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25 August 2005 New Zealanders Are More Highly Taxed than Australians In a recent speech, finance minister Michael Cullen declared that it was a "myth" that taxes are high in New Zealand and that "if anyone tells you that Australians pay less tax, your best response is: baloney". He is wrong. The ratio of government spending to GDP is the best measure of the overall tax burden. 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's December 2004 Economic Outlook forecast that spending by governments at all levels would total 35.8 percent of GDP in Australia and 38.7 percent in New Zealand in 2005. An alternative measure is overall taxation. On this basis, accounting firm Staples Rodway calculated that Tax Freedom Day came 7 days earlier in Australia than in New Zealand this year - meaning that the tax burden is 5% higher in New Zealand. These approaches avoid the problems of comparing the different features of the two tax systems, including different bases and rates for income tax and GST. In particular, looking at statutory income tax rates alone - Australia's two top personal tax rates are 42% and 47%, compared with rates of 33% and 39% in New Zealand - can be very misleading. Nevertheless, a proper analysis even of personal income tax alone tells the same story. Dr Cullen focused on income tax comparisons to make an argument that a New Zealander earning either the average New Zealand wage, $41,400, or 1.5 times the average wage, $62,100, would pay less tax than someone earning an equivalent income in Australia. However, his analysis confuses apples with oranges, uses an inappropriate exchange rate and rests on misleading examples. The accompanying chart shows the whole picture for incomes up to NZ$100,000. It calculates an individual's income tax liability in New Zealand for each level of income (as a ratio of gross income) and subtracts from that the corresponding ratio for the equivalent level of income in Australia. An IMF purchasing power parity exchange rate for 2005 of NZ$1=A$0.917 is used. On this basis, which is consistent with Dr Cullen's methodology, the chart shows that New Zealanders have a higher average income tax rate than Australians for the whole income range examined. For lower incomes this is largely because the first A$6,000 of income in Australia is tax free, whereas tax at 15% applies in New Zealand. At the higher levels of income in the chart, the New Zealand tax burden is higher primarily because the relevant Australian tax rate of 30% is lower than the New Zealand rates of 33% and 39% and it extends to A$70,000 (equivalent to NZ$76,000). So where does Dr Cullen's "baloney" argument come from? The answer may be from ex-CTU economist and his former economic adviser, Peter Harris. According to its website, the Public Service Association commissioned Harris in May 2005 to explore the "myth" of the exploding public sector. Using the July 2006 Australian tax scale, Harris calculated that a single New Zealand taxpayer on $41,400 would pay 20.6% of that income in income tax, whereas on the equivalent Australian wage of A$39,000 (implying an exceptionally higher exchange rate of NZ$1=A$0.942) Australian income tax would be 19.4%, increased to 20.9% if the Australian Medicare levy were included. In his speech, Dr Cullen omitted the 19.4% figure and claimed that taxes were higher in Australia at 20.9% compared to 20.6%. This is an apples and oranges comparison. At an income of NZ$41,400, the ACC levy in New Zealand is 1.2 percent and the Medicare levy in Australia on the equivalent income is 1.5 percent. Exclude the Medicare levy, use a more appropriate exchange rate and the gap at NZ$41,400 is 1.5 percentage points in favour of Australia, as indicated on the chart. Include the Medicare and ACC levies and the gap is 1.2 percentage points. If these levies were included in the chart, the disparity for low income New Zealanders would be greater because there is no Medicare levy in Australia at lower incomes. A comparison at the $62,100 income level produces a similar result, as the chart illustrates. Other complicating factors could be analysed, but the overall picture is clear. Whether you look at a government expenditure measure, an overall tax burden calculation, or an income tax comparison for the vast majority of taxpayers, New Zealanders are more highly taxed than Australians for the same level of income.
The chart excludes ACC and Medicare levies. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |
