Analysis by Keith Rankin.
The official New Zealand income tax scale has four ‘marginal’ tax-rates: 10.5 percent; 17.5 percent; 30 percent and 33 percent. That means there are four ‘marginal’ untax-rates: 89.5 percent; 82.5 percent; 70 percent and 67 percent. Income taxation is income that is pooled. Income untaxation is income that is kept. (It is the role of academics to look at simple truths in different ways, and to discern insights from those alternative vantage points.)
This month’s chart shows untaxation in New Zealand in 2016, in two different ways.
The first (more conventional, though less interesting) way is to contrast orange with green. The orange is income after tax; the green is tax.
To read the chart, if your annual salary is $60,000 then your marginal rate of untaxation is 70 cents in the dollar. You get to keep 70 cents of the last dollar you earned.
To calculate your total after-tax income (called ‘disposable income’), just calculate all that is orange to the left of the $60,000 line. It amounts to:
· 89.5% of $14,000 + 82.5% of $34,000 + 70% of $12,000 = $48,980
Thus a person earning $60,000 is not taxed $48,980. Apply the same procedure for any level of annual income. (If your income is more than $100,000, the chart simply extends infinitely to the right.)
The second and more interesting perspective is to treat all that has dark shading (orange and green) as a person’s contribution towards the public income-pool, and all that has pale shading (orange only) as a person’s privately-sourced income. To persevere with the above example, persons grossing $60,000 contribute 33 cents of their last (marginal) dollar earned to the public pool and keep 67 cents for themselves. (This would also be true for persons grossing any other amount of annual income.)
From this perspective, the dark orange represents the amount a person draws, as private income, back from the public pool. Thus, persons grossing $60,000 gain 3 cents of their marginal dollar back from the public pool. In total, 70 cents of their last dollar earned is available for private spending.
We can calculate a person’s total rebate from the public pool from the chart. It’s the dark orange area to the left of the person’s gross annual income. For someone grossing $60,000 it amounts to:
· 22.5% of $14,000 + 15.5% of $34,000 + 3% of $12,000 = $8,780
This is what I call this person’s Public Equity Benefit (PEB). It’s the personal benefit that they draw from being an adult participant of New Zealand Inc. To determine the maximum PEB, just use $70,000 as the example income. The maximum PEB (the entire dark orange area) is $9,080.
The equity problem we face is that, for people on higher incomes, their PEB is higher than is the PEB for people on lower incomes. Unlike Family Tax Credits (for example), the PEB is a benefit that gets bigger the bigger a person’s income. There is no equity principle that I know of that justifies people on higher incomes getting bigger public benefits than poorer people.
The first step of tax-benefit reform in New Zealand is to untax every tax-resident at 67 cents in the dollar, and to ensure that every tax-resident receives, in addition to their privately-sourced income, a benefit from the public income pool that is at least the present maximum Public Equity Benefit of $9,080 per year.
It is not hard for the government to do this. It’s a poverty of the imagination – not of the economy – that holds us back.