, and why is it that new software firms, which might be just two guys in their garage, decide to locate in San Francisco or Silicon Valley or Seattle despite the fact that these are amongst the most expensive places to live in the United States. The contrast with industrial economy firms is stark: they go where resources plus transport are cheapest, so paper mills are near forests, milk factories are near farms, and steel mills are near coal mines. The lobster industry is in Maine, because that is where the lobsters live, and the oil industry is in Texas, because that is where the oil is.

There are three factors that create clusters First, firms go where they think they will find good employees, which happens to be where all the other employers are. Second, they also want to find good suppliers, and customers for their products,hence the ecosystem. The venture capitalists of Silicon Valley are far more helpful to a growing firm looking for funding than the venture capitalists of other places with less developed ecosystems. And third, it turns out that innovation, collaboration and the creation of new ideas are highly influenced by proximity. Even small physical distances are enough to deter collaboration and information sharing. This is seen from networks of patent citations: inventors are significantly more likely to cite other inventors living nearby than inventors living far away. Similarly, I recall a study from Google some years back of information flows in the workplace that said that what you know is determined largely by where you sit (sorry I can’t find the reference just now). Mr Moretti says (p141), “being around smart people tends to make us smarter, more creative and ultimately more productive”. These cluster effects are intensifying because they are self-reinforcing, and because, once a cluster is established, the costs of moving it are overwhelming.

The policy of inevitability

The question for policy-makers, especially local economic development agencies, is therefore how to turn their city into a brain hub.

Mr Moretti explores a few options. Basically it is hard. The best bet is to have already got lucky and have had some innovation sector businesses set up shop. If that has not happened, then you could look at supply side ideas or at demand-side ideas to get things started (this is from the perspective of the labour market, so “supply side” means increases the number of workers, and “demand side” means increasing the supply of jobs).

On the supply side, the basic strategy is to attract highly skilled, young, creative types, and then expect that high-tech employers will follow, hoping to take advantage of the ready local labour supply. Mr Moretti is down on this approach, arguing that Berlin is the best example of this strategy but that Berlin continues to have amongst Germany’s worst unemployment problem and weak economic growth. That said, Berlin is widely considered to be one of the most interesting and vibrant places in Europe at present. Conclusion: there may still upsides for residents in adopting the supply side strategy, but it is far from a slam dunk case from an economic point of view.

In some industries, and Mr Moretti says biotechnology might be one, attracting stars is also important to encourage both other workers and to encourage employers. Qatar does this. So does Singapore. And probably other places with which I am even less familiar. New Zealand’s efforts to attract over-achievers from other countries to come and live here might also be an example, so when James Cameron or Julian Robertson come live here, they can help attract other people and establish an ecosystem. Mr Moretti talks about the cautionary tale of the University of Washington, whose efforts to build a classy economics department foundered when resources ran scarce before the star attraction programme was completed.

The demand side idea is basically about attracting high-tech employers to come set up shop. The main tool is subsidies or tax breaks as part of so-called “place-based policies”. Mr Moretti says around $60 billion a year is spent on them in the United States. The idea is to provide subsidies for the first firms to come along, and then stop the subsidies after enough firms have arrived that economic development is self-sustaining: the “big push” strategy aims to break the impasse that keeps high-tech firms from locating outside of existing high-tech areas.

Mr Moretti says the push needs to be really big, decisive and sustained, and it has to target the right people. And the big problem is this last point: local government needs to be in the business of picking some winners.

The track record of these types of policies is mixed, to put it nicely. Many hubs have nothing to do with government action: Silicon Valley, the biotech cluster in San Diego, and the movie cluster in Hollywood are examples. Even in smaller places, Portland Oregon being one that I am familiar with and that seems actively to encourage the inward migration of young, skilled people, the heart of the high-tech hub is a private employer: Intel’s semi-conductor facility in 1976 was the start of things there. More locally, it is not obvious that government had much to do with Weta, nor with Xero, both of which have substantial local ecosystems around them.

That said, internationally Israel and Ireland would be held out as examples of success, the former more so than the latter these days, and even there the intention of government spending was not to create a local tech sector but instead to develop innovative defense technologies. Taiwan is another relevant example, transforming from a rural economy to an advanced one courtesy of government-sponsored research in the 1960s and 70s. Policy-makers bet on several failed technologies, but also on semi-conductors, which turned out extremely well. The history of efforts by governments is not studded with success, however. Mr Moretti reviews the experience of Fremont California, where Solyndra, a major employer, maker of solar panels, and recipient of significant federal government support, went broke in 2011. It seems that the industry of making solar panels does not exhibit strong forces of agglomeration, although it is hard to find this sort of thing out without trying.

