Income inequality has been an ongoing concern for Kiwis and NZ is one of the worst countries in the OECD in terms of wealth distribution. The top 10% hold 50% of NZ’s total household wealth. In simple terms, the rich are growing richer and the poor poorer.
The Current NZ Tax System
NZ does not impose high or vast amounts of taxes and sits in the middle of the OECD countries in terms of total taxes. Our tax system is regarded efficient and easy to administrate but fairness is equally as important, if not more. The overall tax system should be progressive and aim to redistribute and improve the wealth of a country.
High Wealth Individuals Research Project
The IRD High Income Individuals project looked into collecting information from 311 high-wealth individuals regarding their income, assets and other financial information. In this group the median wealth was $106 million and average wealth at $276 million. IRD has found that the wealthiest kiwis are paying tax at an effective rate of 8.8% while the average kiwi pays at an effective rate of 20.2%. This has shocked many, especially those at the lower end of the income decile.
With the release of the report, for the first time, we have data confirming the unfairness of the NZ tax system. Although our income taxation scheme is progressive and similar to those of other OECD countries, a crucial area is left untaxed, capital gains.
In the wealth group studied, only about 7% of their income was taxable as personal income and the rest was earned through companies, trusts and trustee income and other capital gains. Those earning salaries are taxed on every dollar they earn while those deriving majority of their income from capital gains are able to escape tax due to the absence of a capital gains system in NZ.
Another significant point to be noted was that 66% of the high wealth families studied declared they were recipients of a “significant gift or inheritance”. A total of $411 million was reported as being received, averaging around $6.2 million per family. This is a large amount of money that is capable of providing a significant head start to the recipients. As the saying goes money makes money and it is inheritance and such gifts which start generational wealth. These families are at quite an advantage and are well equipped to use the amounts to continue their wealth.
Looking into the Future
The research has sparked discussion on the possibility of implementation of the capital gains tax in NZ and whether it is necessary to promote a more equitable and fair system. The topic of capital gains is controversial as it has been discussed many times with many in favour of the tax and many against. Taxes such as inheritance tax, wealth tax, deemed income tax and CGT on realisation basis will be a hot topic as we approach the upcoming elections.
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