This policy brief examines why and how the tax reforms of the late 80s and early 90s to flat low rate taxes fell short of their promise and explores practical options with better outcomes.
Better tax policies could also raise more revenue, not only to reduce poverty but also to fund the much-needed expenditure on climate change, healthcare and education.
The concern in the 1980s was that higher income people faced highly visible and damaging tax rates (the top tax rate was 66% for a time). Unfortunately, the reforms shifted the problem from high income earners to low and middle income earners where the problem was far less visible and far more damaging.
This paper looks at these claw backs of various kinds which create high Effective Marginal Tax Rates (EMTRs) over long income ranges. Showing low and middle income paid workers face huge disincentives to earn extra income.
The paper argues the broad base principle for the income tax system was never achieved, because the fourth Labour government (1984-1990) failed to include capital gains in the base. In particular, the deliberate under-taxation of housing income has been a major driver of NZ’s inequality and poverty problem.
There are now huge inequities in the distribution of housing resources. Real estate gains accumulated tax-free over time have led to a ‘landed gentry’ class developing, and wide and damaging wealth inequality.
As housing is by far the major source of lopsided wealth and misallocation of resources in New Zealand, CPAG supports an approach that includes housing income in the tax base as outlined by St John and Baucher.
RECOMMENDED POLICY ACTIONS
· A tax on an imputed income on wealth held in real estate as outlined above in this document, (rather than a Capital Gains Tax or a Land Tax or a Comprehensive Wealth Tax).
· No exemptions for GST but better recognition of the regressivity of the GST/income tax system through more generous and wage-linked tax credits, and regular adjustment of tax brackets for inflation.
· That the Effective Marginal Tax Rates (EMTR) problem is urgently reduced by:
o Increasing the tax threshold above which a 30% marginal tax rate applies from $48,000 to over $50,000.
o Reducing the Working for Families abatement from 27% to 20%.
o Raising the current threshold for Working for Families abatement from $42,700 to a much higher and indexed threshold (say $53,000 in 2023/24) and indexing to wages annually.
o Reform of Supplementary Assistance such as the Accommodation Supplement.
o Raising the threshold of student loan repayments from the current $22,000 income to $60,000, and establishing a loan forgiveness programme for those who stay and work in Aotearoa New Zealand.
IMPACTS AND INDICATORS
If implemented, these actions would invest in children, young people and whānau and be steps towards moving Aotearoa to be a nation where all children and families flourish free from poverty. Significantly more children and their families will live free from the toxic stress of poverty. They will have better life outcomes, better health, more choices and be better able to contribute to society.
Government would be much more likely to meet its child poverty reduction targets and meet them on schedule. Child poverty would also measurably reduce on a range of other indicators.
Structuring taxes to achieve equitable and efficient outcomes is relevant to:
· The Crown meeting Te Tiriti o Waitangi obligations
· New Zealand meeting its obligations under the UN Convention on the Rights of the Child.
· New Zealand meeting its targets for UN Sustainable Development: Goal 1: “End Poverty in All Its Forms Everywhere”; Goal 2: “End Hunger”; and Goal 10: “Reduce inequality”.
· The national vision “that New Zealand be the best place in the world for children and young people”
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