Smaller scale efforts to attract employers, e.g., Twitter’s recent move to central San Francisco, are very common and, in some cases, seem to pay off for the communities involved, i.e., the benefits from spillovers can be bigger than the cost in tax foregone. That does not make the residents happy necessarily, since they appear to be giving city tax breaks to enormous profitable companies.

A programme that successfully encourages development, that does not try to pick winners too directly, that targets incentives carefully, and that incentivises private investment is more likely to be a winner, says Mr Moretti.

So what to do

Sadly Mr Moretti does not offer too much encouragement. There are no straightforward answers it seems, and you will only know you have succeeded once you have succeeded. His policy agenda is fairly broad, mentioning vouchers to encourage people to move to areas where they are more likely to find a job, a boost to RnD, a major improvement in the quality and quantity of education especially in technical subjects, and a loosening of immigration policy, since immigrants seem to be a lot more inventive than locals in the United States.

What all this means for New Zealand, a place that is not a brain hub in many industries and is far from the world, is not especially clear. The picture is even less clear for regions within New Zealand, which are still further from brain hub status by comparison with the major centres of New Zealand.

But let’s say New Zealand wants to be a brain hub, i.e., we want to adopt some policies that will attract or create high-tech companies that will hire high-tech workers, and this will generate jobs and boost everyone’s income. Assuming we have not got lucky, i.e., we are not a brain hub already, and we have good education, immigration and RnD policies already, some possibilities include the following:

* Understand the situation, i.e., figure out what New Zealand is good at and not good at, what is useful and can be built upon and what is difficult and will need to be worked around. Thinking about how the whole hangs together (“the city of four million people” to quote Shaun Hendy) and how we can compete with much larger Australian cities that attract more people is useful.
* Back some local employers or employment initiatives with public money, and over time expand the ones that seem to be working (i.e., the example of Taiwan, but not of Solyndra). Bear in mind that tech venture capital firms expect only one of every ten investments to succeed, a few to muddle on, and the rest to sink without trace. Politically you are going to have to be resilient to failures with public money. Not easy.
* Connect with educated locals and encourage them not to leave. The experience of Otorohanga might be inspirational as well as educational at the level of the nation.
* Connect with your diaspora, and try to encourage them either to come back with their businesses and networks, or to take an active role in supporting local initiatives from wherever they are in the world.
* At a national level, I think it would really helpful if New Zealanders went to a more diverse set of places (and not just focusing on the UK and Australia). We are not sufficiently well connected to China and the coasts of the USA.
* Make some localised improvements to amenities. Perhaps just giving talented people a place to run into each other could be a useful step forward. ATEED is building an innovation hub to house high-tech firms: a cluster of them is clearly already developing on Viaduct Harbour Avenue, with Vodafone, HP, Microsoft and others already in residence, just to name the brands you can see on the door. Fonterra is moving in next door.

You could also get some useful ideas on talented people and how to attract, retain, develop and connect them from the ever-interesting McGuinness Institute, and their project TalentNZ.

Do not expect speedy miracles. Sustainable economic development takes a long time. You can see New Zealand’s exports and imports broken down by type below, courtesy of the MIT observatory of economic complexity. First is 1990. Second is 2010. See how many colours have changed?

NZ Exports 1990

embed_tree_map_sitc_export_nzl_all_show_1990

NZ Exports 2010

embed_tree_map_sitc_export_nzl_all_show_2010

Somewhere to live

I own a house in Christchurch with two friends. It is a charming three-bedroom character home in Spreydon with wooden floors, a sunny open-plan kitchen and lounge area, a double garage, and a decent-sized backyard with a fairly extensive garden. Lovely if you are in to that sort of thing.

For my sins (and for the princely fee of two dollars a year), I am responsible for its management. And that meant that I had the task of re-renting on a recent weekend after our previous marvelous tenants bought a house.

Shaky ground

Rental demand is very high in Christchurch at present. I have no idea what is really going on, but it seems that not as many people moved away as might have been expected after the earthquakes, and many people are now arriving to help with the rebuild. Although plenty of houses have been lost, not many have been built yet and the net result of all of that is huge interest in anything habitable and increases in rents.

