5 minute read

• Higher Taxes are inevitable due to rising superannuation, healthcare, education and defence expenditure.

• We must confront reality: the cost of essential services will rise, and higher investments are critical to boost our productivity.

• Unlike most rich countries, we don’t have capital gains, wealth or inheritance taxes.

• Is there now any excuse for taxing the richest in the land at 9%?

Laura Clark, former UK Ambassador to New Zealand, said we have Scandinavian dreams but tax like the USA. While Scandinavian dreams are very much in the rear-view mirror, we do tax and run deficits like the USA. We are adding another $45 billion to the credit card over the next four years, with the economy ticking along at normal levels. And this is after firing nearly 10,000 government workers and denying $12 Bn for some of the least-paid workers in the country.

Higher Taxes are inevitable due to broad medium-term trends in advanced economies – the three largest expenses, superannuation, healthcare and education, will grow significantly higher than inflation and wages. And now we have to spend billions more on defence.

Is there any excuse for taxing the richest in the land at 9%?

Slashing expenses in critical areas like R&D (which is already only 50% of the OECD average) damages economic growth and productivity. The scientists we lose will take years to replace, and their knowledge even longer. We are cutting support for food banks during a cost-of-living crisis, hurting the neediest in our society. We are not building any state housing with a waitlist of 20,000 and rising homelessness.

David Parker, retiring from politics, regretted the inability to reform our unfair tax system, where the wealthy paid only 9% of their incomes on tax, while the middle class paid 20%. Moms and dads pay another slice of their hard-earned money on GST. A 2018 study by Victoria University found that high-income earners (earning $330,000 per year) paid the lowest tax among ten countries. If the argument often made – that the wealthy flee to low-tax destinations was correct, we would be a country attracting tax ‘refugees’!

Our GST, a regressive tax that burdens the middle class more than the rich, is one of the highest in the OECD as a percentage of GDP. Unlike most countries, we don’t have an exemption or a concessionary rate for food, which exacerbates the situation.

We are almost unique in taxing from the first dollar we earn, burdening students, retirees, low-income earners and the middle class. In Australia, the first $20,000 is tax-free, and in the UK, the first $28,000.

Before the mid-1980s, we had a wealth tax, an inheritance tax and a top tax rate of 66% on high-income earners. Now we have no wealth or inheritance taxes, a top tax rate of 39%, and a draconian GST, resulting in a massive transfer of the tax burden from the wealthy to the hard-working middle class and low-income earners.

Unlike most rich countries, we don’t have capital gains, wealth or inheritance taxes.

We are probably the only rich country without a Capital Gains Tax (even the USA taxes 20%). In the latest IPSOS survey, two-thirds of New Zealanders supported a Capital Gains Tax. It is a travesty that an average income earner pays 20% in income tax and GST and must cover all the expenses of running a household. In contrast, someone who makes a Capital Gain of a million dollars pays no tax on it.

The Economist, the preeminent economic magazine today, called for higher inheritance taxes to address a rising ‘inheritocracy’. They argued that the surest way to get rich was not by working hard but by marrying into a wealthy family. Inherited wealth as a share of national output has doubled in France since 1960 and tripled in Germany since the 1970s. And our tax system is more lopsided than those of the French and Germans.

Superannuation costs have increased from $ 14 Bn to $ 21 Bn, 50% over the past five years, from 2019 to 2024. We will have fewer workers to support a retiree population that has grown by 30% over the past decade and is expected to double over the next thirty years.

Healthcare costs have jumped from $18 billion to $30 billion (65%) over the same period. Healthcare expenditures are expected to continue increasing exponentially due to an aging population and advances in expensive new drugs and medical procedures. The cost of education increased from 42% ($14 billion to $20 billion) and is likely to rise as a better-educated workforce will require longer years of education.

The tax-cutting path we have been on for the past thirty years is not sustainable. Increasing the burden solely on the squeezed middle is unfair and could lead to revolt and populism.

We might make a dent in expenses by tinkering with the retirement age and investing more in preventive and primary healthcare. However, we must confront reality: a future where the cost of essential services will rise and higher investments critical to boost our productivity.

Our governments are trying to block floods with their fingers in the dike. It is myopic to ignore opportunities to widen the tax base.