How NZ's tax system compares with other countries

Otago Daily Times

7 hours ago

By Susan Edmunds of RNZ
In recent months, Treasury, Inland Revenue and an organisation representing accountants have suggested New Zealand needs a rethink of its tax settings.
Inland Revenue said taxes would have to increase to cope with an ageing population and CPA Australia said a capital gains tax should be considered.
But do you know how much the average person in New Zealand pays, and how that compares to other countries?
Infometrics calculated the average tax bill of a household with two median income earners, earning $72,900 per person before tax, not including any Working for Families credits.
Chief executive Brad Olsen calculated that they would pay $39,800 to the government, made up about $14,100 in income tax each, and $11,600 in GST. They might pay another $3800 a year in local government rates.
"Central government still collects the vast majority of money from households - at still over 90 percent of total funds collected by central or local government going to the Beehive coffers. The proportions have shifted slightly, in 2023 when we ran this same exercise, around 93 percent of tax or rates collected went to central government, and 7 percent to local government.
"In dollar terms, we estimate that our median household scenario would be paying around $985 more a year in rates than in 2023, but $3182 more in income tax and GST."
Rates rises were more noticeable because households received a direct notice in the mail telling them what they had to pay, Olsen said.
"In contrast, most households don't track - or get a demand for - their taxes from central government. For income taxes, PAYE workers never see their income tax as their employer withholds the tax and pays it to IRD. For GST, you don't directly tally up your GST and pay it to the government - it's all part of your daily spending. The difference in how you pay - and how noticeable that payment demand is or not - does behaviourally contribute to how we talk about these various increases.
"We spend a lot of time, fairly, on rates increases. That's reasonable scrutiny. But we spend a lot less time on tax payments than rates payments, even though tax payments are 10 times larger than rates payments.
"That's also true, in my mind, around current discussions on rates capping. Presumably if it's good enough for central government to impose on local government, it would be good enough for central government to tax-cap itself? For every dollar of additional rates paid in the last three years, tax paid by a household has increased by $3.23."
As people earn more through the PAYE system, their income tax bill increases.
A report by consultancy OliverShaw in 2023 said those in the top two tax brackets at the time made up 21.2 percent of taxpayers and paid 68.5 percent of income tax in the 2021 tax year. Those earning $180,000 to $300,000 constituted less than 2 percent of taxpayers, but paid 9.3 percent of income tax.
But while the dollar value of GST paid is higher for wealthier people, it may make up a smaller proportion of their income because they may save more, or put money into financial assets that do not incur GST.
Some wealthier people may also be able to earn income in ways that does not attract as much tax.
Simplicity chief economist Shamubeel Eaqub said people might be surprised to see that New Zealand is among the lower-taxed countries in the OECD.
On a measure of tax-to-GDP, in 2023, New Zealand had a ratio of 34 percent compared to the OECD average of 33.9 percent.
He said the country was only on the higher side of average because many countries had some significantly lower taxes on specific things, such as Ireland's low corporate tax rate.
On an income tax wedge basis, New Zealand was third-lowest in 2024, behind Chile and Colombia on a comparison of total tax as a percentage of labour costs.
This reflects the impact of Working for Families credits.
"There is no right or wrong number when it comes to taxes," Eaqub said. "If we want less public service, we pay less tax, if we want more public services, we pay more."
He said many countries had much higher tax bills - France has tax at almost 44 percent of GDP, Denmark at 43.4 percent and Italy at 42.8 percent.
"Italy has to but that's why younger people are leaving. There's a cost - if you tax a lot and make younger people poor they might go somewhere else. You can't arbitrarily increase taxes if you're not giving the value people are looking for. You need to maintain the legitimacy of the tax system."
New Zealand workers tend to shoulder more of the tax bill than those in other countries, because income tax on individuals makes up such a large proportion of the total tax take.
"We have big areas where we don't have any tax," said Council of Trade Unions policy director and economist Craig Renney.
"There are no capital taxes, no social security taxes. It means New Zealand's taxation structure looks very different to the majority of developed economies around the Western world. We tend to over-emphasise GST and PAYE. Labour is a smaller share of tax in other jurisdictions."
Any conversation about tax changes needed to get away from winners and losers and instead encourage people to consider what outcomes could be gained from higher revenue, he said.
"The way we historically structure tax conversations does not help."
New Zealand's corporate tax rate is now one of the highest in the OECD, at 28 percent.
NZ Initiative chief economist Eric Crampton said reducing the government's structural deficit would require a mix of reducing spending, boosting economic growth and increasing taxes.
"I would focus on spending before looking at taxes. Increasing revenue to cover the cost of current spending should depend on decent evidence that current spending delivers substantial value.
"If the government demonstrated that higher tax revenue was needed, increasing GST while shifting income tax rates and thresholds to compensate could make sense. Inland Revenue has been looking at different options for ensuring lower-income households would not be made worse off if GST increased. GST captures spending that comes from income that is harder to tax when it is earned, including income from capital gains, as well as spending by tourists.
"But first priority ought to be ensuring value-for-money in spending, especially where an ageing population increases fiscal pressure."