On this page

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The following are introduced or discussed on this page. Scroll down to read or follow links to other pages.

 

• The purpose of government

• Government in New Zealand. 

• The economic situation in New Zealand

• Taxation

  • Goods and Services Tax (GST)

  • Wealth tax

• Universal Basic Services

  • Free dental services

  • Prescription charges

• ​New Zealand Superannuation

• Comparing the policies of the political parties

  • Basic Income and tax change calculator​

• The policies of the political parties

  • The Opportunities Party (TOP)

  • Labour

  • Green

  • Te Pāti Māori

  • National

  • ACT

  • New Zealand First

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The purpose of government

 

The primary purpose of government is to ensure and enhance the well-being of all a nation's people, not some at the expense of others. To achieve this, governments will act to ensure:

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• law and order, justice, and protection against harm

• protection against invasion by malevolent forces from outside the country

• good quality education and health, 

• adequate albeit a basic standard of living for all citizens and

• an equitable distribution of wealth

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Many of the requirements for a government to achieve these objectives are outlined on our United Nations page.

 

To maximise well-being governments should ensure efficient management of government resources. This includes the management of the distribution of funds.

• The more efficient a government is when it spends money, the more it can achieve with the income it receives from taxation.

• Government efficiency is maximised, and intervention minimised when payments are made to all on an equal basis with broad targeting achieved with an appropriate tax system that ensures that those who have the most pay tax in proportion to their ability to pay.

• In contrast, narrow targeting of benefits to individuals requires a greater use of government resources, and this results in more and less efficient government. 

• New Zealand Superannuation is a good example of an efficient system. Taxable payments are made to all on an equal basis so those with the highest incomes will pay tax on the income received from New Zealand Superannuation at their highest marginal tax rate. This provides broad targeting of the payments to those most in need. Government administration costs for New Zealand Superannuation are minimal.  Money paid out is spent by those who receive it and taxes ensure the money paid out is returned to the government over a number of cycles. For more details see our New Zealand Superannuation page.

• When money is collected as taxes, those who have the most should pay more in taxes than they receive from the government in payments while those who have little should receive more from the government than they pay in taxes.

• Governments should avoid actions that transfer wealth from those who have the least to those who have the most.

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Government in New Zealand

 

New Zealand has a unicameral parliament with a mixed-member proportional (MMP) voting system and a parliamentary period of three years. Although there are two larger parties, Labour, centre left, and National, centre right, most elections under the MMP system require a coalition between one of the larger parties and a smaller party to form a government. This has sometimes led to minor parties having disproportionate influence in government.

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The economic situation in New Zealand

 

Past attempts to reform New Zealand's economy have led to a growing disparity between rich and poor. Gross domestic product grew by 35% between 1982 and 2011. However, almost half of the increase went to a small group who were already the wealthiest in the country. The average income of the top 10% of earners (those earning more than $72,000) went from $56,300 to $100,200, almost doubling, while the average income of the poorest tenth went from $9,700 to $11,000, an increase of just 13%!

The top 1% of the population now own some 16% of the country's wealth and the richest 5% owns 38%.

 

In contrast, 50% of the population, including beneficiaries and pensioners, earn less than $24,000.

Those on the lowest incomes struggle to make sufficient income to pay for food and accommodation. Households often have two adults working long hours just to ensure that they can meet basic requirements.

 

From this, we can see that there is a need for the government to enhance the well-being of those on the lowest incomes but there really is no need for any government to enhance the incomes of the wealthiest sectors of the population.

While there are many in the top 50% of the population who feel that life is financially difficult, the major reason for this is the shortage of housing, a result of a long-standing failure to increase the housing supply to match population increase. This shortage has led to increased house prices and rental rates. Increasing the housing supply is the best way to ease both house and rental prices. Simply providing more money to people with incomes in the middle range without increasing the housing supply is likely to lead to corresponding increases in both house prices and rental charges leaving people no better off.

