What’s the problem?
A lot of millionaires are paying tax at a rate lower than the lowest earners in the country.
We found this out from a Treasury report (which you can read below), which attempted to measure how wealth is distributed. The key takeaway: 42 per cent of the richest Kiwis pay less than 10 per cent of their total income in tax.
The lowest income tax rate is 10.5 per cent, which earners pay on income up to $14,000.
Some people, including the Green Party, think it’s a big deal and have reiterated that there needs to be tax reform.
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OK. So how does it work?
Most people are taxed on the earnings from their job.
The different bands for typical incomes like salaries, wages and benefits range from 10.5 per cent for incomes up to $14,000 to 33 per cent on earnings above $70,000.
From April 1, a new high-end tax rate of 39 per cent applies on earnings above $180,000.
The very rich don’t exactly have normal jobs, so they don’t get taxed like most of us.
Many derive most of their income elsewhere, with wealth tied up, for example, in companies they own, or investment assets.
Different tax rates apply to different types of businesses. But most businesses are subject to a 28 per cent tax rate, and trusts (and trustees) are subject to 33 per cent tax on earnings.
Already you can see a problem brewing … a 28 per cent rate is much lower than the 39 and 33 per cent rates charged (or to be charged) on Kiwis working in high-income jobs.
Tax consultant Terry Baucher outlines a simple example of a person who is paid a salary of $200,000. They’ll pay income tax on that.
But if they (or their company) also hold assets, and those assets increase in value by $800,000 over a year, that person’s economic income is $1m. It’s possible the $800,000 increase may not be taxed at all.
“But that tax as a percentage of their economic income is at a lower rate than a lot of us who work in normal salaried jobs.”
It’s important to remember that the wealthy are not doing anything illegal. As Nightingale puts it, they are just obeying the tax policy settings that successive governments have chosen.
The question is: are we as a society comfortable with that? And is that fair?
Imagine you own a company that makes millions every year
Let’s take a very simple example of a company that posts a $2m profit. The company is owned by a single individual who pays him, or herself, a $200,000 salary from the profits.
That salary is subject to regular income tax, anything above $70,000 is taxed at 33 per cent (and from April, anything above $180,000 gets taxed at a rate of 39 per cent).
The company has $1.8m in profit…