Wednesday 23 October 2013


Finance Minister Bill English has noted that, since the top marginal tax rate on high income earners dropped to 33 percent, the proportion of total income taxes paid by top-earners has increased. Kiwiblog and The NBR have pointed to this as evidence of increased progressivity by those socialist National Party folks; some on Twitter have argued that English was disingenuous because he ignored the rise in the GST that accompanied the drop in income tax.

Recall that when National proposed reducing all income tax rates and increasing the GST, they were attacked on two fronts. They weren't just critiqued for increasing reliance on the GST, which hits the poor more than a progressive income tax.* They were specifically critiqued for the drop in the top marginal tax rate. "Tax cuts for the rich." Let's look back to the history.

Here's NZ Herald's Audrey Young:
Prime Minister John Key yesterday defended bigger tax cuts for the wealthy, arguing that they already paid a big portion of tax.
Here's a Labour press release:
“The tax cuts are unfair; a third goes to the top five percent and fifteen percent goes to the top one percent. People in the middle and bottom will go backwards after inflation.
 “The upper income tax cuts are unaffordable.
 Here's Gordon Campbell:
As No Right Turn has calculated, the top 2% of earners will get 11.5% of the total income tax bounty, and that happens to be roughly the same amount as the government has had to borrow to finance the entire package. Literally, New Zealand is borrowing to provide tax cuts for its most wealthy citizens
I could go find more, but what's the point? Anybody who was paying attention knows that English and Key were critiqued not only for switching from income to consumption taxation but also for the substantial cut in the top marginal tax rate for folks on higher incomes. They saw it as a big giveaway to National's rich mates and reckoned it meant that the rich were paying much less income tax.

So it is hardly a swindle or disingenuous or dishonest for Bill English to point out that the richest tier of taxpayers are now, because of changes in the income tax system, paying a larger portion of aggregate income taxes.** While it is definitely true that the total tax burden matters far more than the income tax burden, where National previously was attacked specifically on the income tax part, it is eminently fair for them to point out that the fraction of net income taxes paid by rich households has gone up rather than down.

If I wanted to attack English's press release, here's where I'd instead be going.

  1. We should be looking at a longer time series on proportion of income tax paid by top-earning individuals and top-earning households rather than just the comparison of pre-change and current figures. Top earners in the US took a much larger income hit from the financial crisis than did lower-income folks because a much larger part of their compensation bundle is tied to firm performance. They also then rebounded much more strongly post-crisis. You could easily get a big increase in the proportion of income tax paid by the wealthy in the current period as compared to the immediate post-crisis period simply via this effect. The base year then should have been set somewhere pre-crisis.
  2. English, throughout, talks about the proportion of income taxes paid by high-earners. He doesn't say how much total income tax was paid by high-earners. It's possible that total income taxes dropped as part of the tax switch by enough that it's simultaneously true that high income earners pay more of it proportionately but pay less in income tax in an absolute sense. I do not know if this is true. It seems pretty unlikely, but it's possible. However, recall that progressivity isn't defined by how much a tax system hurts the rich, it's defined by the proportion of total taxes paid across different income cohorts. 
  3. It would be better to accompany all of this with both the total tax paid by income decile across all forms of taxation, and with income-linked benefits including WFF. Gross and net tax both matter. A bar chart, by decile, with income, tax paid (all sources), and transfers received, would likely be best.
    1. Further, it isn't immediately obvious why cash benefits like WFF count while in-kind benefits don't. Like tertiary education subsidies. 
  4. The real scandal, to my mind, is the very high effective marginal tax rates faced even by those on zero net tax. The combination of abatement rates across some plausible combinations of benefits wind up resulting in effective marginal tax rates that utterly disincentivise work while resulting in no net tax paid - the worst of both worlds. Having a lot of households paying no tax at all can be fine if it's because you have a reasonable minimum earnings threshold or because you're running a clean negative income tax. But achieving it by taxing any earned income at close to 100% while handing over a benefit cheque isn't exactly something to be proud of.

Bottom line: I'm not sure that English has entirely proved his case against the critics of the 2010 tax cut, but I don't think he's wrong to put up evidence against that critique either.

* THIS DOES NOT MEAN THAT GST IS REGRESSIVE. GST is a flat tax; income tax is progressive. Net effects remain ambiguous.

** I haven't checked his numbers, but can't imagine that Treasury would have this wrong.

1 comment:

  1. I agree pretty much with what you are saying. I tried to get data to cover your point 3 a few years back and asked Mr Dwyer, who I think you know and ended up talking to Bryce Wilkinson. In the end I had to combine some data and make an estimate of GST paid by income group as at that point the data did not appear to be available. I have not had a look to see if this has been rectified, but it seemed to me at the time to be bizarre that it was not readily available.

    Point 4 is the real issue, has been for decades and I can't see it being addressed anytime soon, apart from making it worse.