 

Financial management or economics

 

Good financial management by governments is essential to maximise the well-being of citizens. Sound management ensures that services delivered to citizens are maximised and that money is not wasted on too many layers of administration and management. Providing services free of charge minimises the cost of providing the services as administration and management costs are almost eliminated. However, care needs to be taken in some cases to ensure that scarce resources are efficiently targeted to those most in need and not wasted. Broad targeting that does not require resources generally works better than narrow targeting that requires excessive resources for little gain and is prone to error. 

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There is, however, a significant difference between managing the finances of a small business or even a large corporation and being the minister of finance of a government. A minister of finance requires good financial management knowledge and skills but also a greater and broader knowledge than a financial manager.

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Financial managers must ensure that a small business or a large corporation makes a profit to ensure the survival of the business. In contrast, the minister of finance of a government has a primary responsibility to ensure the well-being of all the country's citizens. This includes an obligation to ensure that all citizens have at least a basic level of income to avoid poverty. While a financial manager of a business can simply cut expenditure to keep a business profitable, a finance minister must ensure that an economy continues to function through an equitable distribution of wealth and that all people have that basic level of income essential for survival.

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If too much money flows to a small portion of the population, an economy is likely to contract leaving large sections of the population with insufficient income and in poverty. Ensuring an equitable distribution of wealth, ensuring that everyone has just enough for basic needs, while ensuring that all are free to increase their incomes and wealth through their own efforts, eliminates poverty and enhances the well-being of all without an undue impact on the wealthy.

 

The understanding and skill required to do this is more than that required for the financial manager of a business. A finance minister needs to understand basic financial management but must also have a broader understanding of economics and the international and ethical requirements that a government should look after the well-being of all its citizens and not a few while others suffer. 

 

There is always a danger that a finance manager, no matter how good they are at managing finance, who becomes a finance minister, may, while attempting to bring a country into surplus, unduly restrict the supply of money to those who are most in need resulting in increased poverty levels and economic retraction. Being a finance minister requires a broader knowledge and skill base and an understanding of and empathy for those less fortunate than themselves. 

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Taxation

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Governments create money and distribute it to their citizens to provide a means of exchange. However, the circulation of money and trading invariably result in some individuals accumulating more money than others. The more money an individual has, the easier it becomes to accumulate more. The less money a person has, the more likely they will accumulate increasing levels of debt and pay others interest for that privilege. Unchecked, all money will accrue to a few individuals while the remainder will live in poverty.

 

To ensure that money retains its value, governments limit the amount of money in circulation. They do this through taxation and the control of interest rates. The most equitable way to tax people is to tax them in proportion to the amount of money they have and pay money to everyone equally in the form of a Basic Income. However, because there are difficulties with taxing wealth, rather than taxing wealth directly, governments have traditionally taxed incomes and expenditures.   

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New Zealand has a five-stage progressive income tax system. Income up to $14,000 is taxed at 10.5%, and income from $14,000 to $48,000 at 17.5%. From $48,000 to $70,000 the rate is 30% and from $70,000 to $180,000 the rate rises to 33%. All income earned over $180,000 is taxed at 39%. The average rate that a person pays, the effective tax rate, is always lower than the rate that a person pays on the last dollar they earn, the marginal tax rate.

The current tax rates were applied from 1 October 2010 except for the 39% rate that was introduced in 2022. Apart from the 39% rate, tax brackets have not been adjusted for inflation since 2010 resulting in "bracket creep". This means that as incomes have increased without adjusting the income tax brackets, taxpayers have ended up paying a greater proportion of their total income in tax. This leads to the argument that tax brackets should be adjusted to correspond with inflation, but this assumes that the tax rates and brackets were correct when they were originally set when they may well have been inappropriate or a matter of debate at the time.

