On December 6th the Organization for Economic Cooperation and Development (OECD) released Divided We Stand: Why Inequality Keeps Rising, a report into income inequalities around the world.

According to the report, the richest 10 percent of New Zealanders earn approximately 10 times more than the poorest 10 percent. In the 1980s the ratio was approximately 6 to 1. New Zealand’s current inequality levels put the country on par with Australia, Japan, and Canada, and above the average for OECD nations.

The authors of the report examined several economic measures to gauge the extent of income inequalities in New Zealand, including the gini index on household net income, individual earnings, household market incomes, and wage dispersion.

New Zealand was deemed to have a household net income gini index of 0.32, with the OECD average household net income gini index is 0.31. The wage dispersion ratio between the bottom 10 percent of earners and the top 10 percent of earners was 2.92, significantly lower than the OECD average of 3.33.

The report suggested that the best means to address any shortcoming in income equalities was to address the issue of unemployment, invest more into national education and work training programs, and close outstanding loopholes which allow for high income earners to neglect their tax obligations.

Photo by / Piers Brown

On March 8th the New Zealand Minister of Revenue Peter Dunne gave a speech to the Tax Agents Institute of New Zealand, regarding the government’s current outlook on the tax system. During his speech, the Minister unveiled a new method of donating to the recovery of Christchurch.

The Minister said that last year New Zealanders claimed tax credits of NZD 154 million for donations they had made. He stated that when taxpayers come to file their upcoming annual tax returns, they will now have the option of redirecting part of their tax credits to the government’s Christchurch Earthquake Appeal. Peter Dunne described the system as “a kind of gift aid scheme”.

Peter Dunne explained the government’s decision to instate the new system, saying, “…the message I have been getting is that many people want to be able to do more.” He went on to say that the new scheme will allow New Zealanders to make valuable donations without directly feeling the financial impact of their deed.

The Minister also reminded New Zealanders that they are able to make donations to the appeal through the payroll giving scheme. He advised taxpayers to investigate Inland Revenue Department resources to see if they are able to make such donations.

On May 26th the IMF released The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand and Potential Growth of Australia and New Zealand in the Aftermath of the Global Crisis, two separate working papers concerning aspects of the New Zealand and Australian economies, in the face of the receding effects of the global economic crisis.

The Potential Contribution of Fiscal Policy to Rebalancing and Growth in New Zealand, advises the New Zealand Government to rebalance its taxation policy to reduce the reliance on labor and capital taxation. Projections indicate that if appropriate alterations are made to shift fiscal focus to consumption taxes, New Zealand’s long-term growth potential will rise 1 percent above baseline. Although, the benefits will be negligible if the consumption tax revenues are redistributed via public transfers, such as benefits and welfare programs. The paper also suggests that Government spending be heavily reduced. As an example, the paper suggested that if Government expenditure be capped at 1 percent of GDP long-term economic growth could increase by 2 percent.

Potential Growth of Australia and New Zealand in the Aftermath of the Global Crisis discusses the impact of the financial crisis on New Zealand and Australia. According to the paper, New Zealand and Australia can be expected to undergo medium-term potential growth levels of 2.33 percent and 3 percent respectively. The Governments of both countries are warned to expect economic hurdles in the form of higher costs of capital. Although the difficulties could be offset by increased demand for commodities, especially from quickly recovering Asian economies.

Photo by JavierPsilocybin

On May 20th the New Zealand Government revealed its latest budget, introducing numerous personal income tax rate decreases, measures to close loopholes in the tax treatment of rental properties, and an unexpected cut to the level of corporate taxation. According to a poll conducted by New Zealand Taxation, nearly 60 percent of respondents claimed to be neutral in satisfaction regarding the tax changes, while over a quarter of survey takers said they were “Very Unsatisfied” with the Budgets. Additionally, 16 percent were “Very Satisfied” or “Mildly Satisfied” with the cumulative fiscal change package.

Phil O’Reilly, Business New Zealand Chief Executive, has been an outspoken supporter of the 2 percent decrease to corporate taxation and PIE levy rates, announced in the Budget. he claimed that the new rates will lead to competitive and higher-earning economy. Commenting on the fiscal package he said, “These tax decisions are targeted at the long term health of the economy. It is to be hoped that future budgets will continue this positive approach.” Although he went onto to ask what measures will be implemented next to ensure the competitiveness of New Zealand’s economy against the Australian market.

