When debating tax, don’t forget spending quality

Dr Bryce Wilkinson
Insights Newsletter
5 May, 2023

An IRD report on effective rates of tax attracted much public attention last week.

It was launched by the Minister of Revenue, David Parker.

In proposing that high income people are not taxed enough, Parker asserted in the report’s foreword that: “New Zealand is not a highly taxed nation”.

This claim is false.

Parker’s case is that we “sit in the middle of the OECD in terms of total taxes as a proportion of the economy.” That is like claiming that an obese person in New Zealand is not obese by American standards. So what?

Member countries of the OECD commonly have big (and problematic) welfare states. This gives them amongst the highest government tax and spending burdens in the world, New Zealand included.

On the Heritage Foundation’s database for 2022, only 31 of 178 countries gathered more in taxes relative to gross domestic product than New Zealand’s 32.3 percent. The ratio for the median country was only 18.5%.

Successful countries can have much lower tax burdens. Singapore’s tax ratio was put at only 13.1% of GDP. Some of its infrastructure we can only envy.

The IRD’s paper illustrates the point that when asset prices are rising fast those who own lots of property gain relative to those who do not.

Everyone has always known this of course. The case for a broader capital gains tax has been debated by government tax taskforces for as long as I can remember.

The Tax Working Group’s 2019 report rehearses the pros and cons. Even tax experts can agree to differ.

The minister argued that it was unfair if the very wealthy did not pay at least as high a proportion of their economic income in tax as everyone else. His example defined economic income to include all unrealised capital gains.

The public is also likely to think it is intolerably unfair to force households to sell the family home, farm or small business to get the cash to pay the tax on a paper capital gain that may be temporary. Most senior politicians know this.

Discussions of tax burdens should not be allowed to distract attention from the elephant in the room – an abundance of ill-justified spending.

Big government is no guarantee of prosperity, literacy, a well-run health system or quality public infrastructure. Sadly, these days New Zealand exhibits this point.

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