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Simply adjusting tax brackets for inflation will invariably result in greater tax cuts measured in dollars for those in the highest tax brackets. It is hypocritical, if not dishonest, for politicians who are not short of income themselves and never have been to represent such tax cuts as being for the benefit of those on low or middle incomes when the greatest tax cuts are for those who are like themselves in the higher income brackets from which they will also benefit. When asked about this, some politicians advocating tax cuts have either refused to answer the question or deflected the question by pointing to the smaller increases that those on lower incomes will receive claiming that they are significant.

 

If tax cuts are for the benefit of those on lower incomes, those advocating the tax cuts should also increase the tax rates for the higher incomes to stop those on higher incomes from gaining greater net increases in income than those on lower incomes.

 

For the 2023 election, all political parties considered here, except Labour, are proposing to either alter the tax brackets or both the tax brackets and tax rates, but with different objectives.

The Māori and Green parties are both proposing a reduction of tax rates for the lower tax brackets and increased rates for the higher tax brackets. This targets the tax changes to those on lower incomes. In contrast, National, ACT, and New Zealand First are proposing adjustments of the tax brackets for inflation which will provide a greater increase in net income for those on higher incomes. Changes to the IETC proposed by National and the introduction of the LMITO by ACT, which will presumably replace the IETC, are insufficient to offset the greatest net benefits flowing to the wealthy.  

 

Even when tax changes are restricted to the lower income brackets, those on the highest incomes will always receive the greatest benefit.

The TOP tax changes are in the first stage similar to those of Māori and Green but in the second stage will provide a greater advantage to those with the highest incomes which they intend to offset with a Basic Income and property taxes for urban areas only where those with the most expensive properties will pay the largest property taxes.

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More details of the proposed changes by each political party are included in the details for each party below.

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Goods and Services Tax (GST)

 

A Goods and Services Tax (GST) is a way of taxing consumption rather than income. On the 1 October 1986, New Zealand introduced a comprehensive 10% GST to replace various sales taxes and lowered income tax rates. The purpose was to increase the net incomes of taxpayers and to allow people to increase their net worth by taxing consumption rather than incomes. Those who consumed more are taxed more. This, it was hoped, would lead to those on higher incomes who do not consume at a high level increasing their investment in the country. The GST rate has increased to 12.5% in 1989 and 15% from 1 October 2010.

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To keep the GST simple and minimise the administration costs there were to be few exemptions to the GST. Food was not exempted as occurs in some countries.

Moves to remove GST from all food, or perhaps just fresh fruit and vegetables, are probably a well intentioned move to reduce the cost of living for low income families. Low income families spend a greater proportion of their incomes on food than wealthy families. However, wealthy families spend more on food so will gain a greater benefit measured in dollars from the removal of GST on food.

 

Experience in other countries has found that when GST is removed on some items but not others, the government loses tax revenue but the cost savings are not passed on in full to consumers. Legal battles often follow over definitions of what may or may not be included in the tax exemption. Supermarkets and other food retailers will have increased compliance costs which are added to the price of the exempted items, because these items are either regarded by the retailers as the cause of the administration problems or are regarded as an area that will stand higher prices. Supermarkets, like other businesses, charge what the market will stand.

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A 2014 treasury paper found that if GST was to be removed from food, poor targeting to those on low incomes would occur and that greater targeting to low income families would be achieved by using the money to pay for a universal transfer (Basic Income). For this reason, removal of GST on food as proposed by the Maori and Labour parties is not supported here.

 

Read or download the paper here: NZ Treasury: Food Expenditure and GST in New Zealand (WP 14/07). (pdf version)

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Wealth tax

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Increasing the total wealth of the nation, or the average net wealth per capita or well-being of a nation, is not necessarily a problem. There are many people who have insufficient wealth now. There are people who have trouble affording food and are forced to rent because they cannot afford to buy a home. However, increasing the wealth of the wealthiest while the least wealthy continue to struggle to feed and house themselves resulting in a growing inequitable distribution of wealth is likely to be counterproductive as it slows the rate of total growth or wellbeing of a nation. 