As a cumulative package, the new Budget has received general praise, with commentators lauding the numerous tax cuts. Although several commentators have claimed that the Budget is of greater benefit to high-income earners with little advancement for low-income New Zealanders. David Cunliffe, Finance Spokesperson for the National Party, commented further, saying, “When the rosy glow of Beehive spin wears off, New Zealanders will know they’ve been swindled.”

Photo by tony_the_bald_eagle

On May 20th the New Zealand Government revealed its national budget for the year 2010. The latest budget aims to reduce the impact of last year’s recession while introducing a range of fiscal stimulus measures and providing a solid base with which the Government can maintain control of the nation’s economy.

The Budget announcement revealed a number of significant alterations to New Zealand’s tax system. As expected by most economists, the Government has confirmed that the Goods & Service Tax (GST) rate will be raised to 15 percent from the current rate of 12.5 percent.

The increase in GST is offset by decreases to personal income tax rates at all income levels. Taxpayers earning below NZD 14 000 (approx. USD 9 507) will face a tax rate of 10.5 percent, compared to the current rate of 12.5 percent. The tax rates levied on the NZD 14 001 to NZD 48 000 income bracket will be reduced by 2.5 percent to 17.5 percent. Marginal incomes between NZD 48 001 and NZD 70 000 will be taxed at 30 percent, 3 percent below the current rate. The top marginal rate, currently applied to incomes above NZD 70 000 (approx. USD 47 538), will experience the biggest reduction, falling from 38 percent to 33 percent. The drops in personal tax and rises in GST are intended to encourage taxpayers to lessen personal consumption and increase the national saving propensity. Both changes are scheduled to take effect on October 1st 2010. Government income support, student allowance payments and numerous other payouts are scheduled to increase by 2.02 percent to compensate for the increased GST.

To further encourage savings amongst New Zealanders, the Budget includes a 2 percent decreases to the tax rates levied on corporate incomes, top-marginal Portfolio Investment Entity (PIE) earnings, and tax rates on life insurance policy holders and widely-held savings vehicles. Effectively, the change will result in tax levies of only 28 percent for the three types of income. The reduced rates will be introduced in the 2011-2012 financial year for corporate rates and insurance rates, and on October 1st 2010 for PIEs.

In line with Government promises, changes have been outlined which aim to remove the currently existing tax bias towards misbalanced investment in rental properties. Applying from the start of the 2011 financial year, depreciation deductions will no longer be allowed for buildings with an estimated useful life exceeding 50 years. Additionally, the current Working for Families scheme will be altered to exclude investment losses (including rental property losses) from taxpayers’ entitlement calculations.

According to the Government, the costs of the tax reform package are fiscally neutral in the medium term. Although, the cumulative monetary cost over the first four years, including the Government’s estimated macro-economic benefit assumption, will be NZD 415 million (approx. USD 282 million).

Photo by Ewan-M

On May 17th John Key, Prime Minister of New Zealand, appeared in a television interview and made it clear that the upcoming budget will feature cuts to personal taxes across all levels, but with special emphasis on top-marginal rates. John Key’s comments led economist to believe that the anticipated increase in Goods and Service Tax (GST) will also be announced within the Budget, to offset the decreased tax personal tax revenues.

When questioned on the fairness of increased tax cuts for high earners, John Key claimed that the move was vital for the future economic situation of the country. According to the Prime Minister, it is important that efforts are made to retain the highest skilled workers in the nation, both for their large tax contribution and provided services. He summarized the intentions of the change, saying, “Part of what you are going to see on Thursday is a deliberate attempt to get people to say here and contribute to the economy.”

Overall, John Key stated that the Budget will be aimed at improving the economic growth of the entire nation. He said that it will also deliver increased benefits, opportunities and welfare for everyone in the economy.

Photo by nznationalparty

On May 10th the Maxim Institute released Lifting the Bucket: Tax policy and economic growth, a report detailing the Institute’s proposed changes to the New Zealand economy. The report was accompanied by the results of a survey profiling national tax payer’s opinions regarding taxation levels and Government spending on public projects. According to the releases, the New Zealand tax system is overly-reliant on taxes that are harmful to growth, and New Zealanders are unwilling to institute changes if they result in reductions in public projects and Government spending.