Looking at the data on rents in Christchurch over time compared with the New Zealand average courtesy of Massey University does not seem to reveal so much. Average rents in Christchurch in February 2011 were 310 a week – the same as the average for the country. Rents from August 2012 were 330 (up 6% in the 18 months) for Christchurch versus 320 overall (up 3%).

More revealing, perhaps, is a more anecdotal report.

We had more than 2,500 views on our online advertisement on trademe in the two weeks before the open home. I took twenty or so phone calls and a handful of texts, as well as fifteen email inquiries. On the weekend there were 25 visits and we had 20 applications, eight of which were acceptable in the sense that I would have been happy to have those people live in our house. And of course in the end just one was successful.

How to win

There were two basic approaches taken by potential tenants, the tragedy and the salesperson.

The tragedarians inspired my sympathy. It would take a harder heart than mine to not be sympathetic to those who were being kicked out of their current digs for earthquake repairs or because the landlord was moving in, those who were squatting in a caravan with relatives or perched in a hostel looking for a place to move into with the family when they arrived in a few weeks, or searching for a place closer to family in the area after medical treatment.

In the event, though, this turned out to be the wrong approach to actually secure the lease. Sifting through the tragic tales to somehow try to determine the situation most worthy of relief would have required both wisdom and emotional strengths greater than those I possess.

At best, the tragedarians were playing a kind of lottery, no different in practice from the guy who filled in the form but never spoke to me, presumably chancing that, if he filled in enough forms in enough places, for some place he would be the preferred candidate.

Sell job

So, hard-hearted though it is to say, the salespeople won out in the end. What I was looking for was a decent long-term tenant who would look after the place, pay the rent, not generate any dramas, and tell me when something was wrong. Bonus points if you were prepared to tend the garden. People who found that out what I wanted early and could demonstrate they fitted the bill had the right strategy.

Successful was the person about whom we knew the most, because he was one of only two applicants who had the smarts to write to me beforehand to ask what we were looking for, reasoning that there was no point in applying for places whose criteria they did not meet.

Horrible was the process of calling the 19 unsuccesful applicants, particularly since for many of them there was no compelling reason why they did not suit other than blind luck, and for the others, well, no one filling in a rental application form actually wants real feedback on how they rate in a prospective landlord’s eyes. And so basically I feared not having anything coherent and not insulting to say if they asked me “why not”. And I did not like at all the power and status that I had by virtue of just having bought a house in Christchurch six years ago.

In the event, as often with fears, I need not have worried. The thing that made the calling most horrible was not that the unsuccessful applicants were upset, but that they were all so kind and understanding. It was as if they were sorry to have put me to the trouble of calling them all rather than confused and angry that I had not recognised their evident virtues. Not one of them asked me for any reasons, which made me meditate more than usual upon the apparent goodness of humanity, and made me suspect that this decision was far bigger for me than it was for them.

Strange what you can learn on the weekend.

Trouble at the top

I see in the news that CEOs are still getting pay rises bigger than their employees. CEOs pay has grown almost 10% in the past year, they say, compared with a 2.9% rise in average ordinary time earnings (and 1% consumer price inflation).

This is a trend that has been going on for quite a while, and it is much more of an issue in other places like the UK, where the government is requiring listed companies to have a shareholder vote on executive pay that will bind the company, and in the US, where recently the New York Times reported on 25 companies who paid their CEOs more than the companies paid in taxes. Cue dismay and disgust.

It does seem to be an issue all around the world, although these guys say it is mostly a US problem:

American chief executives received roughly four times what their Swedish counterparts in comparably sized companies did and 3.1 times that of a Japanese chief at a comparably sized company.

The average CEO at one of the 500 biggest US companies was paid $10.5 million a year in 2012, roughly split one third salary, one third other benefits, one third shares. Nice work if you can get it, although CEOs a bit longer in the tooth probably remember 2007 as the halcyon days – average US big-company CEO compensation peaked at $17 million each that year. And spare a special tear for poor Mr Dauman at Verizon who took home $84.5 million in 2010 but could only manage $43 million in 2011.

The ratio of CEO pay is obviously high enough to be a cause of significant political controversy, although CEO pay is not as high these days as it was earlier in the 2000s  relative to production worker pay on this data.

The golden goose

So why is this happening. Have we we got more companies that need leaders, driving up demand? Or perhaps fewer people coming out of CEO school looking for sandpits, reducing supply? Or maybe the value of what CEOs do has gone up over time somehow.