 

In New Zealand, the increasing accrual of wealth by a diminishing wealthy minority is a significant problem that can lead to a shrinking economy, increased inequality, and growing rates of poverty. A suggested solution to this is a wealth tax used to support a Basic Income rather than a capital gains tax. 

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However, care is needed with any form of wealth tax to ensure that it does not discourage people from saving for their own homes, their future needs, and for retirement. A wealth tax should be used for the development and overall good and well-being of the nation. With some forms of wealth tax, capital flight and tax avoidance may be a problem. For this reason, some political parties advocate a wealth tax but provide a tax-free exemption to allow people to accumulate a reasonable amount of money during their lifetimes. While a family home, holiday home, or a family farm, might be included in an exemption, it is questionable that the exemption should be extended to ownership of numerous rental properties or multiple investment farms. 

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Because of the problem of capital flight, some people suggest that a wealth tax should be restricted to taxes on land only as land cannot be moved out of the country to avoid tax and again some suggest that there are tax-free exemptions to avoid taxing family homes and owner farmers. It is also argued that restricting taxes to land only encourages commercial investment and will discourage land speculation which will benefit the nation and add to general wellbeing. 

 

​The Green and Māori parties are both proposing a net wealth tax with a significant tax exemption of two million dollars per person which would exclude tax on family homes for most homeowners.

 

TOP is proposing a land value tax, a restricted wealth tax, that only applies to urban land with no exemption for homeowners. The TOP land value tax will be significant for many homeowners, but it is largely offset by a proposed Basic Income. While the intent of the TOP land value tax is to stop speculative buying of urban land, we wonder why there is no exemption for homeownership and why there is no land tax to prevent rural land speculation which also occurs, and no tax on other accumulation of wealth.  

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Universal Basic Services

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Universal Basic Services and Basic Income are complimentary. Practicable extensions to Universal Basic Services that will enhance the well-being of all people are to be welcomed. Only significant extensions that are part of various party's policies are discussed here.

 

Free Dental Care

 

Free dental care is a worthwhile extension of universal basic services and will play a part in improving the general well-being of New Zealanders. This is an area where New Zealand is lagging well behind the UK where free dental care was introduced in 1948. Australia is ahead of New Zealand with some free or subsidised dental care depending on the state or territory. In New Zealand, free dental treatment is limited to those under 18 and is otherwise extremely restricted and usually only available in emergencies.

 

New Zealand is known for poor oral health with cost being given as the main reason for not seeking dental care. There are reports of people extracting their own decayed or damaged teeth because they cannot afford a dentist.

 

In this election, Green are proposing free dental care for everyone. Labour and TOP are proposing free dental care for those under 30. Te Pāti Māori will provide free Dental Care for Whānau earning less than $60,000. 

 

Labour has outlined a timetable for the first stages of the introduction of free dental care citing the need to increase the number of dentists as a reason for not immediately extending free dental care to all.

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Prescription charges

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Free medical prescriptions are a worthwhile universal basic service. In the past, all medical prescriptions were free. Prescription charges were introduced in 1985 and increased in 1988, 1991 and in 1992 increased from three to five dollars. The five-dollar part charge on prescriptions had the greatest impact on those who were chronically ill and those on low incomes. In some cases, people failed to pick up needed prescriptions because of the cost. The wealthy or those who have little illness do not notice the charges.

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The part charge has also enabled large discount chemist chains to undercut traditional pharmacies by providing "free" prescriptions paid for from their profits. In some cases, this has forced independent pharmacies to close. 

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The $5 part charge on prescriptions was abolished on 1 July 2023.

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Prescriptions require a doctor to examine a patient and prescribe a medicine, and this limits the number of prescriptions. Ensuring that those who require prescriptions can afford to pick them up is a way of ensuring the well-being of the community. The benefit of a part charge is broadly targeted to those most in need.

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New Zealand Superannuation

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New Zealand Superannuation is included here and discussed under the policies of individual political parties because it is a Basic Income that is restricted to those over 65. First paid in 1940 it is one of the world's longest-running Basic Incomes.

