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Tax Freedom Day Arrives On 1 May

"May 1 marks Tax Freedom Day in New Zealand", according to the executive director of the New Zealand Business Roundtable, Roger Kerr. "It represents the day in the year when the average New Zealander stops working for the central government and starts working for themselves."

Mr Kerr said that the calculation of Tax Freedom Day was based on central government expenditure, which currently amounts to 33 percent of gross domestic product (GDP). Government spending is the best measure of the tax burden because almost all government spending ultimately has to be financed from present or deferred taxation (borrowing).

The measure is therefore a more accurate representation of Tax Freedom Day than calculations based on current taxation or income tax alone.

Indeed it understates the true tax burden because it leaves out or underestimates elements of government spending such as local government and ACC. Total government spending in New Zealand, as measured by the OECD, is projected to be almost 40 percent of GDP in 2002. On this basis, Tax Freedom Day would fall on 27 May.

This broader measure underscores the extent to which New Zealand is still a highly taxed country. Compared with New Zealand, Tax Freedom Day on this measure comes more than a month earlier in Ireland (24 April) and the United States (25 April), three weeks sooner in Australia (2 May) and over a week earlier for the OECD as a whole (19 May). A number of Asian and other countries have levels of government spending, and hence tax burdens, that are well below the OECD average.

The government lifted its long-term spending objective from under 30 percent to 35 percent of GDP in the 2000 Budget Policy Statement. Tax Freedom Day will arrive 18 days later as a result. The Local Government Bill will also lead to higher spending by councils and further delay Tax Freedom Day over the medium term.

These calculations are of interest because of economic evidence that, beyond a certain point, government spending and taxation harm economic growth. No country has sustained per capita growth rates of 4 percent or more a year with general government spending equal to 40 percent or more of GDP. Accordingly this ratio must be reduced if New Zealand is to regain its place in the top half of the OECD income rankings.

Ends

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