More than 40% of millionaires paying tax rates lower than the lowest earners, Government data reveals
Thomas Coughlan
05:00, Feb 25 2021
Jacinda Ardern rejects National suggestion Labour would bring in the Greens' wealth tax, despite ruling it out, as "mischievous and wrong". (First published October 11)
The wealthiest New Zealanders pay just 12 per cent of their total income in tax on average, according to research from Inland Revenue and Treasury, Stuff can reveal.
The same research found 42 per cent of the wealthiest New Zealanders were paying lower tax rates than the lowest tax rate paid by people who earn their money from an ordinary job or a benefit.
That compares with an effective tax rate of about 16-18 per cent on New Zealanders earning the median income from salaries and wages of $55,000-$60,000.
An effective tax rate is the percentage of total tax a person pays measured against their total income. This differs from marginal tax rates, such as income tax brackets or flat tax rates such as company tax or GST.
READ MORE:
* Three large elephants remain despite RMA overhaul and higher deposit rules
* New Zealand's largest union backs call for 50% top tax rate
* Loans and lending guarantees prove surprisingly hard to give away
According to Treasury, a full 42 per cent of High Wealth Individuals (HWIs) pay less than 10 per cent of their total income in tax.
That is lower than the lowest income tax rate which is 10.5 per cent, which income earners pay on income up to $14,000.
The reason for the disparity between New Zealand’s wealthiest people and regular salary and wage earners is that the wealthiest New Zealanders tend to earn a large part of their income in parts of the economy that are either taxed lightly or not taxed at all.
It's a good time to be rich in New Zealand, with the highest income New Zealanders paying less tax than everyone else.
The figures come from a sample of HWIs analysed by Treasury and IRD. Generally, IRD defines a HWI is a person or a family who control wealth greater than $50m. Although the Treasury paper in question didn’t specify what it meant by a HWI because it wanted to focus on anyone who might fall into the top 10 and 1 per cent of New Zealanders by wealth.
The research looked at “economic income” which “is a broader concept than taxable income and includes, for example, capital gains”. In New Zealand economic income, as opposed to “taxable income”, which is defined in legislation, is not a concept used in tax law.
Treasury noted that the 42 per cent of HWIs paying less than 10 per cent of their economic incomes in tax were paying at a rate “lower than the statutory tax rate”.
The paper warned this “could be due to the source of income earned (eg capital gains), the use of imputation credits, or the use of loss carry forwards”.
“As nearly 80 per cent of the tax paid by these HWIs was corporate tax, the timing of imputation credits and loss carry forwards is likely to explain the large variability in effective rates,” Treasury said.
The research comes from a Treasury paper delivered to Finance Minister Grant Robertson, Associate Finance Minister David Parker, and then Revenue Minister Stuart Nash in August last year. Parker has since become Revenue Minister.
According to Treasury, Parker had requested “improved estimates of the distribution of wealth in New Zealand”.
Currently, data on wealth comes from the Household Economic Survey (HES), from Stats NZ. It’s conducted every three years by the Government’s statistician and is regarded as an accurate estimate of the wealth of most New Zealand households.
Stuff
Wealth share held by top 10 net worth percentiles
However the HES is much less accurate at estimating the position of HWIs, particularly the top 1 per cent of New Zealanders.
The number of HWIs is too small to be accurately captured in surveys and there’s a suspicion that some underreport their wealth when asked. Treasury says that practically, the HES is only useful for households whose wealth is below $50m.
Treasury was reporting back to Parker on two “experimental methods” it was going to use to better calculate the wealth of rich people.
That’s something Parker appears to have been interested in. Treasury mentions that two other briefings were delivered to him on the subject.
The data also looked at where the super wealthy stored their wealth. It found that the top 1 per cent of New Zealanders had 11 per cent of the country's wealth in owner-occupied housing. The data didn’t strip out how much of New Zealand’s investment properties were in the hands of the top 1 per cent.
