Picture credit: Fairfax NZ.

New kid on the political block in New Zealand, The Opportunities Party (TOP), is proposing a radical new approach to tax.

Soon after the party was launched in November 2016, its founder, economist and businessman Gareth Morgan (pictured above), announced its tax policy. TOP advocates taxing a deemed minimum rate of return on all productive assets, including housing and land.

For mum and dad home owners, this means taxing the “benefit” they receive each year from living in their own home. It’s called taxing “imputed rents” and is not a new idea, having been originally suggested by the Tax Review committee in 2001.

TOP thinks New Zealand’s current tax system is unfair. It believes that not taxing the equity people have in their homes is a loophole.

TOP says its package will be tax neutral, stating that, “every additional dollar of tax collected will be given back via income tax cuts”.  The party says that about 80% of adults will be either unaffected, or pay less tax, under its policy. 20% of adults will pay more tax.

TOP thinks New Zealand’s current tax system is unfair.

TOP argues that the tax burden on low income families is too high, and its proposed tax cuts are intended to favour New Zealanders on below average incomes to reduce inequality.

TOP makes a raft of claims about its policy, including that it will make the tax system fairer; make housing more affordable over time; lead to more sensible investment of capital; encourage more “trickle down”; and reduce New Zealand’s reliance on foreign investment and debt to finance growth.

Debatable merits

It’s great to see political parties floating tax reform ideas and the media and public debating their merits. But the details buried in TOP’s tax policy raise some questions. 

TOP believes the current system is unfair. Is is? And if so, how unfair is it? Let’s start with some facts.

More than 1.8 million Kiwis – 50% of the adult population – declared taxable income of less than NZ$30,000 in the year to June 30. That 50% paid 10% of the total income tax paid.

A further 20% of the adult population earned between NZ$30,000 and NZ$50,000. So 70% of New Zealand adults – more than 2.5 million people – earned taxable income of less than NZ$50,000. That 70% of the adult population paid 24% of the total income tax. 

The details buried in TOP’s tax policy raise some questions.

Of the adult population, 90% earned taxable income of less than NZ$90,000. The 10% of adults (344,000 people) who earned more than NZ$90,000, paid 45% of the total income tax. In fact, the top 3% (earning more than NZ$150,000) paid 24% of the total income tax.

Find those numbers scary? Wait, there’s more. These numbers include all individuals of working age (ie all over the age of 16), including recipients of NZ superannuation and social welfare benefits. However, they do not take into account Working for Families. If they did, the true “net tax” position would tell an even more frightening story.  

At a guess, after factoring in these “transfers”, the top 10% of income earners would pay more than 70% of the total “net” income tax and the 70% of the adult population earning taxable income of less than NZ$50,000 would pay, around 10-15% of the “net” income tax.

A progressive tax system

As with all statistics, some caution is required. The numbers are based on returns of taxable income, so do not factor in undeclared taxable income and income or gains that are not taxable. It also means that people who invest in assets and derive non-taxable capital gains and live off the cash look poorer than they are.  

But the point is, these numbers don’t suggest the current system is that unfair. New Zealand’s current tax system is actually a fairly progressive tax system, a system in which the more you earn, the more tax you pay. The current system is certainly not perfect and inequality in incomes and wealth is certainly a significant challenge for New Zealand. But it’s hard to argue that our income tax is unfair.

TOP says 20% of adults will pay more tax under its policy. Will that be the same 20% of adults who are already contributing most of the income tax?

Low income families

TOP says the tax burden on low income families is too high, but how does TOP define a, “low income family”. Treasury’s numbers suggest that the number of low income families is very high. But how high is the tax burden on those families? They certainly pay GST, but how much income tax do they pay?

A family with two children with a household income of NZ$50,000 should currently receive more from the government in assistance than it pays in income tax. It should pay no “net” income tax.

So how will the tens of thousands of families who earn less than NZ$50,000 that TOP may describe as “low income families” benefit from the TOP policy when they do not bear an income tax burden currently? One assumes they will receive more in transfer payments. If that is the TOP intention, an already progressive system will just become more progressive.

Bear in mind too that Working for Families is available for:

• almost all families with children, earning less than NZ$57,000 a year
• many families with children, earning up to NZ$74,000 a year
• some larger families earning more.

TOP’s policy doesn’t appear to be all that enticing for retired people who own their own homes, but that story is for another day.

Want to know what's in store for tax in New Zealand in 2017? Read 'New Zealand tax predictions for 2017' by Peter Vial CA now.