There’s a meme that’s been around for a while, but which has been repeated frequently over the last day or two. That meme is that, in New Zealand, “People earning $55k per annum [or less] don’t pay tax.” Tau Henare said it on Twitter, John Key said it on Campbell Live, and apparently DPF said it on his blog as well, among others.
That statement, as you might suspect, is not true. To make it true you have to add numerous conditions and qualifications.
Firstly, this doesn’t apply to everyone earning from $0-55kpa. It applies to those who qualify for the Working For Families in-work tax credit. As the name suggests, that means you have to, well, have a family. Specifically, you need to have at least two dependent children. (I believe if you have a single child you can get a partial credit, but it’s not worth as much.) Additionally, it takes into account household income, not your income. Using the calculator for WFF, I entered an imaginary family with two twelve year old kids. I earned $40k and my partner was a partly stay-at-home parent who earned $15k. My tax credit came out as $136/wk. Then I went to IRD and used the same incomes to find out my income tax. Mine was $6020, my partner’s was $1645, for a total of $7,665. Weekly, that’s $147.40, minus the tax credit for a total of $11.40 – annual tax of $592.80.
However, WFF is complicated by a few factors. For starters, shared custody, or whether the number of dependent children changes frequently. For example, if my partner and I split up and we share custody on a week-by-week swapsies basis, my tax credit drops to $98, while my tax is at $115.76, leaving me with nearly $18/wk to pay – $923.52 each year on my $40k. It’s not six thousand, but it’s not nothing, and leaves me worse off than before my partner left.
So already, what we really mean is that “A household containing two children, earning $55k per annum [or less], pays only a percentage point or two of tax, depending on how many parents are in the household.”
Next we get to discuss what we mean by “tax”. There are many kinds of tax – in New Zealand the main taxes are income tax and GST. In other countries there’s also capital gains tax. This statement only discusses income tax.
Now, we’re at: “A household containing two children, earning $55k per annum [or less], pays only a percentage point of two of income tax, depending on how many parents are in the household.”
Why is that difference important? Because while our income tax system is progressive (placing more burden on the rich), GST is regressive (placing more burden on the poor). Low income people spend far more of their income proportionally on goods and services to which GST apply, sending 15% of all of that money straight back to the government. But you can only multipy household expenses a certain amount – someone who earns a million dollars is not going to be spending a third of that on food, for example, because that would be ridiculous – over six thousand a week! So richer people spend much less of their income on goods and services. Capital gains tax is also progressive, as low income people can’t afford the properties and shares that are subject to it, however New Zealand doesn’t have a capital gains tax, further advantaging rich people. Luckily I don’t have to get more into how this distinction affects the tax system, because someone else has done it already!
The Pantograph Punch post doesn’t take into account Working For Families, because you can’t. WFF is incredibly situation dependent, as already shown. So you take the situation I’ve mapped and the situation PP mapped and combined them and what you find is:
Middle-class two-parent families with dependent children pay the least amount of tax, over all.
Poor families without dependent children pay the most amount of tax, over all. (Yes, you can be a family without kids!) Poor families with a single parent don’t do as well as middle-class two-parent families out of WFF – notice that as the household income went down, the tax after WFF went up.
Rich families without dependent children pay the least amount of tax, over all. Rich families with kids do pretty well too, because even if you earn $100kpa you qualify for a certain amount of WFF!
However, there is one last thing to take into account.
Working For Families is a tax credit. It isn’t taken off your tax straight away, or even automatically. It’s a rebate. You have to apply for it. You can choose how you want it paid – ie, weekly or fortnightly, or as a lump sum. To get it weekly or fortnightly, you have to know pretty accurately what your annual income will be and if you get it wrong your tax will be adjusted at the end of the financial year and may leave you with a bill if you end up earning more than you expected. That advantages people with steady, regular employment and good job security, and disadvantages people who work multiple part time, casual or temporary jobs – respectively, middle class people and low income people, generally speaking (but not always of course – some people on a very low income have very steady, but very shitty, employment, while some middle class people are for example self employed and don’t know how much business they’ll drum up over the year). Someone with a low income that isn’t steady and regular would thus be much safer to opt to get it as a lump sum, after you know how much you’ve earned over the year and exactly how much you’re entitled to. That means you can’t actually afford more, week to week, unless you very carefully release the previous year’s rebate a week at a time over the next year. You could use the rebate on things that have built up and which now really need paying – and that often means that they’ve gotten more expensive while you’re waiting for it, because you know you’ll be getting that money soon, so you want to feed your kids in the meantime rather than avoiding the late fee or the extra interest or the extra power cost of your shitty washing machine that needs replacing or extra water damage to your house until you can get the plumber in.
Ultimately I’m not even sure what our final pronouncement is. Suffice to say, it’s nothing at all like “People earning $55kpa don’t pay tax.”