Using the Rich List to compile a rich list
The first method Treasury used was to take the National Business Review’s popular Rich List – literally a list of the wealthiest individuals and families and add it to the HES data.
This method may sound unconventional but is used in other jurisdictions such as the United States and Canada.
The other method was to look at the Reserve Bank’s household balance sheet according to a distribution of income provided by Inland Revenue, although this only covers taxable income.
Treasury used these two methods to calculate how much wealth was owned by the top 10 per cent and top 1 per cent of New Zealanders respectively. The information was quite varied. Using just the HES, Treasury figured that the top 10 per cent of New Zealanders owned 59 per cent of all wealth, which it considered to be an “underestimation”.
At top end of estimates – using Reserve Bank data – Treasury believed the top 10 per cent of New Zealanders owned 70 per cent of all wealth. However it warned that the data was unreliable enough that this could be “underestimated or overestimated”.
Regardless, the top 1 per cent of New Zealanders owned between 20 per cent and 25 per cent of all wealth depending on which calculation was used.
Treasury Advice by Thomas Coughlan on Scribd
The unreliability of this data is a problem when it comes to getting a clear picture of the economy. Treasury knows there’s a problem, but it’s been quite difficult working out what to do to fix it. This is something Treasury is currently doing some work on.
For example, it found the HES from 2018 estimated the net worth of New Zealanders totalled $1.37 trillion, while data from the Reserve Bank summed to $1.54 trillion.
When adjusted for some consumer durables and valuables that won’t be picked up by the Reserve Bank, Treasury estimated a gap of up to $340 billion between the two numbers.
“There will be many reasons for this mismatch, such as differences in the valuation of the housing stock and treatment of non-resident ownership, but differential under reporting bias is also likely to be a factor,” Tresury said.
Parker said yesterday that Governments needed good data about wealth distribution.
“I think governments need good data for wealth distribution,” Parker said.
“It's accurate at the bottom, it's not accurate at the top,” he said.
Thomas Coughlan
05:00, Feb 25 2021
Jacinda Ardern rejects National suggestion Labour would bring in the Greens' wealth tax, despite ruling it out, as "mischievous and wrong". (First published October 11)
The wealthiest New Zealanders pay just 12 per cent of their total income in tax on average, according to research from Inland Revenue and Treasury, Stuff can reveal.
The same research found 42 per cent of the wealthiest New Zealanders were paying lower tax rates than the lowest tax rate paid by people who earn their money from an ordinary job or a benefit.
That compares with an effective tax rate of about 16-18 per cent on New Zealanders earning the median income from salaries and wages of $55,000-$60,000.
An effective tax rate is the percentage of total tax a person pays measured against their total income. This differs from marginal tax rates, such as income tax brackets or flat tax rates such as company tax or GST.
READ MORE:
* Three large elephants remain despite RMA overhaul and higher deposit rules
* New Zealand's largest union backs call for 50% top tax rate
* Loans and lending guarantees prove surprisingly hard to give away
According to Treasury, a full 42 per cent of High Wealth Individuals (HWIs) pay less than 10 per cent of their total income in tax.
That is lower than the lowest income tax rate which is 10.5 per cent, which income earners pay on income up to $14,000.
The reason for the disparity between New Zealand’s wealthiest people and regular salary and wage earners is that the wealthiest New Zealanders tend to earn a large part of their income in parts of the economy that are either taxed lightly or not taxed at all.
It's a good time to be rich in New Zealand, with the highest income New Zealanders paying less tax than everyone else.
The figures come from a sample of HWIs analysed by Treasury and IRD. Generally, IRD defines a HWI is a person or a family who control wealth greater than $50m. Although the Treasury paper in question didn’t specify what it meant by a HWI because it wanted to focus on anyone who might fall into the top 10 and 1 per cent of New Zealanders by wealth.