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New Zealand Superannuation has worked well, has minimal administration costs, and has been very effective at reducing poverty among the elderly. 

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Proposals to increase the age of eligibility by some political parties are based on simplistic calculations relating to an "ageing population" while ignoring sound financial analysis that indicates that raising the age is not necessary in the foreseeable future. If the objective is simply to reduce the overall cost or to improve the targeting of the payments to those with the lowest incomes, there are better alternatives, such as coupling payments to a more appropriate tax regime.

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The retirement commission has provided a list of myths promoted by poorly informed and unscrupulous politicians, KiwiSaver salesmen, and others. See: An introduction to New Zealand Superannuation, POLICY PAPERS 2021 | 03, page 2. 

 

The myth that the age of eligibility must rise due to an ageing population is frequently promoted by Kiwi Saver salesmen trying to increase their sales by promoting fear of poverty to those who worry that they will have to retire at age 65 due to poor health and before they are eligible for an increased age of eligibility for New Zealand Superannuation.    

 

Raising the age of eligibility disadvantages those who have poor health in their 60s or those with short life expectancies. It is also counterproductive as reducing New Zealand Superannuation payments will lead to reduced expenditure by those over 65 and reduced economic activity. The reduced economic activity leads to reduced GST and other tax revenue for the government and lower turnover and profits for companies.

 

It is unfortunate that some politicians and political parties have believed the simplistic myth that the age of eligibility must be raised and are intent on making the myth a self-fulfilling reality. Raising the age of eligibility will severely disadvantage those who do have poor or declining health in their mid-sixties and is likely to increase poverty in this age range. 

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Another political suggestion is that the age of eligibility should be lowered for some identifiable groups because of their shorter life expectancies. However, while an average shorter life expectancy can be identified for some groups or ethnicities it is an average. Life expectancy is always individual and there are short and long-lived people in every group or ethnicity. Lowering the qualification age for some groups or ethnicities is seen by some as discriminatory, and they suggest that it is preferable to determine the age on an individual basis. 

 

It may be preferable to allow people who are medically determined to have poor health or poor life expectancy to be eligible from an earlier age, or alternatively, simply make everyone eligible from an earlier age, such as 60, when they are less likely to suffer from age-related health problems. New Zealand Superannuation was set at 60 in 1977 but increased from 60 to 65 between 1992 and 2001 for political rather than sound economic reasons.

 

Most OECD countries already have a population with a greater proportion of the population in the over-65 age group than New Zealand. The New Zealand Retirement Commissioner reports that "In New Zealand to be eligible for NZ Super you need to be at least 65 years of age. Currently, 70% of the OECD has a pension age of 65 or lower. While countries are increasing their pension age, the majority are only moving the age up to 65 over the next four decades. This means that by the 2060s 60% of OECD countries will still have pension ages of 65 or below." The OECD average pension age for men is currently 64.2 and for women 63.4. By 2060 the average for men will be 66.1 and for women 65.5.

 

The OECD ages are lower than the retirement ages proposed by National and ACT despite these other countries having a significantly older population! It is misleading to say that in raising the age of eligibility from 65 to 67 we are following the example of other OECD countries when they are following our example of unnecessarily raising the age from 60 to 65.  See: OECD pension age comparisons. 

 

For further discussion see our New Zealand Superannuation page.

See also: 

• Susan St John, 'Basic Income' for the old and the young in New Zealand, Economic Policy Centre, University of Auckland Business School, November 2022.

• Jenesa Jaram,  2 March 2020, The Spinoff, Is NZ Super sustainable? The truth is, economists don’t know.

• Jenesa Jaram,  18 December 2018, The Spinoff, Stop telling young people NZ Super is unaffordable. 
  NZ Initiative. 

• For the latest from the Retirement Commission see: Retirement Commission: Policy and Research - NZ Super.