You can take your pick from a large number of hypotheses out there in the land of the commentariat. A selection of ideas follows.

  • Some, like these folk in the Wall Street Journal, argue CEOs generate their remuneration (which is often linked with share prices) from manipulating short-term results to drive up the value of their options, and don’t worry enough about long-term company health.
  • The Economist says that the increasing divergence between CEO pay and the pay of the unskilled worker is effectively due to globalisation. Referring to the UK, it says that CEOs with relevant skills are increasingly hard to find as companies diversify and internationalise (although presumably the HR department doesn’t lack for people willing to put their hat in the ring for $10 million a year). More soberingly, there is less to distinguish an unskilled worker in the UK from one in India or China these days, pushing down wages at the bottom end of the labour market as jobs move to where labour is cheapest.
  • Warren Buffett, billionaire investor, is on record as saying (see page 16 of his 2005 report to shareholders) “Too often, executive compensation in the U.S. is ridiculously out of line with performance”, and he particularly criticised large CEO exit payments:

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets.”

(Mr Buffett is not so indiscreet as to reveal how much time he has spent cleaning toilets in his lifetime).

  • The misalignment Mr Buffett talks about could be because compensation of executives in the US is more like a process of executives using their power to influence their own compensation and extract as much as they can rather than pay arrangements that are aimed at maximising shareholder value.
  • Or it might be because no Board wants to admit that they have a below average CEO by setting a below average pay package in this era when everyone knows what CEOs earn (although I think the world would be a better place if information on what people earned was more freely available).
  • Some say CEOs are mates with the people who set their pay and there is an unspoken rule that if they get approved higher salaries, then they will reciprocate when it comes to making the decisions for others. Or that those advising the relevant peeps on what the CEO should be paid are conflicted by other valuable work that they are doing for the CEO. Or that more generally, there just isn’t sufficient connection between company results and what the boss gets paid.
  • Paul Krugman, Nobel Prize winning economist, argues that the upsurge in executive pay was brought about by political and social factors, including an environment where the media and politicians are less likely to criticise inflated pay rates, weaker unions, and a sharp decline in marginal tax rates.
  • These academics argue that it is basically because the value of the companies CEOs run has gone up – similar to the Economist’s argument. So compensation for executives at the largest companies has risen because the market capitalisation of the largest companies has gone up. If you want to be paid more, work for a bigger company. Although reportedly business services, computers and banking are exceptions – they get paid more anyway. Leading some to say that “perhaps chief executives can add more value in more dynamic sectors”.

Or you might not really care why it happens, but just want it to stop.

Input to output ratio

Interestingly, precisely none of these people think high CEO pay has anything much to do with CEO performance itself. Which leads us on to the interesting question of whether CEOs actually matter at all.

And that in turn leads us on to this really interesting Atlantic article. I quote.

In their groundbreaking “Leadership and Organizational Performance: A Study of Large Corporations,” first published in 1972 in American Sociological Review, Stanley Lieberson and James O’Connor … asserted that the CEO’s influence was seldom decisive in a company’s performance…. “Industry effects,” such as the amount of available capital and the stability of the market, accounted for almost 30 percent of the variance in corporate profits. “Company effects,” such as the firm’s historical place in the corporate pecking order, explained about 23 percent. “CEO effects” explained just 14.5 percent. And even this impact should be viewed skeptically: it unavoidably bundles CEO actions that were genuinely smart and skillful with those that were merely lucky.

Which, if true, means that your task as the CEO is to get your company into an area that is growing quickly. Jeffrey Immelt, the CEO of General Electric (the third largest company in the world by some measures), is reported to have said “Not only could anyone have run GE in the 1990s, [a] dog could have run GE. A German shepherd could have run GE.” Previous CEO Jack Welch more or less agreed with this assessment.

Others are even more sceptical about the value of CEO. The article again:

James March, a management professor at Stanford, says that in any well-run company that’s conscientious about grooming its managers, candidates for the top job are so similar in their education, skills, and psychology as to be virtually interchangeable. All that matters is that someone be in charge. “Management may be extremely difficult and important even though managers are indistinguishable,” he writes. “It is hard to tell the difference between two different light bulbs also; but if you take all the light bulbs away, it is difficult to read in the dark.”

Eek. How much do we pay them again to keep the lights on?

