September 4, 2013

NZ tax/benefit system is moderately progressive

In the run up to the US election, there was a popular factoid to the effect that  50% of the US population paid no tax. This was, of course, untrue, but it could be arrived at by minor blurring of a true statement:  47% of tax units (family or individual) paid no net federal income tax.   The US has a strongly progressive federal income tax (more so than NZ), combined with a moderately regressive federal payroll tax and state and local taxes.  The average tax rate ranges from 17% for the poorest 20% of people, to 25% for the middle 20%, to 29% for the richest 1%. These figures are potentially misleading in the other direction, since they don’t count benefits, but the US benefit system is relatively limited and the figures for the middle 20% and up would not be appreciably different.

Doing this sort of calculation precisely is surprisingly difficult, because it’s not as easy as you might think to work out who really pays which taxes.  For example, you might assume that shoppers pay GST and land owners pay land taxes/rates, but in fact renters end up paying a chunk of the rates in increased rent, and retailers pay a small part of GST in reduced profits.   In New Zealand it’s probably a reasonable approximation to just count income tax and GST, and to assume these are effectively paid by earners and buyers.  It’s not a reasonable approximation to just count income tax — and publishing estimates of tax share that only use income tax and benefits, even if you do it with scrupulous accuracy, is likely to lead to the sort of misquotation that we saw in the US.

Over at pundit.co.nz, Rob Salmond does some calculations, and while I think the tone is unnecessarily inflammatory, the final numbers look plausible. The 10% highest-income households  get about 30% of the income and they (actually, ‘we’, I think) pay 43% of the net tax.  [Rob also mentions the highest-wealth 10% of families, implying incorrectly that these are the same people].

For comparison, in the US, it’s the highest-income 5% of the population that gets 35% of the income and they pay 37% of the tax. Since benefits are about 28% of US federal spending, they are about 18% of all taxes, and so the share of net taxes for the top 5% will be about 44%. NZ is both less unequal and has a slightly more progressive tax and transfer system (and we have a national health system, too).  In the other direction, we have more inequality and a less progressive tax and transfer system than, say, Sweden.

If we stipulate that a mix of income tax and GST, with few deductions, is what we’re working with, making the  tax system more progressive has obvious benefits in terms of reducing inequality, and costs in terms of reducing productivity.  Making this tradeoff is a policy issue rather than a technical one, and it’s perfectly reasonable for people to argue for their own positions as strongly as they can: inequality and productivity are worth arguing about.

On the other hand, if you’re going to use a relatively unnatural statistic based on income tax and benefits but not GST, aggregated in an unusual way, I think you have the responsibility to point out carefully  and explicitly that you’ve left out GST (and, ideally, explain why). Bill English said ” The 1.3 million households with incomes under $110,000 a year collectively pay no net tax—that is, their total income support payments match their combined income tax.” The clause before the dash is simply false. The clause after the dash is true, but I don’t think it’s a contribution to informed public debate.

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Thomas Lumley (@tslumley) is Professor of Biostatistics at the University of Auckland. His research interests include semiparametric models, survey sampling, statistical computing, foundations of statistics, and whatever methodological problems his medical collaborators come up with. He also blogs at Biased and Inefficient See all posts by Thomas Lumley »

Comments

  • avatar

    Good stuff.

    When it comes to looking at the implied burdens, albeit without price effects (such as changes in wage rates or the relative price of goods and services), Treasury has done the following decomposition work:

    http://ips.ac.nz/publications/files/2d6039de603.pdf

    http://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/WP10_2013_Distribution-Income-and-Fiscal-Incidence_18062013.pdf

    11 years ago

  • avatar
    megan pledger

    Most of the “burdens” are where we as a society have wanted them to be placed. We wanted retirees to get a retirement benefit, we wanted households with children to get education and health care benefits for the children. These are all social goods (as well as personal goods). For the *Treasury* in their analyses to place all the cost of these social/personal goods on the recipients (or the recipient’s parent/s) is really unfair and done apparently for propaganda ends.

