OPINION: Since Budget day there has been a renewed interest in tax. With capital gains tax (CGT) off the table, speculation has turned toward personal taxation and in particular whether the Government may look to increase the top tax threshold and/or the rate.
None of this speculation has come from what was contained in the Budget, but rather because of what wasn’t covered. As Aristotle said “nature abhors a vacuum”.
To that end, budgets generally contain a wealth of information nuanced around the messages the Government wants to deliver. This year was no exception, with the vast majority of the narrative focussed on new spending badged under a “wellbeing” framework, which meant the commentary was skewed toward expenditure.
Missing was any detailed discussion on revenue. As good as it got was the Government’s overall fiscal strategy (mentioned largely in passing and buried in the bowels of the Budget document); that canvassed general themes and intentions around “progressive taxation that is fair, balanced and promotes the long-term sustainability and productivity of the economy”.
Why was the Budget vague on revenue? In part because Budget messaging is targeted to appease an audience that is mainly interested in the here and now; as the voting public doesn’t tend to look past a 3-year election cycle, which influences the way politicians think and behave.
Put another way, in the absence of announcing tax relief, there is generally no good news when revenue is a Budget topic – hence it’s better to say nothing at all.
So if a revenue lever were needed to be pulled, which one?
Short of fundamental reform of the tax system, taxing existing taxpayers in the same way – but more – would be the natural conclusion.
To provide some context, the largest contributor to government revenue is personal income tax. Since 2015, the personal income tax contribution as a proportion of total revenue has remained steady at just over 40 per cent, despite increasing by over $8 billion during that period. Why? Because of an amalgam of factors that include wage growth, ‘bracket creep’ and growing workforce participation.
GST and corporate tax contributions have also remained steady in percentage terms, while continuing to grow by around $3-to-$4 billion each, during the same period.
What does this all mean?
Some protagonists will profess that corporates are clearly avoiding paying tax and the answer is to focus there. However the simple reality is that domestic corporate profits (real not created) are just not growing faster than other sources of revenue, our corporate tax base is relatively shallow and the corporate tax rate is already well above the OECD average. Taxing the corporate tax base more is therefore unlikely. And it is even less likely that there would be an increase in GST.
The facts, unfortunately, don’t make for great reading for the contributors of personal income tax, particularly those at the top end. Rather than a broad and resilient revenue base, we are critically reliant on personal income tax revenues from a small percentage of the population who are likely to be the easiest target if more tax revenue is sought to be gathered; similar to when the previous Labour Government raised the top rate from 33 per cent to 39 per cent.
Illustrating this using projected 2020 figures, 12 per cent of the population pay 48 per cent of all personal taxation. The top 3 per cent of the population pay 24 per cent. Flipping it around, 48 per cent of the population only contribute 8 per cent of all personal taxation. And these metrics are more pronounced when initiatives like Working for Families are factored in.
So how much more can or should be contributed by this top group; and why is it considered in certain quarters that they are not paying enough?
For some, the answer is enough is never enough. The view is that they can pay more and should (if required). International comparisons to countries with higher rates are also raised – not necessarily in an informed way, but to make a good justifying soundbite.
Of course, there is no easy answer.
But what is clear is that over time, through reducing the tax burden for the many, a small percentage of the population pay the greatest share. A risky strategy, which is further slanted by the fact that this group is not even the wealthiest in New Zealand, but rather the group that derives the most income in their name and therefore pay tax at the top rate.
The undeniable truth is that we already have a progressive personal income tax system where a small percentage pays the vast majority of all personal tax.
The Wellbeing Budget didn’t recognise this. Nor did it provide any other solution to raise revenue than taxing this group more – since CGT is not progressing. Taxing more is hardly a popular topic – made worse if a government gets the taste for it (increasing taxes).
What may ultimately come to the rescue is the New Zealand economy – the gift that keeps on giving; as forecasts now anticipate even greater surpluses than expected on Budget day.
Certainly if the economy can continue to work its magic then taxation may be left off the agenda for a little while yet; which bodes well for a Government that wants to avoid being badged as “tax and spend” and wants to look forward to a second term.
Thomas Pippos is chief executive of Deloitte New Zealand