New Zealand’s Tax Landscape: A Closer Look at Reforms Needed

New Zealand’s tax system faces scrutiny as government agencies, including the Treasury and Inland Revenue, call for a reassessment of tax policies. With concerns about funding for an ageing population, discussions have emerged around potential tax increases and the introduction of a capital gains tax, as suggested by CPA Australia.

According to data from Infometrics, a household with two median income earners in New Zealand, each making $72,900 before tax, pays an average of **$39,800** in taxes annually. This consists of approximately **$14,100** in income tax per person and **$11,600** in Goods and Services Tax (GST), along with an additional **$3,800** in local government rates.

Tax Collection and Its Implications

Brad Olsen, chief executive of Infometrics, highlighted that over **90 percent** of tax revenue collected by central and local governments is directed to the central government. The proportions shifted slightly in 2023, with about **93 percent** of taxes or rates collected going to central government and **7 percent** to local government. Households in New Zealand now pay roughly **$985** more in local rates compared to 2023, and **$3,182** more in income tax and GST.

Olsen pointed out the stark difference in how these payments are perceived. Households receive direct notices for local government rates, while income tax payments are often invisible due to the Pay As You Earn (PAYE) system, where employers deduct taxes before employees receive their wages. “For GST, you don’t directly tally up your GST and pay it to the government; it’s part of your daily spending,” he explained. This distinction contributes to the public’s focus on rates increases over tax payments, despite the latter being significantly larger.

In discussions about potential tax reforms, Olsen suggested that a cap on taxation, similar to those imposed on local governments, could be considered for the central government as well. He noted that for every dollar of additional rates paid in the last three years, households have seen their taxes increase by **$3.23**.

Comparative Tax Burdens and OECD Insights

As New Zealand’s income tax system evolves, it is essential to understand its position relative to other countries. A report by consultancy **OliverShaw** in 2023 indicated that the top two tax brackets constituted **21.2 percent** of taxpayers and accounted for **68.5 percent** of income tax collected in the 2021 tax year. Even those earning between **$180,000** and **$300,000** represented less than **2 percent** of taxpayers but contributed **9.3 percent** of income tax.

Shamubeel Eaqub, chief economist at Simplicity, noted that New Zealand’s overall tax burden is among the lower in the Organisation for Economic Co-operation and Development (OECD). With a tax-to-GDP ratio of **34 percent** in 2023, New Zealand is slightly above the OECD average of **33.9 percent**. Eaqub emphasized that the country’s position is largely influenced by the absence of capital taxes and social security taxes, which are prevalent in many developed nations.

Countries like France, Denmark, and Italy impose much higher tax rates, with GDP taxes of approximately **44 percent**, **43.4 percent**, and **42.8 percent**, respectively. Eaqub cautioned that high taxation without corresponding value in public services can lead to dissatisfaction among citizens, particularly younger people, who may seek opportunities abroad.

The reliance on income tax in New Zealand means that workers shoulder a larger tax burden compared to their counterparts in other countries. According to Craig Renney, policy director at the Council of Trade Unions, the absence of capital-based taxes leads to a tax structure that differs significantly from that of many Western economies. “We tend to over-emphasize GST and PAYE,” Renney stated, advocating for a broader discussion on tax reforms that focuses on outcomes rather than winners and losers.

Eric Crampton, chief economist at the New Zealand Initiative, also weighed in on the need for balance in tax policy. He suggested that addressing the government’s structural deficit will require a combination of reduced spending, enhanced economic growth, and potentially increased taxes. “I would focus on spending before looking at taxes,” he advised.

Inland Revenue has been exploring options to ensure that increases in GST do not negatively impact low-income households, acknowledging that GST captures spending from income that is often harder to tax. Crampton underscored the critical need for the government to demonstrate that any higher tax revenue is justified by the value provided to citizens, especially as an ageing population places additional demands on fiscal resources.

New Zealand’s tax structure will likely continue to evolve amid these discussions, highlighting the importance of understanding both the current landscape and the potential implications of any proposed reforms.