    It’s also really unfair to do the analysis at the level of the household – the father who moves in with his secretary becomes a “maker” while the now solo mother is a “taker” as her household get lumbered with the cost of all the health and educational services their kid’s use.

    The Treasury analyses are too simplistic – they fail to take into account that having and raising kids is essential for society and it’s economy but, by their analyses demonise the people who do so as if they were not contributing anything because being pregnant, giving birth and raising kids doesn’t earn a monetary income.

    11 years ago

    • avatar

      Treasury’s analysis is not trying to add any of the value judgments you’ve discussed – it is just describing the distribution of income and the impact of policy.

      What we SHOULD be doing in terms of fairness is a separate question, and one that the democratic process hopefully helps us solve to some degree. Understanding where we are in a descriptive sense helps society discuss this, which is why Treasury has done and released this information.

      11 years ago

      • avatar
        megan pledger

        1) Making the household the unit of measurement was the *choice* of who ever did the analysis. There is no way you can say that choice is values neutral. Going with the status quo is not values neutral.

        2) Describing something unfairly or incompletely doesn’t help make good policy.

        11 years ago

        • avatar

          Megan, the household is the standard unit of analysis – and Treasury offers work where they change the way households are “weighted” among members. It is very true that this is an issue that requires significant thought and care – but they have been at pains to suggest that.

          “Describing something unfairly or incompletely doesn’t help make good policy.”

          They are describing things as clearly as we possibly can – these issues are far from easy! Providing this improves policy more than just relying on our feelings and empty rhetoric!

          I am sure, in fact I know, that Treasury shares your concerns about making sure we try to clearly understand what is going on – which is why they have been, and are, investing significantly in trying to show and discuss these trade-offs that exist.

          This is not propaganda as you’ve stated above – in truth people inside society have very different ideas about what is fair and what is not fair, and the policies we get are some representation of this.

          There is nothing in this Treasury work that suggests we should “transfer less” or “transfer more” to certain groups :)

          11 years ago

  • avatar
    megan pledger

    1) It’s a false dichotomy to say the alternative to “unfair”/”clearly as we possibly can” description is “feelings and empty rhetoric”.

    2) When the vast majority of households with children were two parent households then it made sense that the taxable unit was a household. The subsidies that each parent gave the other for splitting up domestic and non-domestic work were neutral at the household level. The services the children used could be held against both their parents because both parents were in the household.

    Now(ish)adays 26%* of kids live in solo parent households. It makes no sense to have all the government service use by the children accrue to the care-giver household and not to the non-caregiver household.

    *actually an NZstat figure from 1999 but it was the first one I found given the time I was willing to search for it, the last figure I recall is 33% of kids live in solo parent households.

    3) Age/time ought to matter in the treasury analysis. What we really want is a person’s life time net benefits received to equal their net tax paid and they mostly do because inflation takes care of it. To say (or imply) we want people to be tax neutral at every age is just stupid – we want retirees to have a benefit, kids to have health and education.

    4) These things matters because what policy comes out of it – solo parents on the DPB have to go back to work when their child starts school or when their child is 1 if the child is born while it’s parent is on DPB.

    There is no law for the non-caregiver parent about getting off a benefit or about taking a higher paying job to generate more income when his/her kids reach a certain age. And that’s because the govt cost of his/her kids isn’t accrued to him/her so it looks like s/he is doing a great (tax-govt benefits) job.

    11 years ago

    • avatar

      Megan,

      I am calling your statements empty rhetoric not to knock them down – it is because my impression is that you are driving meaning into their analysis that is not there!

      Treasury is currently expanding their analysis along a number of dimensions – to expand the way they look at household structure, to incorporate information from recent longitudinal studies etc etc.

      But even within what they have done so far, without this, this statement is patently unfair:

      “For the *Treasury* in their analyses to place all the cost of these social/personal goods on the recipients (or the recipient’s parent/s) is really unfair and done apparently for propaganda ends.”

      This is not what they have done at all. All they have done is described how the income distribution actually looks.

      Convoluting a description of the data with we we think society should do, or what is fair, is dangerous. And if Treasury was doing this they should be called to task.

      However, they are not.

      11 years ago