Silver linings

The Atlantic eventually conclude with two interesting points:

  • One, it is important to ask not whether CEOs add any value, but when they add value, i.e., in what circumstances do you want a rockstar CEO and when would rather have someone less dramatic and ultimately less change-oriented.
  • Two, good CEOs can improve things a little bit. Bad CEOs can really stuff things up. I think anyone who has ever had a boss or been a boss knows this. It is much much easier to stop/ruin/doubt/undermine than it is to support/improve/really add something useful.

I note the irony in Atlantic feteing the then CEOs of Research In Motion, Mike Lazaridis and Jim Balsille, whose “newest BlackBerrys are flying off the shelves”. No more. This is Research In Motion’s share price  for the last five years (the article was written June 2009). Mr Balsille is particularly infamous for saying that he wasn’t worried about the iPhone, and didn’t think it would affect sales of Blackberrys. That said, they got the last laugh, to the tune of $12m between them when Research In Motion finally showed them the door.

Progressive conservative

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
(000) % (m) %
0-10k 667 20 198 1
<50k 2440 73 6,618 27
>50k 903 28 18,509 72
>100k 197 6 8,806 34

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.

Country People Threshold Income Tax
New Zealand 50% 30k 12%
Australia 50% 25% 15%
Ireland 54% 50k 21% 3%
United States 50% 32k 14% 2%

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.

Welfare differences

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.

WIIFM

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.

Why can’t we all just get along

Incorporating a modest sort-of book review of The Company of Strangers, by Paul Seabright, and The Spirit Level, by Richard Wilkinson and Kate Pickett.

Hmmm. This has turned out to be longer than expected. A short summary is called for:

  • Trust between citizens in society is crucial to make life pleasurable.
  • Trust in strangers is also crucial for the functioning of the economy – buying things you want depends on trading with strangers to an extent unprecedented in history.
  • Trust is fragile and undermined by substantial differences between citizens, including income inequality. New Zealand has quite a high level of income inequality according to recent OECD figures.
  • If trust is so important, then we want to craft public policy in ways that increase societal trust. Income redistribution is certaintly going to part of this, but there must be more to the picture too. The challenge is that these are complex, long-term, cultural issues and cause and effect are highly murky.

There you go. On with the show.

Trust and be damned

Trust in your fellow citizens is really helpful in an enormous number of ways. If you doubt this, consider all the effort you go to every single day because you can not be sure that someone else won’t burgle your house while you are out, or steal your car, or take your bag or your phone from where you leave it on the table in that cafe you go to. And imagine how much easier life would be with fewer ID checks, security scans, credit checks, locks or keys, and less fraud, theft, or violent crime, let alone less fear. What would it be like if you could really trust your neighbours, let alone those with whom you have more distant social connections?

I treat “trust” as being a firm and justified belief in the reliability, truth and good intentions of a fellow citizen. My hypothesis is that societies where people trust each other more create fewer conflicts between citizens, minimise protective behaviours (like locking doors) that are only necessary because of a lack of trust, and resolve conflicts that are created much more easily and positively. There is less mis-understanding, more helping out your fellow humans, and a higher level of what we might call “societal empathy”, which I think of as the ability to understand, share, and act as if you care about the feelings of someone else with whom you share space in society. As a result of this enhanced low-level (person to person) co-operation, there is less need for higher level (government to person) intervention, and society just becomes a nicer place to be.

I have read a couple of interesting books recently that touch on this issue of societal trust. Both authors argued that trust in society can not be taken for granted, and is undermined by substantial differences between citizens. This makes sense to me. You can’t trust people that you don’t empathise with, and empathy requires having some interaction with other people or some shared experience that makes you feel like you have something in common, and makes you willing to do something to help another person.

Friends with benefits

Paul Seabright’s “The Company of Strangers” tells the remarkable (but mostly unremarked) tale of how much your life depends on getting along with strangers. Mr Seabright thinks that we have reached the point where even the most basic activity relies on a web of international co-operation that functions without anyone being in charge overall. Just think about how you get the food you eat (probably in a supermarket – grown, processed and brought there from all over the world by people you will never meet), the clothes you are wearing (ditto – and even more complex than fresh food because it has a longer shelf-life), and the device you are reading this blog post on (likely built in Asia to a foreign design with components from all over the world, and charged using electricity brought to you through a complex process run entirely by strangers who have no idea who you are, or what you are using their product for).