The research looked at “economic income” which “is a broader concept than taxable income and includes, for example, capital gains”. In New Zealand economic income, as opposed to “taxable income”, which is defined in legislation, is not a concept used in tax law.
Treasury noted that the 42 per cent of HWIs paying less than 10 per cent of their economic incomes in tax were paying at a rate “lower than the statutory tax rate”.
The paper warned this “could be due to the source of income earned (eg capital gains), the use of imputation credits, or the use of loss carry forwards”.
“As nearly 80 per cent of the tax paid by these HWIs was corporate tax, the timing of imputation credits and loss carry forwards is likely to explain the large variability in effective rates,” Treasury said.
The research comes from a Treasury paper delivered to Finance Minister Grant Robertson, Associate Finance Minister David Parker, and then Revenue Minister Stuart Nash in August last year. Parker has since become Revenue Minister.
According to Treasury, Parker had requested “improved estimates of the distribution of wealth in New Zealand”.
Currently, data on wealth comes from the Household Economic Survey (HES), from Stats NZ. It’s conducted every three years by the Government’s statistician and is regarded as an accurate estimate of the wealth of most New Zealand households.
Stuff
Wealth share held by top 10 net worth percentiles
However the HES is much less accurate at estimating the position of HWIs, particularly the top 1 per cent of New Zealanders.
The number of HWIs is too small to be accurately captured in surveys and there’s a suspicion that some underreport their wealth when asked. Treasury says that practically, the HES is only useful for households whose wealth is below $50m.
Treasury was reporting back to Parker on two “experimental methods” it was going to use to better calculate the wealth of rich people.
That’s something Parker appears to have been interested in. Treasury mentions that two other briefings were delivered to him on the subject.
The data also looked at where the super wealthy stored their wealth. It found that the top 1 per cent of New Zealanders had 11 per cent of the country's wealth in owner-occupied housing. The data didn’t strip out how much of New Zealand’s investment properties were in the hands of the top 1 per cent.
Using the Rich List to compile a rich list
The first method Treasury used was to take the National Business Review’s popular Rich List – literally a list of the wealthiest individuals and families and add it to the HES data.
This method may sound unconventional but is used in other jurisdictions such as the United States and Canada.
The other method was to look at the Reserve Bank’s household balance sheet according to a distribution of income provided by Inland Revenue, although this only covers taxable income.
Treasury used these two methods to calculate how much wealth was owned by the top 10 per cent and top 1 per cent of New Zealanders respectively. The information was quite varied. Using just the HES, Treasury figured that the top 10 per cent of New Zealanders owned 59 per cent of all wealth, which it considered to be an “underestimation”.
At top end of estimates – using Reserve Bank data – Treasury believed the top 10 per cent of New Zealanders owned 70 per cent of all wealth. However it warned that the data was unreliable enough that this could be “underestimated or overestimated”.
Regardless, the top 1 per cent of New Zealanders owned between 20 per cent and 25 per cent of all wealth depending on which calculation was used.
Treasury Advice by Thomas Coughlan on Scribd
The unreliability of this data is a problem when it comes to getting a clear picture of the economy. Treasury knows there’s a problem, but it’s been quite difficult working out what to do to fix it. This is something Treasury is currently doing some work on.
For example, it found the HES from 2018 estimated the net worth of New Zealanders totalled $1.37 trillion, while data from the Reserve Bank summed to $1.54 trillion.
When adjusted for some consumer durables and valuables that won’t be picked up by the Reserve Bank, Treasury estimated a gap of up to $340 billion between the two numbers.
“There will be many reasons for this mismatch, such as differences in the valuation of the housing stock and treatment of non-resident ownership, but differential under reporting bias is also likely to be a factor,” Tresury said.
Parker said yesterday that Governments needed good data about wealth distribution.
“I think governments need good data for wealth distribution,” Parker said.
“It's accurate at the bottom, it's not accurate at the top,” he said.
