February 7, 2012 12:00pm by David Farrar

tax wedges

A new book has found total tax rates on the incomes of rich New Zealanders are now the lowest in the developed world.

New Zealand’s top tax “wedge” of 33 per cent on incomes above $70,000 is lower than all 27 other high-income nations in the Organisation for Economic Co-operation and Development, after including social security and payroll taxes which do not exist in this country.

Rich New Zealanders also escape without paying any tax on capital gains that would be taxed in most other countries.

On the other hand, New Zealand has the world’s most comprehensive goods and services tax (GST), taxing 98 per cent of all potentially taxable consumer spending compared with a developed world average of 59 per cent.

New Zealand is one of only five high-income OECD nations that do not allow any exemptions for food – a key factor in our high food prices.

The book’s author, Professor Rob Salmond, a New Zealand-born political scientist at the University of Michigan, says New Zealand has a tax system of extremes.

I’m not sure I’d call the book new. I read it last year. It’s a good book with lots of interesting data.

At some stage I hope to have time to discuss it in more detail. I would make one point for now though. This is off memory though, but if I am wrong I am sure Rob Salmond will correct me.

The tax wedge includes social security and payroll taxes, and presumably this includes payroll taxes in Australia where the “tax” goes towards the individual’s retirement savings.

I believe there is a huge difference between taxes where your tax money goes to the Government to spend on whatever they decide, and between payroll deductions where the money is invested in your name, and still belongs to you.

UPDATE: Rob has clarified the OECD tax wedge does not include the superannuation deductions, which is good.

Incidentally I do support a capital gains tax. I believe the best tax system is broad based and low rates.