Given how well this system works most of the time, one could be forgiven for thinking that it is the natural order of things. Mr Seabright says otherwise, reviewing the evolutionary history that has enabled humans, alone amongst all species, to come to trust strangers enough to co-operate on everyday activities to such a extraordinary extent. For most of human history strangers represented danger; they were to be avoided or treated with grave suspicion. Trading between unrelated people was a difficult and unpredictable business, and meetings between strangers could just as easily end in violence as in a mutually satisfactory exchange. But, once we really got the hang of it – which has only been in the last few hundred years – this trust and the trading that has resulted has enabled remarkable improvement in people’s lives all over the world, (as well, of course, as leading to a bunch of other developments of more questionable social value).

The trust system relies on a network of “institutions” – in the economist’s sense of sets of rules, both formal and informal that govern social behaviour – that mean that humans generally treat strangers as honorary friends. We are prepared to deal with strangers in accordance with the rules in the expectation that they too will follow the rules, and the rules or institutions that have been developed are robust, i.e., reliable enough to be taken for granted most of the time, and self-reinforcing to a large extent, i.e., in a variety of ways citizens punish those who betray others’ trust.

The economic system also works because no one really has to think too deeply about the systemic consequences of the actions they take in their little piece of the world. People proceed simply to make decisions that seem to them the right ones within a framework of rules set by the society in which they dwell, and the insititutions as a whole emerge from that behaviour – what we might call “short-sighted co-operation”. To use the example of a trading situation, I can sell you whatever it is that I make without worrying too much about the use you are going to put it to. As the extreme cases, Mr Seabright talks about firms that make cluster munitions, or people who work in nuclear weapons laboratories. In both cases, employees simply do not spend a lot of time considering the negative consequences of their jobs, but like most others, they focus on doing the job they have as best they can. These blinkers are not required in order to make the economic system work, but they do make it a lot more effective because they enable a lot more trading to happen. Consider the time and difficulty of buying a television on hire purchase (where you need to establish your creditworthiness) compared with paying cash for the same item (where you are relying on the credibility of the bank that issues your currency). If one had to be reassured of the good intentions and positive impact of all buying and selling, our market system would work vastly less effectively.

Mr Seabright discusses the limitations of the trust system. It can break down because trusted people turn out to be untrustworthy, or because the short-sighted co-operation leads to society doing things that are unsustainable for society as a whole. He talks about a wide variety of different forms of societal co-operation – cities, environmental issues, the market system itself, firms and families, the growth of knowledge, and also about social and economic exclusion in the form of unemployment, poverty and illness – and discusses why they have emerged, the constraints and difficulties they present, and the prospects for the future.

The book talks in some detail about the system of money and about banking, and discusses in particular lessons that can be drawn from financial crises. There is a particular application to the events of 2007 when, as the real estate market turned sour in the United States, banks quickly became extremely unwilling to lend money to each other, uncertain as to the others’ exposure to what were sure to be substantial property losses. The speed with which the disaster evolved and the extent of the damage it did – leading to both wide-ranging (and expensive) intervention by the US Federal government in the financial markets, and enormous financial losses for shareholders in affected banks – just emphasises how amazing it is that we put so much faith in the financial system as a normal part of our everyday lives. If my experience is typical, we do not really think at all about the risks we are taking in depositing our money in a bank, or borrowing someone else’s money via a bank to buy something that we want without having to save what it costs, like a house.

In the last section of the book, Mr Seabright discusses the development of collective action that societies take to respond to some of the perceived short-comings of the market system, both within their own borders, and in co-operation with other nations. And in the last twenty pages or so, he discusses how fragile this reliance on strangers is, particularly in terms of relations between states and what the prognosis is for the future.

Mr Seabright’s book is very good on economics: indeed, the book is in part a clever re-telling of basic micro-economic theory – when markets work well, when they don’t, what can be done about it in either case. His book is less focused on issues apart from market-based exchange, like the importance of trust and reliance on strangers for community life and the enjoyability of life in cities.

Nevertheless, I think his basic point is extensible beyond economics: modern life requires thorough-going trust of strangers, so modern life is going to get more and more difficult if people trust each other less. If this is right, then public policies that increase societal trust could be useful and indeed increasingly necessary.

Esprit de corps

“The Spirit Level”, by Richard Wilkinson and Kate Pickett focuses on income inequality in societies, and links higher levels of income inequality with a very wide range of societal ills. Their basic point, substantiated with a great deal of data, is that societies with less equal income distributions do worse in a very great number of ways. They have worse mental and physical health, higher rates of obesity, lower life expectancy, worse educational performance, and higher rates of teenage pregnancy. They are also more violent, more crime ridden and suffer from less social mobility. This is shown both across countries and, for many of the same measures, across states in the United States with varying levels of income inequality.

