The other day I was stuck on the motorway behind a van that had painted across its back bumper the phrase: “A fine is a tax for doing bad, a tax is a fine for doing well”. This made me ponder the common misunderstandings of our tax system, so often fuelled by political parties and elites who don’t want to give up any of their cash for the greater good and general functioning of society. This blog post seeks to respond to the van’s slogan, and similar claims that tax is always and only ever a bad thing. In doing this, I break down the dominant types of tax we have in NZ and a couple that we don’t but maybe should have, and explain how it all ties into wealth, poverty, and the growing gap between the two.
A progressive tax system is a way of taxing income so that lower income earners pay less and high earners pay proportionally more. Our New Zealand income tax system is modelled on this. It means that depending on your annual earnings, you will be taxed at a different percentage tax rate. The current income tax brackets are:
|Income per annum||Tax Rate|
|Up to $14,000||10.5%|
|Over $14,000 and up to $48,000||17.5%|
|Over $48,000 and up to $70,000||30%|
|Remaining income over $70,000||33%|
The progressive tax rate is calculated on every dollar you earn. For example, say you earn $40,000, you fit into the 17.5% tax bracket but not all your income will be taxed at that rate. The first $14,000 will be taxed at 10.5% and the remaining $26,000 taxed at the higher 17.5%. Only every dollar over each threshold is taxed at the higher rate. So say you get a pay rise from $70,000 to $72,000. Your first 70K will remain exactly the same in terms of taxation, it’s only the remaining 2K that gets taxed at 33%. You needn’t reach for your calculator to see that using this system it is simply not possible for higher income earners to be “worse off” than lower income earners even if a pay rise pushes them into the next tax bracket. Everyone pays the same tax on their lower levels of income regardless of their total income whether it be 20K or 200K.
Income tax cuts are a hotly debated issue and it is often argued that a top bracket tax cut for the rich will encourage spending and investment and therefore boost the economy. However, evidence-based research on previous tax cuts show it is far from clear that this would happen, and when coupled with government spending cuts has the potential to actually cause recession. The once lauded trickle-down theory that bonuses for the rich will benefit lower income earners has been widely disproven.
It’s important to remember that progressive tax is a redistributive system, meaning that the state is intervening to redistribute resources from the wealthy through tax to the poor through welfare and social services provision. However, this does nothing to change how the distribution and accumulation of wealth through profit is inherently unequal under capitalism, due to a small elite controlling the majority of capital. Redistributive tax systems will never be radical enough to get to the heart of the issue. Instead, the working class must seize and democratize the means of production – but that’s a topic for another day…
A regressive tax is one that disproportionately impacts poor people because a larger proportion of their disposable income must go towards basic goods and services to ensure their survival. Two clear examples of regressive tax in NZ are GST and fuel tax. Although they are flat-taxes, which appear to affect everyone equally, they burden lower income earners far more because purchasing necessities for basic living takes up the bulk, if not all, of their disposable income. When these taxes increase, for example when GST went from 12.5% to 15%, or the more recent fuel tax increase, low-income earners have to make sacrifices in other areas like food, heating, and clothing. Ricardo Menendez March, from Auckland Action Against Poverty, highlights the particularities of geographical inequities in Auckland relating to the fuel tax when he writes: “A low income family, living in a public transport deprived area and dependent on an old vehicle to get around will be paying a higher proportion of their income towards fuel compared to a family living in an area that already enjoys a greater degree of public transport infrastructure and proximity to schools and workplaces.” These kinds of tax hikes have no place in our economy, they contribute to increasing disparity between rich and poor and hit hardest the people who already struggle the most.
There are other types of taxes that target wealth and profit accumulation specifically, two common ones being a capital gains tax and inheritance tax. A capital gains tax is effectively a tax on the profit gained from buying and selling capital such as property, shares, or intellectual property patents. Apart from a minimal tax on property resold within 2 years, or invested in purely for business purposes, NZ does not have a tax on profit. That means that the majority of high level wealth goes untaxed, which, given the horrific rate of inequality in this country, is a concerning issue. Inheritance tax, when implemented, often kicks in at a certain level of wealth inherited to protect the less well-off, and can be as high as 40%. New Zealand currently has no Inheritance Tax whatsoever. Both profit and inheritance is money that is not earned through working, and is often, as Max Rashbrooke puts it, “derived from luck”. Furthermore it is able to exponentially increase through further investment in assets, stocks, and trust funds. The fact that there is no decent way to tax and regulate wealth accumulation is one of the most shameful gaps in NZ’s tax system, and is leading to growing inequality between rich and poor every year that such complacency continues. But since it is the richest few that control political decisions, especially around money and resources, nothing is likely to change without a radical restructure spearheaded by those who suffer the most under the current system.
Hopefully this post has broken down some of the core aspects – and downfalls – of our current tax system, and showed how it is an important part of our economy that deserves our attention. Morgan Godfrey writes that “everywhere you look and listen, tax is talked about as something holding us down”, but “tax isn’t a weapon politicians use against the economy. Tax is what we use to pool our resources and secure the things we need: schools, hospitals, homes and more” (9). Furthermore, it doesn’t need to be this overly technical and boring realm that we leave to political debate around election time, and complain about when we see our P.A.Y.E figure on the payslip. Tax is the glue that holds our society together. The unfairness is not that we have to pay it, it’s that the wealthiest are able to so easily get out of paying their share.