Trickle-Down in the Other ‘Down Under’

Where in the developed world do rich people pay the least in taxes? To Americans these days, this question would seem to have an obvious answer.

The most rich people-friendly nation at tax time simply must be the United States, a land where the mega rich pay taxes at lower rates than their secretaries and a White House hopeful with a quarter-billion-dollar fortune pays only 13.9 percent of his annual take-home in federal income tax.

But that obvious answer would be wrong. The rich people-friendliest developed nation in the world just happens to be New Zealand.

So show the latest data from the OECD, the industrial world’s official economic research agency. And so says Rob Salmond, a New Zealand-born political scientist now at the University of Michigan.

“We charge less tax than any comparable country on high incomes, dividends, and capital gains,” notes Salmond.

The tax laws that New Zealand has locked in place over the last quarter-century almost read like a “tax reform” wish list — on steroids — from Mitt Romney and his rivals for the GOP Presidential nomination.

Abolish taxes on the estates rich people leave behind at death, as former governor Romney and all his rivals propose? The tax law in New Zealand exempts all huge private fortunes from any “death taxes.”

Drop the tax rate on capital gains below the current 15 percent, as Rick Santorum advises, or simply eliminate taxes altogether, as Newt Gingrich advocates, on asset trade profits? New Zealand has no tax levy on capital gains income.

Tax no dollar of ordinary income at more than 35 percent, the rate the Bush tax cuts fixed in the U.S. tax code back in 2001? All the GOP Presidential candidates are vowing they’ll extend that 35 percent Bush-era rate. In New Zealand, no dollar of millionaire income faces a tax rate higher than 33 percent.

Cutting taxes on America’s most wealthy, our GOP Presidential candidates all claim, would bring the United States a broad new prosperity from sea to shining sea. New Zealand’s recent tax history offers a real-life test of that claim.

New Zealand’s 33 percent top tax rate has been on the books for most of the years since the mid 1980s, as have the rest of New Zealand’s exceedingly rich people-friendly tax policies. So how are all these policies working out?

Not particularly well. Rich people-friendly tax policies in New Zealand have helped turn a society that worked — and worked admirably — for average New Zealanders into an economic deadend for all but the high-income set.

This bleak transformation hit the headlines last week, and dramatically so. Over six straight days, New Zealand’s largest-circulation daily newspaper showcased just how unequal New Zealand has become — and just how brutally that inequality has impacted daily life in Auckland, the nation’s largest metro area.

The onset of Auckland’s inequality, the New Zealand Herald series details, has been incredibly sudden and swift.

“Auckland has changed from an equal city to an unequal one in less than a generation,” notes Herald reporter Simon Collins.

Indeed, back in 1986 Auckland ranked as one of the most equal cities in the world. Over half the metro area’s census tracts — 52 percent — had median incomes within 10 percent of the regional median.

By the 2006 census, this “bunching” around the middle had largely evaporated. Only 26 percent of Auckland census tracts now have incomes that fall within 10 percent of the region’s median. The number of Auckland tracts with medians more than 30 percent above the metro median has more than tripled.

What changes has this immense income shift brought? Some changes have become exceptionally visible. Auckland’s super rich, says the Herald, “have built sprawling homes on a scale the city had never dreamed of in the 1980s.”

Other visible changes have come at the bottom. Food charities — largely “unheard of” in 1986 — have become a necessary fact of everyday Auckland life.

“Even for families who are not considered poor,” the Herald observes, “parents are having to do without to make sure their children are fed and clothed.”

In 1986, New Zealand’s top 1 percent households were grabbing 5 percent of the nation’s income. That share has since doubled.

New Zealand’s top 1 percenters today do, to be sure, get a smaller share of national income than top 1 percenters in the United States. But New Zealand’s inequality may be, if anything, more striking, since New Zealand — before the current inequality surge began — had been a more equal place.

In fact, the New Zealand that entered the 1980s rated as something of a global middle class haven, full of policies that helped poorer people gain middle class status. Those policies have largely gone by the boards as income — and power — have concentrated at New Zealand’s economic summit.

One example: Between 1946 and 1985, New Zealand’s “family benefit” funneled a weekly allowance to the family of every New Zealand child. Young parents could “cash in” this benefit for a first-home downpayment. Lawmakers abolished the overall universal family benefit in 1991.

The next year, lawmakers turned around and gave affluent households a huge new tax break, the ability to deduct off their regular income any “losses” they suffer when rents from the properties they own don’t equal their mortgage payments on those properties.

This new tax subsidy gave the affluent a huge incentive to go out and borrow to buy up homes for renting out. If their rental income topped the mortgage outlay due, they made money. If the rents didn’t cover the mortgage, they had a tax break. Either way, they won — and they won even more when they sold their rental properties and didn’t face any capital gains tax on the profits.

The resulting real estate speculating left much of Auckland’s housing unaffordable for working families — and forced widespread housing overcrowding.

The overcrowding, in turn, has exploded hospital admittances for infectious diseases, the New Zealand Herald notes, “as extended families unable to afford rising Auckland house prices and rents double up in houses and garages.”

New Zealand is suffering educationally as well. The latest education data indicate that no developed country’s schools now do a worse job than New Zealand “at helping students overcome the disadvantages of being born into poor families.”

The reason? Auckland schools are struggling to serve a vastly expanded poverty population. Last winter, one local principal told the New Zealand Herald, many students “came to school in thin shirts and shorts without shoes or sweaters.”

The purchases that hard-pressed New Zealand families can afford, meanwhile, come encumbered with a heavy sales tax burden. In the developed world as a whole, sales taxes cover 59 percent of potential consumer purchases. In New Zealand sales tax impacts 98 percent of what consumers purchase.

What can New Zealand do to regain a more equitable quality of life? One unusual suggestion came last month in an essay contest sponsored by civic action group in the community of Whangarei. Local resident Trisha Fisk won a $1,000 prize for an essay that proposed a “maximum wage.”

“Society has developed a system where a minimum wage has been legislated for,” Fisk wrote. “Now why can’t our system also legislate for a maximum wage?”

“Does the multi million dollar CEO really earn his keep so many many times more than the worker who actually produces the goods?” Fisk asks. “Would he be worth bobsy-die if the individuals at the bottom of the feed chain didn’t do their job?”

“Bobsy-die”? That slang might not be familiar to most Americans. New Zealand’s economic predicament, on the other hand, may well become our future.

Sam Pizzigati co-edits Inequality.org. His latest book: The Rich Don’t Always Win: The forgotten triumph over plutocracy, 1900-1970, that created the American middle class, 1900-1970 (Seven Stories Press).