Note that the negative effects referred to are not because countries or states are poorer than their comparators. They relate just to the level of income inequality, regardless of the total income level. Higher incomes are associated with higher life expectancy, to take just one example, but at any level of income, a less equal income distribution will mean lower life expectancy for the population. In this way the social ills tracked are shown to be related directly with income inequality.

Also note that the negative effects of income inequality are not just confined to the poor. It is true that, on many of the measures, poorer people in a society do worse, with lower life expectancy and higher rates of imprisonment, for example, that those with higher incomes. But, from the data, even those on high incomes are better off in a society with a more equal distribution of income. Greater equality helps the poor most, but helps all levels of society to some extent (except perhaps, say the authors, those who are very rich).

The scale of these differences between societies is enormous. As the authors say (p181 in my hard-back version), across whole populations, rates of mental illness are five times higher in the most unequal compared to the least unequal societies. People are five times more likely to be imprisoned, six times as likely to be clinically obese, and much more likely to be murdered. For all of a large number of social ills, living in a society with more equal income distribution means you will be socially far better off.

Put another way (p261), if the United States were to reduce its income inequality to about the average of the four most equal of the rich countries (Japan, Norway, Sweden and Finland on The Spirit Level data), rates of mental illness and obesity might be cut by two-thirds, teenage birth rates could be more than halved, prison populations could fall 75%, and people could live longer while working around two months less a year. At the same time, the proportion of the population feeling they could trust others might rise by 75%, with obvious positive consequences for the quality of community life.

Interestingly the book also refers directly to the impact of higher income inequality on trust within societies. There is long-term evidence quoted in the book that greater levels of income inequality reduce the extent to which people feel they can trust their fellow citizens and the extent to which they are willing to look out for them. In the terms of my hypothesis, greater income inequality makes citizens feel they have less in common with their fellow travellers, and this makes them less inclined to do anything to help others out.

How much equality

Usefully , there has been some news media recently about New Zealand’s relative level of income inequality. An OECD study has found that New Zealand and Sweden (!) have bolted up the international rankings for income inequality in the last 25 years. Most of the change apparently happened in the period from 1988 to the mid-1990s, with the nation above the OECD average level of inequality since then despite incomes becoming slightly less unequal since 1995.

The summary of the OECD study itself says several interesting things:

  • Income inequality has slightly declined since 1995 after growing sharply for the ten years before that. There has been income growth for all, but the middle class has been doing particularly well, reducing inequality in the income distribution.
  • Poverty has grown throughout the last 25 years to levels similar to the rest of the OECD (about 11% of people are now living on less than half of the median income, which is the definition the OECD uses for poverty).
  • In terms of distribution, the proportion of children living in poverty has grown to 15% – at the higher end of OECD figures – and poverty among younger adults has also grown. Poverty amongst the elderly, on the other hand, is amongst the lowest in the OECD, at 2%.
  • Poverty is highly correlated with unemployment. Almost half of people living in households where no one works are poor, compared with 4% of households in poverty if there are two or more people working.*

If societies with more equal income distributions are better places to live, then New Zealand became a less nice place to live through until the mid-1990s, and since then it has slightly improved. I guestimate that the sharp decline in equality after 1985 was caused in large part by sharply rising unemployment, which peaked in the late 1990s and then fell away to very low levels in the 2000s.

[then]

In terms of politics, the extent to which people think increasing inequality is a good thing or a bad thing varies quite a lot between even right-thinking individuals. And many people don’t like the idea of not liking inequality because it implies that they have to do something about it – especially by taking money from people who have more and giving it to people who have less.

I think some inequality is useful and important, but too much is likely to be bad, in the sense of doing more harm to society than good.

The economically useful part is when differences in income between different people reflect differences in the value of different jobs. These differences help guide people in making choices about what work they want to devote themselves to. Surgeons command higher salaries than baristas in large part because society is willing to pay more for quality surgery than they are for quality coffee. The differences in salaries between these two groups will help ensure that roughly the right number of people work as surgeons relative to the number that work as baristas. Income differences can be pro-social, i.e., they work for the good of society, in these circumstances.

