Taxes

A conversation about the similarities and differences between taxes and social security contributions – my son is studying economics – prompted me to head off to the OECD website and get the data on total taxes and social security contributions as a share of GDP.

Here is what I found for 2021 (the OECD didn’t have this level of data for its Latin American members, and I omitted Ireland and Luxembourg, as their GDP numbers aren’t a suitable basis for these purposes).

That is the snapshot for the most recent year, 2021, and here is how New Zealand has compared to Australia and to the OECD median (countries in the first chart) for the period back to 1995 when the data are comprehensive.

To be honest, I was a little surprised. I guess time passes and impressions need updating from time to time: the story I had been walking around with (probably formed a decade ago) was that New Zealand tax revenue as a share of GDP fluctuated around the OECD median. It used to but, whether under National or Labour-led governments, it hasn’t done so for some time now. It isn’t that taxes are trending down in New Zealand – as a share of GDP in 2021 they were about the same as in the first couple of years of the Clark government but (a) the contrast with huge surge in tax revenue in the 00s is striking, and b) the OECD median has been edging up.

Of course, Australia is an important comparator, given the number of New Zealanders who look at making – and often do make – the move to Australia, and there is not much consistent sign of a change in the relationship between the two countries’ tax/GDP shares. And the Anglo countries have tended to be lower taxers than continental Europeans, and of the five Anglo countries we were the median taxer in 2021. Whatever one thinks of the US, Australia is hardly some unliveable hellhole (certainly the New Zealanders who move there don’t think so), although neither is it some star productivity growth performer.

Opposition parties seem to be making a fair amount of noise about tax as we begin to head towards next year’s election. And in many respects I sympathise: I find it hard to think of a single one of the tax increases put in place in recent years that I thought there was a good economic case for, and the fiscal drag that results from not indexing income tax thresholds is just bad policy at any time. We tax business too heavily, whether under National or Labour.

But…..you have to identify the things you don’t want governments spending money on, and that is where our main Opposition party seems to struggle.

The picture is, if anything, a little more stark if we shift from taxes and social security contributions to total current revenue. Natural resources owned by the state are part of the picture here (see Norway in this chart vs the first one above)

On this measure, we are even more firmly to the left of the chart.

(Incidentally, there is a line – that I probably thought had merit – that we don’t need quite such high taxes because our public debt is low. But the OECD database had net interest data, and we turned out to have been the median country last year. (Low central government debt, but persistently high relative interest rates I guess)

All this data has been taken from the OECD. There is some IMF data, and for a wider range of advanced countries. I don’t put a great deal of trust in the IMF numbers (too often I find NZ numbers that look odd), but they do capture places like Singapore and Taiwan.

But here is the IMF’s total general government revenue data, for 2021

On this measure and this group of countries we are somewhat further from the left. And if (like me) you aren’t overly interested in underperforming Mexico, Chile, and Colombia, note nonetheless the really low revenue/GDP numbers for Taiwan and Singapore. One can have a highly productive economy (both countries now have materially higher GDP per capita than New Zealand) with a materially low overall share of government revenue and/or taxes.

I focused on taxes in this post because (a) that is where the political debate seems to be, and (b) because in 2021 government spending was much more thrown about by Covid one-offs than tax revenue was. In the longer-run, it is the level of spending that determines how high taxes eventually will need to be. Over the recent decades New Zealand governments have had a good record of returning to balance or surplus whenever shocks push the budget into deficit (which means we are one of a minority of OECD countries like that, and very unlike say the US and UK where deficits have been normalised). But note that – with an overheated economy, and thus cyclically high revenue – we are not projected to be at balance or in surplus this year.

(And to anticipate questions as to what I would cut were I granted a magic wand, here are the first five that come to mind: Kiwisaver subsidies, fees-free first year tertiary education, R&D subsidies, the accommodation supplement (having freed up peripheral land and collapsed house/land prices), and NZS (raise the eligibility age to 68 in the next five years not the next 25). But realistically I do not expect New Zealand wil operate with a lower tax or revenue to GDP share than it has now.)

20 thoughts on “Taxes

    • Something of that sort yes.

      And interest-free student loans

      Bottom line is that one could take out perhaps 2% of GDP in spending without facing any hard choices re health, education or care for the most vulnerable.

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  1. What about all those people still working and receiving NZ super (really old age pension) – NZ super is a massive cost – at least $12 billion!

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    • That is a change I definitely wouldn’t make – it becomes a big discouragement to staying in the workforce. But the big increase in the proportion of 65-69 year olds already working is part of what makes me comfortable with increasing the eligibility age to 68 quite quickly.

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      • I would link it with a slight increase in NZ super for those deferring collecting it, but really for most people still working they earn far more than NZ super so I don’t agree it would be a significant disincentive. However, I wouldn’t agree with abating NZ super against investment income as that seems more likely to cause a disincentive and would be perceived as more unfair.

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      • Agree on investment income.

        Re labour income remember that a lot of over 65s are already working part-time.

        I guess my longer term goal is to have universal NZS cutting in at an age where most people are no longer physically able to work (with needs tested benefits at lower ages). Retirement is a fine thing but not obvious why the state shld pay when people are generally able to work.

