Anyone with a basic knowledge of maths understands that people who earn more pay more tax.
To illustrate that, let's keep it simple and work off a theoretical 10% rate.
Someone who earned $50,000 would pay $5,000; someone who earned $500,000 would pay $5,ooo,000 and someone who earned $5,000,000 would pay $500,000.
Of course the one who earned more would have a lot more left after paying their tax and would be much more likely to have investments that gain in value, at least on paper, but don't incur tax.
The government might calls that economic income. Most of that is more commonly known as unrealised capital gains, the taxing of which would be very unfair.
That doesn't bother the government which set the IRD the task of researching high wealth individuals.
There is no surprise in what the research found:
The Government has wasted $5 million dollars, abused the information gathering powers of the IRD, and politicised officials, for the sake of a report that tells us nothing we don't already know, says the Taxpayers' Union.
Responding to the High Wealth Individuals Research Project report just released by IRD, Taxpayers' Union spokesman Jordan Williams said:
"There's nothing new in here. The report confirms that we have a highly progressive income tax system, compliance is good, and those who can afford to pay a lot more do so. Thanks for the newsflash, Captain Obvious"
"It also confirms that the wealthy obtain most of their economic income from capital gains that are not taxed. A fifth-form economics student could have told David Parker that."
"Fundamentally, the report concludes that high net wealth families are only paying 9% of their economic income in tax. But the report shows that most of that economic income is unrealised capital gains. No one in the world taxes that, and it is disinformation to encourage comparisons to those primarily earning PAYE income."
"The report totally ignores the risky nature of capital gains. The short point is that investing in a business is more risky than turning up to a job and demands appropriate returns to encourage much needed investment. Tax rates need to reflect that, as well as the fact that New Zealand, like all countries, compete for capital."
"Everyone supports evidence-based public policy. This report is policy looking for evidence and its timing is clearly designed to stoke resentment and justify an envy tax that will make New Zealand poorer."
Economic income is not income, it's a paper gain in value and it's the government's fault that people have made such steep capital gains:
New reports from IRD and the Treasury conclude the obvious: Labour's economic mismanagement has hurt everyday New Zealanders while the rich have got richer, National's Finance spokesperson Nicola Willis says.
Today the IRD has released a research project analysing gains in the capital gains and incomes of high-wealth New Zealanders from 2015-2021. Treasury has also released reports on the distribution of wealth and tax in New Zealand.
"These reports highlight the impact of Labour's sugar-hit economics. The Government's decision to embark on a money-printing, borrowing and spending frenzy has led to massive capital gains for some, at the expense of everyday workers," Ms Willis says.
"That's not a result of tax policies, it's the result of Labour's deliberate monetary and fiscal policy decisions.
"The IRD research shows that in 2017 the wealthiest New Zealanders made economic income of $1 billion. However this soared to a staggering $14.6 billion in 2021 as Finance Minister Grant Robertson's policies took hold.
"This is the direct result of the Government's decision to allow the Reserve Bank to print tens of billions of dollars through its extended quantitative easing programme and the massive blow out in its own spending, up $1 billion a week since Labour came to office.
"National's economic management approach of more conservative monetary policy, more disciplined spending and a greater focus on productivity had the direct opposite result during our last period in office. Treasury concluded between 2010 and 2018 the share of wealth held by the wealthiest New Zealanders actually fell.
"The Minister for More Tax, David Parker, can keep flogging the dead horse of a capital gains tax as much as he likes, but it doesn't change the fact that the main driver of inequality under Labour has been its own economic policies.
"The practical issues with imposing a capital gains tax have not changed. National continues to oppose a capital gains tax.
"The solution to New Zealand's economic problems is not more tax. The solution is a government that will bring spending under control and demand more accountability from agencies including the Reserve Bank and that will allow lower and middle-income earners to keep more of what they earn. That's what National will deliver."
There's dishonesty in the government's assertion about the value of economic income because it ignores the impact of inflation. The price of assets increase with inflation but the real value doesn't.
Another problem with the research is a lack of hard data:
The Treasury and Inland Revenue reports on taxation released today support the key conclusions of the Sapere Report commissioned by OliverShaw and released 18th April. However, the HWIRP does not deliver hard data that can be relied upon to develop sound tax policy.
"As the Sapere report noted, the methodology adopted by the Inland Revenue's High Wealth Individual Research Project (HWIRP) is inconsistent with the Treasury report and best international practice," said Robin Oliver. "Compared to the Sapere and Treasury reports it is therefore likely to paint a misleading picture of our tax system making it seem broken when it is not. In particular, the headline claim of HWIRP: '…when personal, company and trustee taxes are included, the median family in the high-wealth group paid 8.9% of their economic income in tax,' cannot be relied upon. It is based on, officials' assumptions about unrealised capital gains and a tax treatment of the family home that would not be acceptable to New Zealanders.
"Indeed, all three reports confirm that our tax system is not broken. As Geoff Nightingale of PwC has said, the tax system raises substantial money to fund government and does so relatively efficiently compared to other comparable countries.
"All these reports demonstrate that overall, our tax rules are fair in that the rich do pay tax in New Zealand and in general a person's tax increases as income increases even if income is more widely defined than it is under our income tax legislation," says Oliver.
HWIRP (page 91) shows the 311 high wealth households each paid on average $2.5 million in tax in 2021. The amount paid by this group increased from, $436 million in 2016 to $764 million in 2021 -- an increase of 75%. The rich pay tax and they are paying more."
The Sapere and Treasury reports show that for everyone it is normal for effective tax rates to be less than rates set out in the income tax law. The Inland Revenue report provides no such context and focuses only on about 400 selected high wealth households. The Inland Revenue report suggests that on average these high wealth households have effective tax rates materially lower than the Sapere report's estimates of 23% to 31%.
The difference results from assumptions and gathering methods used in the HWIRP. The Inland Revenue report:
- Adopts a selective definition of economic income that seems set up to suggest low effective tax rates for high income households.
- Ignores inflation and how this artificially increases the income from capital.
- Suggests an ideal tax system that takes economic theory to absurd levels – taxing the rental value of owner-occupied homes, taxing unrealised as well as realised capital gains and taxing companies at such a high rate that investment in higher productivity would vanish.
- Is not based on hard data but estimates by officials of how much income assets generate.
- Unjustifiably mixes economic and legal concepts in calculating effective tax rates.
"For high wealth households, Inland Revenue estimates that 83% of their income has been unrealised capital gains that are not taxed," says Oliver. "Including that in income naturally generates a low effective tax rate. However, this is just officials' backroom estimates of how much investments have increased in value. It does not measure cash or anything that these households can spend. No country has a comprehensive tax on unrealised gains because no one would want one. It is like saying the homeowner in a period of rapidly rising house prices has made huge amounts of income and should sell their house in order to have the cash to pay a large proportion of the proceeds to the government. Nonsense."
Not just nonsense but expensive nonsense.
The report wasted time and money on what anyone with a basic understanding of economics would have already known.
What's fair about wasting money on a report with several shortcomings including that it lacks hard data, ignores inflation and takes economic theory to absurd levels?
And is it fair that 21.2% of people (those earning more than $180,000) pay nearly 70% of tax and that around 50% of people pay no net tax?
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