Thought for the Day: Determining Total Income Tax Revenue

Wednesday, 18 February 2015, 8:31 am
Column: Keith Rankin

This OECD item (http://www.oecd.org/ctp/consumption/revenue-statistics-and-consumption-tax-trends-2014-new-zealand.pdf) comparing the tax "burdens" of different countries came into my inbox a few days ago.

The language is value-laden. It assumes that the income of one party in the economy is a burden to other parties. This may be true for some billionaires and even for some governments, but is not a generally true proposition. I don't think that my income is a burden to you. It may indeed be good for you when I spend it.

The next point to note is that, for each country, the tax 'burden' as shown is an artefact of the way each country manages its cash benefits. Benefits may be paid – either as tax credits or tax discounts – by the revenue-collecting agency (eg New Zealand's IRD). They may also be paid as direct transfers by another agency, such as Work and Income, or Studylink. Administratively, there are three kinds of benefit: transfers (TR), tax discounts (TD), and tax credits (TC).

Increased tax discounts, benefits that put more cash in our bank accounts when rates other than the top rate are cut, are almost always accounted for as a reduction in total tax, but should not be. Increased benefits in the form of tax breaks (increased TDs) are as much increased cash benefits to the people who receive them as are increased TRs and TCs.

Increased transfers paid by non-IRD agencies (TRs) are almost always accounted for as government spending, and almost never as a reduction of the tax burden. Many recipients of these payments also pay income tax, so for accounting purposes these benefits could be deducted from their taxes. Even when beneficiaries do not pay any income tax, it is valid to regard cash benefits as negative taxes, and to account for them as such.

The TC (tax credit) type of benefits is the most ambiguous. in New Zealand these are administered by the IRD and are paid as Family Tax Credits and Independent Earner Tax Credits. Politicians and public servants with points to prove, may deduct some or all of these from the 'tax burden'. A full deduction of TCs from the tax burden has the effect of making it look as though our taxes are comparatively low,and of making it look as though the rich incur a disproportionately high proportion of the tax burden.

New Zealand should assess total income taxation as 33 percent of total taxable income, and to treat all cash benefits (TRs, TDs and TCs) as government outlays. (Other countries' governments should do the same except that their top/trust rates will generally not be 33 percent.)

That is consistent, and transparent. It would show that government income is actually larger than we presume it to be. And it would be seen that lower income people contribute at least their fair share towards public revenue. (Public revenue is not per se a burden. It is distributed back to us, or spent on our behalf on collective goods such as schools and hospitals and roads.)

The statistics charted by the OECD reflect each country's internal administrative balance between the three types of benefits, rendering comparisons meaningless. Further, the different ways we account for these different kinds of cash benefits can easily be manipulated for political or ideological purposes.

ENDS

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Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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