Who is more highly taxed?
Are Australians or New Zealanders More Highly Taxed?
There has been renewed political debate about whether New Zealanders are more or less highly taxed than Australians, sparked by the Australian government’s announcement of tax reductions in its recent budget.
Finance minister Michael Cullen has said that “if anyone tells you that Australians pay less tax, the answer is: baloney”. How can we assess this claim?
There are several ways of looking at it. The best and most conclusive is to look at relative levels of government spending.
The ratio of government spending to gross domestic product (GDP) is the best measure of the total tax burden. This is because budget deficits and surpluses tend to balance out over time, and most of what governments spend must be raised in tax.
On this basis, overall tax burdens are lower in Australia. The OECD forecasts total government outlays (by all levels of government) to be 38.5% of GDP in New Zealand in 2006 compared with 35.5% in Australia. In other words, the tax burden is higher in New Zealand by a significant 3 percentage point margin, or 8.5%.
The picture is similar if we consider total tax revenue. Total revenue is relevant because there are significant differences in the two countries’ tax systems. For example, the rate of Australia’s GST is 10% compared with 12.5 percent in New Zealand, and it is levied on a narrower base (excluding food and other items).
OECD figures for 2003 (the most recent comparable year) show total tax revenue as a percentage of GDP at 34.9% in New Zealand and 31.6% in Australia – a 3.3 percentage point gap in Australia’s favour.
When it comes
to personal income tax alone, the recent changes to
Australia’s tax scale suggest that most Australians will pay
less tax than New Zealanders.
The Australian budget retained the existing tax free threshold of about NZ$7,000 but reduced the highest tax rates and increased tax thresholds.
The existing 15% rate will apply to income between NZ$7,000 and NZ$30,000 and then the 30% rate will apply up to about NZ$90,000. This range accounts for the vast majority of taxpayers.
By contrast, New Zealanders are hit by a 33% rate for income over $38,000 and a 39% rate for income over $60,000.
A top statutory rate of 45% will apply to Australians earning over NZ$180,000, but this will affect only around 2% of taxpayers. Moreover, the Australian tax system affords more opportunities to minimise tax: the late Kerry Packer, for example, was reported to have paid an average tax rate of 25%.
The government has
made much of the fact that New Zealand families with
dependent children benefit from the Working for Families
scheme, which it has labelled ‘tax relief’.
This is a misnomer. WFF does not involve any reduction in overall taxation. It simply means large amounts of tax are returned to households with children, many of which paid the tax in the first place, and is akin to other welfare payments.
This ‘churning’ of income through the tax system involves deadweight costs (which reduce economic growth) and high effective tax rates (typically in the 53-59% range and in some cases higher) on any additional income earned by WFF recipients.
There may be some exceptions to this general picture. The government has pointed to the annual OECD analysis of tax paid by the ‘average worker’ which shows a small gap in New Zealand’s favour.
However, this is a narrow measure covering essentially the manufacturing and some service sectors; it relates to wage and salary income only, not earnings of the self-employed and other income; and the gap will be narrowed if not reversed in future OECD calculations by the recent changes in the Australian tax scale.
Moreover, ‘average workers’ in Australia earn 35% more than their New Zealand counterparts according to the OECD, and thus take home more on an after-tax basis. They also face a lower rate of income tax on additional income earned. This marginal rate is more relevant than the OECD’s average rate in respect of incentives to work and save.
Perhaps most importantly, the trend in Australia has been towards lower government spending and tax reductions since the beginning of this decade compared with an opposite trend in New Zealand. People are forward-looking in deciding where to work, invest and do business, and many will see Australia as offering better future prospects in tax and other terms.
So essentially Dr Cullen’s claim is wrong. Some may argue that the benefits of higher spending in New Zealand outweigh the higher tax burden. However, people vote on such issues with their feet. Australians are not flocking to New Zealand to enjoy any such benefits, and the risk is that migration will become increasingly one-way.