Over on Kiwiblog David Farrar discusses how redistributive the tax system is, and how including average welfare households that earn $60k “effectively pay no tax”.
There are a few points to keep in mind when looking at this:
- The obvious one that you will always hear is that a tax and benefit system is supposed to be redistributive – this is the point. So the question is how much redistribution we want, especially given that there is a cost in terms of “efficiency” (having private and social value align from market activities).
- Let us focus just on wages. Comparing gross and net wages over the entire tax system doesn’t make sense – it is a appoximation for how “small” changes in tax will work, not large changes: The key point here is that the gross wage is the “cost to the employer” while the net wage is the “renumeration for the employee” – the tax paid isn’t all “cost to the employee”, it is shared between the employer and employee based on the idea of tax incidence. If the “tax” wasn’t there, this does not mean that the high wage household gets all that income – so saying it that way “exaggerates” their contribution to redistribution. In truth, the tax paid by those wage earners is the contribution from that market transaction – which is a very different thing to think about! Note: I am saying wages would change if the tax system changed.
- On the note of market, redistribution works by changing relative demand for goods and services and endowments of individuals – in this way relative prices change. If we are talking about contributions in terms of the goods and services we care about, and over the entire tax system in this way, we need to think about how goods and services prices change as well!
Yes our tax system is progressive – but framing it as “the top 5% of households pay 47% of tax” is a bit mischevious. In fact, it would be closer (but not perfect) to say that market transactions that involve the top 5% of income earners contribute to 47% of the nominal value of tax revenue … a little less us vs them right 😉
I think Bill English is spot on saying:
“But people who call for even greater transfers to low income families, or who call for the top tax rate to be raised, need to be aware of how redistributive the tax and income support system really is,”
Indeed we should consider the starting point – to many people view increasing redistribution as always increasing social justice, when that is not the case. However, Farrar’s point does not follow:
Income tax rates should be lowered
I’d prefer it if he fleshed out whether this means an increase in other taxes, or a cut in spending, as the normative implications are very different 🙂