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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