New Zealand is a relatively high-taxing economy where higher-income earners pay the bulk of income tax. Those are two of the conclusions of Australian economist Sinclair Davidson in a new study published by the New Zealand Business Roundtable.

In Personal Income Tax in New Zealand: Who Pays, and Is Progressive Taxation Justified? Professor Davidson - associate professor in the School of Economics and Finance at RMIT University in Melbourne, Australia - examines three questions:

• Is New Zealand a high-tax or low-tax economy?
  
  
• Who pays the lion's share of tax in New Zealand?
  
  
• How do arguments for a progressive tax scale measure up?

In answering the first question, Professor Davidson comments that tax comparisons are often ambiguous, given the differing definitions of tax and social security contributions. However, he writes, "it is clear that New Zealand is not a low-tax economy, compared with non-European economies, on any measure and definition." When comparing tax ratios on a weighted basis, the full extent of the this country's tax burden becomes readily apparent. New Zealand is relatively high-taxing, and for its region particularly high-taxing.

Furthermore, the study finds that New Zealand's top marginal tax rate cuts in very quickly at an income level of 1.2 times average per capita gross domestic product (GDP). This compares unfavourably with the United States at 8.5 times per capita GDP or 9.5 times per capita GDP in Singapore.

Professor Davidson finds the perception that the so-called 'rich' do not pay their fair of tax to be at odds with reality. In 2004-05, the top 2.58 percent of taxpayers paid 24.07 percent of personal income tax. This is 9.33 times more in tax than their population share. Various studies show that between 40 and 60 percent of households receive more in government benefits than they pay in tax. Reviewing the tax incidence literature, Professor Davidson finds that "the evidence shows that the tax burden is concentrated in households in the top half of the income distribution." The top 10 percent of households pay almost as much in tax as the next decile earns in income.

Tax debate often revolves around the notion of 'fairness'. Professor Davidson writes:

It is argued that people should pay their 'fair' share of tax, and it is often assumed that progressive taxation is 'fair' taxation. The most sophisticated argument for progressive taxation is equality of sacrifice based on diminishing marginal returns, but economists have long discredited it. Other ad hoc arguments are equally unsatisfactory. Progressive taxation is inherently arbitrary and unfair.

The study notes that the McLeod Tax Review of 2001 commented that progressive and proportional tax systems can both be described as being fair. After weighing the arguments, it recommended moving to a lower, flatter tax scale.

New Zealand Business Roundtable executive director Roger Kerr said that Professor Davidson's study was a contribution to current debate on fiscal policies. "The Business Roundtable has pointed out that New Zealand cannot become a high-growth economy with current levels of government spending and taxation. In respect of tax policy, from both a growth perspective and on fairness grounds, political parties should be heeding the McLeod Review's recommendations."

'Personal Income Tax in New Zealand: Who Pays, and Is Progressive Taxation Justified?' is available to download for free as a PDF file from the NZBR website. It is also available for sale.

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Also available on the NZBR website: 'The Case for a Flat Tax', based on a lecture in Auckland by University of Chicago law professor Richard Epstein in 2004.

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For more information, contact:

Sinclair Davidson
Associate Professor of Corporate Finance
School of Economics and Finance
Royal Melbourne Institute of Technology
239 Bourke Street
Melbourne 3000
Australia
Ph: +61-3-9925-5869
Email: sinclair.davidson@rmit.edu.au

Roger Kerr
Executive Director
New Zealand Business Roundtable
Ph: +64 4 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
New Zealand Business Roundtable
Ph: +64 499 0790
Email: dyoung@nzbr.org.nz

www.nzbr.org.nz