Among its many proposals the report revolves around a series of key changes. Primary alterations include lowering corporate and trust tax rates to 27 percent. The personal income tax structure would be altered to a two tier system with a starting rate of 10 percent and a top rate of 27 percent, with a top-band earnings threshold of NZD 27 000. Goods and Service Tax (GST) would be increased to 15 percent, and Government spending would be limited to 30 percent of national GDP. Justifying the changes the report stated “We need to move toward a system that relies more on consumption taxes, like GST, and less on income and corporate taxes, so that the tax system is more growth-friendly on the whole.”

According to the results of the survey accompanying the report, the majority of New Zealanders are opposed to the types of changes recommended by the Maxim Institute. The suggestion of reducing Government spending with reductions in Working for Families, KiwiSaver, interest free student loans, “20 Hours Free” early childhood education and New Zealand Superannuation was met with the most opposition among those surveyed. Similarly, GST increases and land taxes were not supported, even if they are counterbalanced with decreased personal taxes. The Maxim Institute claimed that the spending should be addressed and rebalanced to restore efficiency and cut wasteful expenditures.

Photo by Casey Serin

On April 12th the Wellington District Court sentenced Lance Christopher James to two years jail time for 19 separate tax evasion charges amounting to NZD 365 184. Lance James pleaded guilty to eight charges of failing to file a personal tax return or paying appropriate tax obligations, and 11 charges of failing to pass on employee PAYE deductions. Despite having repaid some of the tax obligation, Lance James still owes NZD 168 000, excluding penalties and interest charges. James has been refused bail pending appeal of his sentencing.

Patrick Goggin, IRD Investigations Assurance Manager, issued a warning to others considering any form of tax evasion, saying, “Others who are tempted to cheat on their taxes should take note of this sentence and be left in no doubt of the very serious consequences if they choose that path.”

Lance Christopher James has held positions as a self-employed property developer since 1993. In many cases, Lance James acted as the sole director and shareholder for his development firms. In 2008, an arrest warrant was issued for James for aiding and abetting Brooklyn Holdings Ltd, Ohiro Properties Ltd, Complex Properties Ltd, Wadestown Properties Ltd, and Brooklyn Rise Ltd to commit tax evasion.

Photo by gorbould

Confirming the Tax Working Group’s analysis of the New Zealand tax system, Bill English delivered a speech on March 23rd calling the taxes burden faced by an average working family “unfair and inequitable.” According to the Minister the root of the problem resides in the current definition of income and the proliferation of differing tax rates, which become apparent when individuals or families with relatively similar incomes have significantly dissimilar tax obligations.

Bill English illustrated an example of taxation inequality by drawing attention to a hypothetical self-employed individual who would typically pay over NZD 27 500 annually in tax. He contrasted this with the situation whereby the self-employed person forms a company which is owned by a separate entity and assigns themselves a salary of NZD 48 000, automatically reducing their tax liability by NZD 3000. The reduced income would then entitle them to a Working for Families benefit, which allows them NZD 8 500 entitlement. Further tax obligation reductions could be achieved by claiming losses from a leveraged property investment. According to Bill English, it is conceivable for an income of NZD 100 000 to face NZD 10 000 in taxes, while a typical earner would exceed NZD 27 500.

Explaining the Government’s dedication to ratifying the misbalance, the Finance Minister said: “In the Budget, the Government will make the tax system fairer by closing this type of loophole. We will make sure that taxable income more accurately reflects true economic income – and that the system is fairer to all taxpayers.”

Photo by Ewan-M

On March 5th the New Zealand Government made public its Tax Outturn data for the seven months to January 2010, which it claimed is one of the earliest indicators available to judge the economic conditions of the country. The data shows that the total direct tax revenues for the time period were 1.3 percent lower than projected in the 2009 Half-Year Economic and Fiscal Update, though indirect taxes had risen by 1.8 percent, making the net effect an approximate 0.1 percent drop below forecasts. Compared to the same period in the previous year, the direct tax revenue had dropped by 14.6 percent, and indirect taxes grew by 1.1 percent.

According to the Tax Outturn Data, individual tax revenues had dropped by 1.7 percent compared to projections, and 9.3 percent compared to the previous year. Corporate tax revenues fell by 24.7 percent in comparisons to last year though exceeded forecasts by 1.5 percent. Goods and Service Tax revenues exceeded projections and last year’s records by 2.7 and 1.9 percent respectively. Excise duties were on par with governmental estimates, and surpassed last year by 0.9 percent.

The Tax Outturn Data shows that the total New Zealand Government revenues were NZD 32 billion in the seven months to January 2010, with NZD 19.4 billion coming from and direct taxes and NZ 12.6 billion from indirect taxes.

Photo by Remon Rijper