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  2. On that end to the accommodation supplement, what do you think of TOP’s housing policies, as a means to that end?

    – Introduce a land value tax of 0.75% – a small annual tax paid on the value of residential land.
    – Remove the current Bright Line Test and allow tax deductibility of interest for landlords, which is replaced by the land value tax.
    – Require a deposit of 100% of the value of an existing home when purchased for investment purposes.
    – Return the GST on new residential builds back to the local councils to fund further infrastructure development.
    – Establish a $3 billion development fund for Community Housing Associations with the goal of clearing the public housing waiting list within its first 3 years of operation.
    – Support more urban densification for central cities and transit nodes. Councils will be required to demonstrate that they have enough land zoned for new residential housing.

    https://www.top.org.nz/affordable-housing-policy

    Their corresponding tax policies are here;

    https://www.top.org.nz/higher-incomes-policy

    Supposedly tax neutral in Phase 1 which introduces the 0.75% LVT.

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    • Freeing up land use, esp on the peripheries, would be much more effective in lowering house/land prices.

      There are some interesting ideas in the TOP release, but I have a number of problems with it, some technical some political. At a technical level, drawing a line in which one class of land faces land tax and the rest don’t is pretty deeply unappealing, and may worsen the process of releasing land into housing. I have heard that this might only be Stage 1, but it is the plan they are running on now. There is also a problem that since their tax cuts rest of the assumed large revenue from the land tax, they would have a vested interest in keeping land prices high – which makes me suspicious as to whether they really care about getting house/land prices down (many “intensifiers” don’t – they just argue for smaller houses, which may be cheaper than bigger ones, but that isn’t the same thing as reversing the huge across the board life in prices.

      I’ve never been v keen on the NZ Initiative idea of remitting GSt on new builds to Councils. It rewards bad behaviour and at best is a second best to removing Council powers to restrict development.

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      • I thought the ones that may have a positive effect on house prices (and as a means to limit rent increases) were;

        – Remove the current Bright Line Test and allow tax deductibility of interest for landlords, which is replaced by the land value tax.
        – Require a deposit of 100% of the value of an existing home when purchased for investment purposes, and;
        – Establish a $3 billion development fund for Community Housing Associations with the goal of clearing the public housing waiting list within its first 3 years of operation.

        Community housing providers are far more likely to my mind to successfully build than Kainga Ora/HNZ.

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      • I’d be wary of allowing only cash purchases of investment properties: doing so strongly skews the playing field away from small investors. Adrian Orr often used to talk of a few mates of his who were fireman, who’d each bought a couple of investment properties. That allowed them leverage to an extent other options wouldn’t (and which would not constrain the already rich). Free up land – eg as in many US cities – and there won’t be an expectation of systematic rises in house/land prices.

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      • On the logic of the tax, it should be levied on all land, so that land is used for its most economic use. But that is one of the political problems; do I believe such a tax would be sustained? No (it wasn’t when we last had a land tax).

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      • With the way petrol prices are going – no one is going to want to live on the peripheries going forward. We aren’t a producer, like the US. And look at the price sensitivity they’ve got – my goodness, they will never accept the kind of prices we’ve been paying for decades. I’ll never live on the periphery again – commuted from Kāpiti most of my working life – its just not ideal particularly when the children are young. I missed so many bedtimes, I couldn’t count – and never made it home for the evening meal during the week with them.

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      • Freeing up land while conceptually has its merits, falls over when one considers the implications of a low energy future. Regardless of ones expectations about global warming oil is going to run out sooner than later (extraction cost of oil have moved from ~40 units recovered to closer 4 units recovered per unit of energy expended, 500 USD a barrel doesn’t unlikely in the next few decades). A free for all house building program is going to lock us into a high energy cost future. While infill housing is being pushed, I wonder if if offers the ROI we need due to costs to the other uses of a area, or the difficulty in mechanization of the building process, or the simple fact that much of it isn’t much above sea level. Throw in the likelihood that we need to push our forward view out to something like 100 to 300 year window due to the likely coming scarcity of energy, the probability that the global temperature will exceed the target (because oil is still the cheapest energy source for the moment), I am inclined to conclude the the best return to New Zealand as a whole, would see housing being addressed by a government lead construction of a new city (500,000 or so in size) in the south island atleast 30 meter’s above sea level.

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  3. It’s the small residential investors (the part-time landlords) that I think we need to discourage. I’d far rather see that money invested in NZ businesses via he stock market and/or taking a share in small business owner-operators. Additionally, RBNZ needs to amend the risk-weighting on residential dwellings as well. Freeing up land is probably the least thing responsible for our ridiculous house prices.

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  4. So having removed the Accomodation Supplement would you also get rid of Income Related Rents?

    The total number of publicly-oned houses was 68,169 in 2021, with 64,206 of those Kāinga Ora properties, and if the income-related rent received is divided by the 64,206 figure it equates to taxpayer funds of $16,260 per property.

    IRR costs the taxpayer far more than the AS.

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    • You make a good point and I was too quick to focus on AS. I would revert to market rents with someone like AS as a buttress for a minority of renters, but expecting that with sustainably reduced house prices the total outlays would typically be quite modest.

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