Tuesday, 23 March 2010

Proposed tax changes

I have been asked about my thoughts on the proposed tax changes in New Zealand. Currently New Zealand has a progressive income tax structure and a sales tax. Individual income tax is

Income Rate
Less $14,000 12.5%
$14,001–$48,000 21%
$48,001–$70,000 33%
More $70,000 38%

There is a 1.7% insurance rate that is taken at the same time. Companies are taxed at 30%. Sales tax (Goods and Services Tax) is 12.5%.

The system is actually more complicated than that with student loans being processed by the tax department, other special tax codes for some jobs, year to year income equalisation schemes for fluctuating income such as farmers may experience, charity donation rebates, child care rebates, family support,.... Sales tax is exempt from financial transactions, residential housing, mining precious metals, charities, and some other situations.

The proposal is to keep the tax take the same but alter the structure. Essentially the top tax rate would disappear and sales tax would increase to 15%, though there are other changes concerning property.

So what do I think? My ideas concerning tax are shaped partly by pragmatics, how does the system work in practice and what are the effects of different laws, but also on my perceptions of what is intrinsically fair. The latter takes priority. Some of these ideas are
  • High tax leads to avoidance behaviour, both legal and illegal.
  • High tax inhibits economic growth.
  • Complex laws leave loopholes which are preferentially exploited by those who can afford accountants and lawyers.
  • Exemptions for certain companies mean they pay less than others who are taxed more, yet they may still use the infrastructure tax pays for.
  • People who earn more money pay more income tax anyway because tax is a percentage rate.
  • Progressive tax favours both spouses working over one spouse earning all the income.
  • Government should spend less and concern itself less in human affairs.
In light of these ideas I think the proposals are a step in the right direction. It is a move toward a flat rate for income tax. Further, by having the maximum individual rate close to the company rate decreases the incentive to use creative accounting to minimise tax. Sales tax affects all people similarly. Sales tax can be said to be a tax on consumption (partly true), rather than income tax which is more of a tax on production. This may encourage people to save rather than spend their discretionary money, a good thing.

Ideally there would be no tax. If there has to be tax I think the government should slowly divest itself of many of its expenditures and concentrate on core responsibilities, though that is another post. In terms of tax, the maximum rate should be the same as the company rate and be decreased until there is a single rate for all people in all occupations and all companies. An exemption on the first $20,000 income for all would limit the effect of tax on those with low incomes. A rate of about 20% for income tax and sales tax would be a starting point with a plan to decrease both to 10% (or less) over time as economic growth increases tax take and government decreases expenditures.

Such a system would be simple, less likely to be abused by both companies and the tax department, and be generally fair with consideration for the poorer members of society. It would led to economic growth and would mean higher employment. With more take home pay the demand for pay rises may decrease in some occupations.


  1. Most of these debates in the US ultimately come down to the question of "will the level of revenue be the same" which doesn't allow the more obvious question of "are we spending too much money?"

  2. I am of the strong opinion that companies should not be taxed. The reason for this is that all taxes are actually paid by the people because companies simply pass along their taxation as higher prices and so that taxation remains hidden from the view of those who could vote to change it.

    The obvious exception would taxing goods that companies send out of the country.

  3. MikeT, exactly. They need to cut back spending. Though for those who actually want to decrease wealth and make the entire populous dependant on the state (ie. that is their ideology), such an action is contrary to their purposes.

    DMM, Possibly, but while the system is as it is such a practice can be abused. What is company versus personal money? While I see the argument for consumption tax over production tax (which is part of the reason I favour this change despite it being revenue neutral) I think it somewhat artificial. One person's end product is another's starting product.

  4. Here's a simple way to reduce the tax burden quite significantly.

    Remove the classification of religion as a charity. That is allow charitable tax exemption only for genuine charity. Not for teaching of supernatural dogma.

    People lime Tamaki are getting rich on this and people like me are forced to subsidise him.

    It's a religious tithe forced on everyone. And it's worth millions.

    It also violates our human rights.

  5. Ken, while I agree that there may be some concerns about Tamaki, how exactly does this cost you directly?

    Tax exemption means that charities do not pay tax, it does not mean the government subsidises them. And those employed by a charity who are paid a salary still have to pay personal tax.

  6. It means they are using publicly financed resources they didn't pay for. This means that all us honest taxpaying people must pay for them. We end up subsidising them

    There is absolutely no justification for them avoiding their share of supporting society. Promoting supernatural belief should not be includes in the Charity Definition. Its ridiculous.

    We are usually happy to subsidies genuine charity in this way - but not these peddlers.

  7. Ken It means they are using publicly financed resources they didn't pay for.

    What specifically?

    I can understand why your would object to funding religious activities, I dislike the government using my money for a variety of pointless as well as immoral activities. But I am not certain what you are funding here. Most churches make little profit so there would be little to tax. But consider the big costs: social welfare, education, health. I don't see the church as an organisation using these services. And they provide a moderate amount of social welfare.

    Any individual Christian using such a service (eg. doctor visit, retirement) is already paying for it through personal tax.

    I agree that it is immoral for the government to force you to support these people, I just do not see that they are.

  8. Hey, no one is saying the individual Christians are rorting the system. It's the churches and supernatural organisations.

    Individuals don't register as charities, Churches and trusts do.

    And there are a huge number who register under the religion provision - just look at the charities commission register. They may be doing no true charity work at all but they get the same exemption for by pushing supernatural beliefs as the genuine charities.

    I could not register a secular organisation promoting science and reason and atheism under those grounds.

    (Mind you I could register a Church of the Flying Spaghetti Monster and get tax exemption - provided I gave it a dogma which was supernatural. Sounds weird but I think there are "spiritualist" organisations already doing this sort of thing - from my look at the register).

    This exemption also works for local body charges - rates, etc.

    So it means that Churches, religious organisations, trusts, etc., are not paying their fare share of social costs - streets, rubbish, defense, health, emergency services, fire service, etc. Everything our taxes/rates are used for. The fair share my secular science and reasons organisation would have to pay.

    It is naive to ignore the way this system is manipulated to bring benefits to individuals. Max Wallace's book "The Purple economy" exposes some of this for Australia and NZ.

    Churches can provide rent free accommodation, superannuation benefits, all sorts of fringe benefit, cars, etc., etc. This helps to reduce the wage bill and the personal tax.

    There have been cases of retired pastors getting accommodation, use of a car, and a tax free allowance enabled by using the church's credit card. Their pension was probably enables by the tax exemption and may not have involve any payment from their taxable wages.

    There have been religious companies who avoid taxation and therefore compete unfairly with other commercial enterprises.

    There are some consequences for pastors of course. Many of them loose their faith but are caught in the financial trap. They just can't afford to leave the clasp of the "mother church."

    This free riding amounts to a transfer of money from the non-religious to the religious. Your organisations benefit from my taxation. The fact that I am paying for all the services that your organisation uses but doesn't pay for. It would be more honest for the religious to confront this and agree to opt out of this supernatural tax benefit. It certainly puts them at a moral disadvantage.

    It is a violation of human rights that I am forced to subsidise such organsiations. After all, you are not forced to subsidse my science and reasons foundation on the basis of my non-supernatural beliefs, are you?

    And isn't it hypocritical for the spokespersons of these organsiations to claim the right to tell me how to live my life when they are morally compromised in this way (as well as by all the sexual abuse that's been going on).

    I guess one day soon there will be a demand to get rid of the ancient provision for forced tithing to churches (apparently it goes back to 1600). But I bet these god botherers will put up a fight. And won't that indicate how important this forced tithing has been to their survival.



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