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Comparing the policies of the political parties

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Several political parties have provided online calculators to enable people to see how their tax or after-tax income will vary if the tax plans of the party are adopted. These require you to input your income and it will calculate your net income or the change in your net income. We have checked these calculators for several parties and found them to be accurate. However, these calculators only check one income and the changes for one party at a time and do not give you the larger picture. You may well receive a tax cut, but those on much higher incomes may get a larger tax cut that they do not need, and your loss of other benefits and services may cost you more than you gain from the tax cuts.

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Basic Income and tax change calculator

  

In order to check the claims of each party and to compare the Basic Income and tax change policies of the various political parties we developed a Basic Income and tax comparison spreadsheet. This spreadsheet which is available for download below enables you to input a particular income and see an immediate comparison of net incomes for each of the seven parties we have looked at.

 

A comparison table tabulating the results for all seven parties in $5,000 annual before-tax or gross income steps from zero to $1,000,000 enables you to see the larger picture. Who will really benefit, those on lower incomes or those on the highest incomes? It enables you to see if the political parties are being honest with their claims, or are they just claiming that their changes will benefit those on low to middle incomes when a greater benefit goes to those on the highest incomes?

 

You can also input a tax scheme and a taxable Basic Income of your own choice for comparison purposes.

 

The Basic Income and Tax Comparison spreadsheet comes preset with a Basic Income set at the level of the adult jobseeker support and a uniform tax of 33% up to an income of $180,000 with a tax rate of 39% above that. Note that with these inputs, those on no income will receive an additional $17,622 p.a. and that this will reduce to a constant $6,964 for those earning $180,000 or more. This indicates broad targeting of the Basic Income to those on low incomes, but the scheme will not be self-funding.

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A Basic Income will replace welfare payments that are the same size or smaller and partially replace larger payments so this will provide some of the funding for a Basic Income. The tax scheme used in conjunction with the Basic Income payments will set the level of broad targeting, reducing the overall cost of the scheme, while increased taxes on those who have more than enough income will provide additional funding reducing or eliminating the need for other sources of funding. 

 

With the calculator, you can change the Basic Income to any value you like and also change the tax rates and thresholds. The Basic Income can be deleted enabling you to just input an alternative tax scheme. If you delete the alternative tax rates and thresholds, the spreadsheet will assume the present tax rates and thresholds.

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Try some alternative proposals. Try a Basic Income of $174.03 with a 33% tax rate up to $180,000 and 39% above $180,000. Those with no income will receive an extra $9,080 p.a. which reduces to zero extra income between $70,000 and $165,000 with those earning $180,000 or more paying an extra $813 p.a. in tax. The Basic Income is targeted at those on the lowest incomes and is partially funded through the extra tax paid by those earning over $180,000.

 

A Basic Income of $337.74 with the uniform tax increased from 33% to 39% for all incomes will increase the targeting of the Basic Income and all those earning over $180,000 p.a. will now pay an extra $2,258 p.a. in tax providing partial funding of the Basic Income.

 

Try a net Basic Income of $381.00 with a uniform tax of 39%. This will give a person with no other income $19,880 extra annual income. The extra income reduces progressively to zero for an income of $180,000 or greater. The rate of $381.00 is large enough to replace most existing benefits and some of the living allowances as well and will partially replace larger welfare payments providing some funding for the Basic Income. However, a higher uniform tax rate, a two-stage tax, or additional funding from other sources may be required to fully pay a Basic Income of this size.

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These examples show how the combination of a Basic Income with an appropriate tax will target the benefits to those on the lowest incomes. In contrast, tax cuts where thresholds are increased, or tax rates lowered will always target the benefits to those on the highest incomes. The wealthy always get more. Try it.  

 

You can download the spreadsheet here (xlsx format). 

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The policies of the political parties

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In the sections below we will look at the policies of political parties relating to income and taxes to see who will benefit the most from the changes that are proposed.

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The Opportunities Party (TOP)

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