Tax cuts for the rich

The New Zealand government budget for the coming year was released recently. Included was some tax restructuring which was anticipated and I have posted my thoughts here. Sales tax was increased and income tax was decreased. All incomes get some tax break. As typical, comments were made by some groups about those on higher incomes getting the better deal. Comments like this may reflect envy, or may be by those who perceive they struggle on their income; nevertheless it still reflects underlying innumeracy (or perhaps it is polemical for those with extreme Marxist views).

Here is the personal income tax structure currently and as it will become in October.

Gross income	Old tax rate	New Tax rate
0–14000	12.5%	10.5%
14000–48000	21%	17.5%
48000–70000	33%	30%
70000+	38%	33%

It can be seen that both systems have a progressive tax structure. That is those on higher incomes not only pay more tax by virtue of the fact that tax is a percentage of income, they pay even more because they also pay a higher rate. Because tax is a rate, tax cuts, whether they be an absolute ratio (say 1% for each bracket) or a proportionate ratio (say 5% reduction on the rate), will always have a larger effect on higher incomes. Below is various incomes with the effect of the various taxes. Accident levy is excluded.

	Old		New
Gross	Tax	Net	Tax	Net	Difference
5000	625	4375	525	4475	100
10000	1250	8750	1050	8950	200
25000	4060	20940	3395	21605	665
50000	9550	40450	8020	41980	1530
100000	27550	72450	23920	76080	3630

Looking at this table it is clear that even if the $0–14000 tax rate was abolished, i.e. set to 0%, those on higher incomes would still gain an advantage. This is because their tax break is greater than what the lower incomes even pay in tax.

The comment "tax cuts for the rich" is nonsensical as any tax cut is going to affect those on higher incomes at least as much as those on lower incomes. What is worth noting however is how much those on higher incomes pay. A tax saving of $4000 may seem a lot to some people, but this is in the context of someone who is already paying $30000. It is also worth noting that a tax break is not a subsidy, it is allowing the taxpayer to keep more of his earned income.

Does tax exemption for churches directly cost taxpayers?

Ken Perrott wrote about several objections he had to religious charities, specifically churches, being tax exempt. This was in response to my thoughts on proposed tax law changes. Initially he made this unlikely (or perhaps hyperbolic) claim of how to significantly reduce the tax burden,

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

Given that most churches make little surplus money, and taxes are on the profits of a company, this revenue stream is going to be very small. Charities are not able to make large amounts of money and spend it as they wish, they must put the money back into the charity's cause.

Ken did also raise a related issue about the cost of charities being born by others. Philosophically I have sympathies with the potential issue he identifies; I object to both covering costs for other people that they should cover, and funding groups that promote ideology I disagree with. I can appreciate that an atheist would object to his money being used for Christian evangelism, much in the way that I object to my money being used to promote humanism. However I am not certain that churches are that costly.

Now tax exemption is not a direct cost, it is a refusal to tax. When Ken was asked what was the cost to him, his initial reply was twofold: religious charities were using publicly financed resources and they have a responsibility to share society's financial burden. Interestingly Ken was happy to subsidise genuine charities. Interesting in that I am not certain I support the use of government money in supporting any charities, religious or non-religious.

Ken's more detailed response can be read here. He covers several areas. His complaint is

1. Religious organisations can get charity status and tax exemption but science, reason, or atheist organisations cannot register as charities;
2. Churches do not pay rates, thus these services are covered by other people;
3. Individuals can manipulate the system to their benefit;
4. Charities offer fringe benefits;
5. Charities have an unfair commercial advantage;
6. Some religious people are morally corrupt; and
7. Forced tithing has been important to the survival of the church.

I think the main issue is around item 2, but I will briefly address the others.

Item 1 is untrue. About 15% of the more than 25,000 charities in New Zealand are religious in nature. The criteria for charities are

• the relief of poverty
• the advancement of education
• the advancement of religion
• any other matters that are beneficial to the community.

There are plenty of charities in New Zealand that are involved in scientific research. Schools can be charities. Neither is tax exemption restricted to charities: some sports groups have tax exemption and some of them can also request charity status.

Item 3 is not unique to charities. Trusts can be misused, and some companies shift profit around the world to minimise tax. Simplifying tax law and minimising tax take are more likely to counter this problem.

Item 4 is irrelevant. Companies do this too. Individuals can allow people to stay with them and not charge board, though other people may have to. This is an issue of envy, not justice.

Item 5 could be a problem if true. It would need to be confirmed. Claims by business of unfair advantage may be an attempt to gain their own advantage, not necessarily because there is a legitimate unfair advantage. Offering my free services to any company, charity or not, is not an unfair commercial advantage, I am allowed to do what I want with my time.

Item 6 is true, but completely irrelevant.

Item 7 is irrelevant to New Zealand. It is more an issue in Europe. And I agree, forced tithing with money compulsory collected by the government and forwarded to the relevant church should not be compulsory based on your stated religion/ denomination. Preferably it should not be collected by the state at all. Some church organisations may struggle if this occurred, but that is not necessarily a bad thing.

Returning to the main issue, item 2: churches getting services that are paid for by others. This includes services that local and national government supply, the first via rates, the latter via taxes. Ken argues,

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.

Now I think that many of these things should be funded by the people using them. Rubbish does not need to be run by council, nor does water supply, or sewage. However the system is that these things are provided by council currently. So I agree that it is reasonable for the charities to pay towards these things, but let's review specifics.

The costs should only be those that relate directly to the organisation and its property, not the people in it. This is because the individuals who are paid by the charity pay their own tax at the normal rates. So health costs for a person who works for a charity are contributed to from his personal tax. The organisation does not have any health costs. Conversely, if a church calls the police about vandalism to their property, then they are using this service as an organisation. So fire, police, water, sewage, rubbish are real costs incurred by the charity which if not paid by the charity are then covered by others. Health, defence, social welfare, retirement, education, are not costs that a church incurs and are covered by the individual tax of its workers. I have left off roading as it is mixed, though on balance is a minimal cost, and almost certainly covered by fuel taxes.

Charities do pay rates. Yes it is reduced to a nominal amount and may not cover the full cost of amenities, but they contribute toward it.

Charities can claim sales tax, but if they hold an event that they charge for they have to pay sales tax.

So the legitimate costs of charities associated with their tax exempt status are small. These categories (such as water) are not significant costs to government.

But how much do religious charities save government? The amount of food, counselling, shelter given to people in- and outside the church is enormous. It would easily dwarf any savings they make from not having to pay their contribution to say policing, and probably decreases policing costs indirectly.

Not that I think churches shouldn't pay for water and rubbish. Ideally these would not be managed by the council anyway, and then everyone including the church would have to pay private providers who could choose whether or not they wished to discount charities. And everyone would pay the true cost, and likely pay much less. But the situation is that the direct costs of religious charities to the state is minor, and completely offset by the savings they provide.

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.