“The latest report from the IRD’s two-year High-Wealth Individuals Research Project has revealed that the median effective tax rate paid by New Zealand’s richest individuals is just 8.9%”1
There’s a lot to unpack there, but I’ll start by saying that this is disinformation. I realise that it’s a big accusation to say that the government’s report is disinformation, but hear me out…
Rich people pay the same taxes that the rest of us pay (they actually pay a slightly higher rate and more money, which we’ll get into in a bit). The rate of 8.9% comes from the total of a theoretical taxable income should Capital Gains Tax (CGT) be implemented and they somehow didn’t pay it - in other words, 8.9% is a magical number that’s made up to shock and polarize us.
How Much Tax Do Rich People Pay?
So how much tax do rich people pay? Well, disregarding CGT (which some people actually do pay - I’ll get into that in a bit), they pay tax based on the same tax brackets as the rest of us:
Rich people don’t have access to special loopholes that regular folk can’t access, giving them a special low rate of 8.9%, as inferred by the report.
But What About If They Have A Company?
Ah yes, special loopholes for companies… well, companies pay 28% tax on profits. Not as much as individuals, but still a lot of your income to be lost to a 3rd party that you don’t have any say on where the money goes, we must agree. Nevertheless, it is less than individual tax rates…
The reason for this is to encourage business, which we can all agree is good for the economy. But what if the dastardly business owner wanted the money for themselves? Well, in that case, they’d have to either pay themselves an income or pay themselves dividends;
If they pay themselves an income, that’s a cost to the business, so the business doesn’t pay 28% tax on that, but when the individual gets the income they pay the same tax as the rest of us (based on the previously mentioned brackets - 39% for a big earner).
If they pay themselves dividends, the company still has to pay the 28% tax. When the individual receives the dividend, they have to pay tax on it at the normal, previously mentioned bracketed rate. As that would be a tax on a tax (because their company already paid 28%) they get tax imputation credits for the amount that’s already been paid… This results in the amount paid from dividends to be exactly equal to the individuals bracketed tax rate - 39% for a big earner.
So owning a company doesn’t give special tax discounts either…
But what if they’re running up costs in the business to avoid tax, like a tradesman might do? Well, they can’t get away with it if it’s a big business because they’re more likely to get audited and you can’t hide big money like that anyway. Also any rich person you talk to will tell you that it’s not worth unexpectedly discovering your next lover in prison for a small amount of tax fiddle money when they’re already rich. So from a tax perspective, they have no better tax options than an electrician sole trader, for example.
But What If They Have a Trust?!
Ah, yup… You’ve got me there… Trusts have a special tax rate. It’s 33%2. I think a third of your income is more than enough tax to be paying and it's a hell of a lot more than the 8.9% everyone now believes that they pay, thanks to the recent report.
You Mentioned That Rich People Already Pay CGT…
Yup, not just rich people. Anyone who buys shares and trades them regularly (i.e. is not a long term investor) pays income tax on trades. How much tax do you have to pay for trades? Well, you can probably guess from the theme of this article… They pay the same as everyone else (albeit a little more because they’re on a higher tax bracket).
We also have CGT on houses that are traded within a specific period of time (it’s called the Brightline Test). This isn’t specific to super rich people, rather, anyone rich enough to casually trade houses for profit. Certainly a tax on wealthy people.
But Capital Gain Is Income That Should Be Taxed
This is a topic in itself that I will write about in a later article which I believe you will find very compelling and logical, but for now, I think that we can summarize and agree that:
Rich people don’t have a special loophole that the rest of us don’t have access to
Rich people pay slightly higher tax brackets than the rest of us, which averages out to somewhere between 33% and 39% on income (excluding additional taxes that we all pay, like GST), not 8.9%
Rich people earn more money and therefore pay more tax than everyone else
Therefore I believe that the recent report saying that rich people pay 8.9% tax is disinformation.
Additionally, it doesn't take a genius to work out that this report is priming the country for a capital gains tax, but what's possibly the most upsetting thing is that it does so by pitting this team of 5 million against each other. Creating division, jealously and hatred among its population is not a good thing for the government of a civilized society to do.