An OECD report shows that New Zealand has almost the lowest “Tax wedge” (Individual tax as a percentage of labour costs) in the OECD. Enter Russell Norman attempting to claim that “the report showed the Government was misleading people that New Zealand had high taxes, to justify tax cuts for the highest-earners”. Unfortunately, the Herald headline “NZ earners’ tax burden second-lowest in OECD” is just complete nonsense.
Occasionally the OECD produces some worthwhile statistics, but these are not they.”
Firstly, even a cursory glance at the data presented would tell you that this is income tax only and does not include any consumption taxes. It is therefore completely stupid to suggest that New Zealanders have a low tax burden when there is no consumption tax data. Worse, New Zealand’s GST is very broad-based, meaning our consumption tax burden is likely to be substantial. This is why National can contemplate reasonable income tax reductions with only a relatively small rise in GST.
The second thing is that employer social security contributions are included in the income tax total, despite the fact that this is not part of an individual’s wage. When one removes the employer contributions the differences in taxation become much less pronounced:
It should be noted that some social security contributions represent enforced savings by the taxed individuals concerned. i.e. it is their money at the end of the day. Calling these contributions “tax” is stretching the definition somewhat.
Thirdly, the average wage is calculated by most countries excluding the employer’s social security contributions, thereby reducing the average wage and artificially increasing the tax wedge.
Finally, the OECD report uses very blunt statistics and does not address the most important issue of marginal rates and thresholds. Nor does it address the matter of company tax and it’s relation to the highest individual tax rate. New Zealand’s large difference between these two rates produces some very odd incentives. Currently every dollar we earn over 70,000 is effectively taxed at 50.5% (38 + 12.5). Buying petrol or alcohol pushes that to about 85%. I seem to recall in the Old Testament that Pharaoh only asked for 20% of the produce from his slaves…
I’m sure we will see plenty of mileage made out of these statistics by the economically illiterate, but the simple fact of the matter is that they are virtually meaningless. Occasionally the OECD produces some worthwhile statistics, but these are not they.