Human beings, however, seem to have very strong views about fairness that limit appropriate distributions of income between different people. Some concept of fair play is built firmly into society, and so it seems normal for people to express concern and want to do something politically about income differences that are not justified or justifiable (my hypothesis is that this justification is made or should be made on the basis of the usefulness of a particular income distribution, from a society-wide point of view). We seem willing as a society to tolerate a level of income inequality, but once it gets out of hand, there is strong societal discomfort, condemnation, and public policy action to put in place a more even distribution. A lot of the debate that we see about economic policy seems to operate in these terms. Note that this is in a country where people generally do not get paid much by rich world standards, where the salary rates for the best paid do not reach the stratospheric levels of other nations, and where the systems for income redistribution are already very extensive.

What is to be done

If we are going to make public policy with a closer eye on how it might affect the level of trust between citizens, it is clearly going to require a much better understanding of what makes people care about others. As Rudyard Kipling wrote in “We and They”, quoted in The Spirit Level “All the people like us are We, and every one else is They”. If it is a good thing for society that everyone look out for each other more, how should it set things up so that people empathise with their fellow citizens?

The making of “they” can be incredibly powerful and I you see it all around me all the time. A person who receives public assistance is either one of us fallen on hard times, as the Dom Post had it the other day, or they are one of them – a work-shy dole-bludger in need of harsh treatment for his/her moral failings. Mr Seabright recounts an ingenious experiment from Benin in 2001 (p294) that demonstrated that voters would prefer policies that enriched them personally at the expense of neighbouring citizens over policies that would be of more general benefit to the nation. The tendency for politics especially to tribally appeal to supporters and define all others as different and dangerous is a constant threat even in liberal democracies like the one in which I am fortunate enough to dwell.

So the question is how do we encourage people in society to look out for each other, and not just those who are the same as us (although that would be a good start), but others who are different but not less worthy of our respect and, yes, assistance, because of that.

On my read, both books are less good on solutions and the policy agenda than they are on establishing their basic points. I am sure this reflects the long-term, uncertain and difficult nature of these problems – which therefore means they are more amenable to political solutions rather than careful policy analysis that weighs up the consequences of alternative approaches.

But from the books, some practical steps to build a more trusting society might include:

  • Redistribute earned income, i.e., try to ensure that people get a more equal recompense from working. The most obvious way to do this is with policies that reduce unemployment, since unemployment is closely tied with poverty, and also policies that raise wages, i.e., encourage the nation to focus on producing things that the world is willing to pay a lot for, and ensure the education system makes the maximum contribution to educating people for high-wage work.As part of this redistribution, The Spirit Level also suggests constraining the forces that generate inequality, in particular the extremely high levels of CEO pay, which perhaps is less an issue in New Zealand. The British government is talking about introducing a simple mechanism for shareholders to vote on CEO pay, intending that this will give more direct control by company owners.

    The Spirit Level also suggests employee ownership as a solution (rather than such extensive ownership by investors with only a financial stake in the company. They argue that more employee ownership would encourage a more long-term, less rapacious and more fulfilling (for employees) style of capitalism if it were combined with more participatory management methods.

  • Redistribute disposable income – i.e., a more progressive welfare system. It isn’t clear to me where the limits of redistribution lie, but it does seem to me that New Zealand is quite progressive already, with 70% of the tax being paid by 25% of the taxpayers. Other tax changes, like introducing a higher rate of income tax for those with very high incomes, seem to be mostly of symbolic effect – they don’t raise enough money to change the distribution of taxation very much at all.
  • Provision of public services with public money, especially health, education and welfare services, can help even up society by effectively insuring citizens against the financial burden of education, ill-health or economic or social crisis. The quality of these services also matter: Mr Seabright discusses the importance of a “secular, multi-ethnic and liberal” education to ensure that citizens learn “how to live peacefully and profitably with people whose community and religion are not one’s own”.
  • Socialise these ideas – The education system is far from being the only place where people learn how to behave. This point is really just a sustained effort to convince people that the world can easily be a different and more pleasurable place to live, and that improving things is partly down to them and how they live their lives every day. So get to know your neighbours, start a after-school programme, run a block party, join a community group. Get amongst it citizens, the health of your nation is at stake.

* The OECD also mentions that New Zealand does a good job of targetting its welfare at the poorest – one third of total cash benefits go to the poorest 20% of the population – only Denmark and Australia do better. Which is probably just as well, given how little money our nation has to distribute by comparison with the rest of the (much richer) rich world. (It amazes me that managing to get only one third of cash benefits targetted at the poorest 20% is considered a good performance – however, that is for another day).

** These specifics come from The Spirit Level, where the game is discussed from page 199.

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.