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Some 30 years ago, by a variety of measures, New Zealand ranked one of the world’s more equal nations. We have now become one of the more unequal.
Our current tax system both reflects our growing inequality and contributes to it. Thirty years ago, we had a much more comprehensive, more steeply progressive tax structure, with a top marginal tax rate of 63 percent. The top marginal tax rate today stands at half that, 33 percent.
We also had inheritance taxes and a capital gains tax three decades ago. Today, apart from some small exceptions, we have neither. Instead of these levies, taxes that primarily impact the wealthy, we now have a goods and services tax of 15 percent, a flat-tax levy that burdens the poor much more than high-income earners.
Our current tax system, note analysts like Robert Salmond, rates as much tougher on the poor and more generous to high-income earners than tax systems elsewhere in the developed world.
In New Zealand today, life overall rates as much tougher for the poor. Some 28 percent of New Zealand’s children now live in families experiencing income poverty. Back in 1982, only 14 percent of children lived in that poverty.
New Zealand’s affluent, in the meantime, have done quite well. The incomes of our nation’s most affluent 10 percent averaged about five times the incomes of New Zealand’s poorest 10 percent three decades ago. That gap has nearly doubled.
The bottom line: In the early 1980s, New Zealand had a level of inequality about as low as Denmark, one of the world’s most equal nations. Today, New Zealand and Denmark sit at opposite ends of the inequality spectrum.
And that difference matters. A great deal of research worldwide links rising income inequality to everything from low levels of social cohesion to economic stagnation and instability. In an increasingly unequal New Zealand, our social ills are getting worse. We are not progressing as we could — or as we should.
To regain the relative equality we have lost, we need to move on two fronts. We need to increase the incomes of those at the bottom and better control the size of incomes at the top. That will require, among other steps, a return to a steeply progressive income tax system and the reintroduction of a comprehensive capital gains tax.
Economic modeling by the economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva shows that top tax rates in developed countries could run as high as 80 percent before losses from tax avoidance and other problems outweigh the revenue gains.
Those of us active with Income Equality Aotearoa New Zealand-Closing the Gap are now working to help the New Zealand public understand how the nation’s tax system could be overhauled to significantly help reduce inequality.
One proposal for a more progressive income tax system now under discussion would set a 70 percent tax rate on income over $200,000 in New Zealand dollars and exempt from income tax all income below $20,000.
Under this proposal, the total tax on an income of $40,000 would drop from $6,020 to $4,000, and the total tax on a $400,000 income would rise from $122,920 to $206,000.
New Zealand could be and should be taking bolder steps to make sure that everyone benefits, not just the well-off, from the wealth our economy creates. Significantly increasing our low wages and establishing a decently progressive tax structure to control obscene levels of pay at the top would help us realize those benefits.