The Treasury and IRD got Sucked into Playing a Dangerous Political Game, undermining their integrity
It's easy to argue that the Stuff news headline which blared, "Richest Kiwis pay about half as much tax on the dollar as the average New Zealander" is a bald-faced lie. It's pure politics, with little economic content. Here's why. Take, for example, Fletcher Building’s CEO Ross Taylor, whose pay was $6.6m last year. To the best of my knowledge, Ross Taylor was not on the IRD's list of the 311 "wealthiest New Zealanders".
That's where the trouble starts. His income is way larger than probably a majority of those 311 families, since they "generally have a net worth of more than $50 million". That kind of wealth is associated with investable funds of around $40m which, at a yield of 5%, gives an income of $2 million. Mr Taylor's income is thereby over three times greater.
However the IRD went and biased their sample by excluding the likes of Mr Taylor. Why would they want to do so? Well, there is a political reason.
Most of Mr Tayor's income comes from his labour services as a CEO, which means he pays the marginal income tax rate of 39% on his remuneration. When you add GST and other taxes, his "effective tax rate" could well be close to 50%.
But the Revenue Minister didn't want a headline saying that "rich Kiwis" like Mr Taylor were paying taxes at a rate two to three times higher than the average family.
Instead the IRD got tricked by its Minister into excluding these kinds of CEO's and only focusing on folks that had been frugal and saved, many over several generations of time, thereby building up their capital. It defined them as "rich" and not Mr Taylor, even though he earns more than most of them.
The IRD did so to fuel a divisive public debate and provide fodder to help sway the election through news headlines arguing the rich weren't paying their share.
In fact, Mr Taylor is paying more than his share. The irony of the IRD's biased "research", which excluded him from their sample, is that the 311 families with high net wealth are exactly the kind of people that most successful countries seek to embrace - namely folks who have increased the economy’s capital stock - their savings having reduced the return to capital and thereby increased labor productivity and real wages.