Mind the trans-Tasman tax gap

Published in The National Business Review (Auckland), 20 September 2013

Less than a week after David Cunliffe’s ascension to the Labour leadership, the details of his policies remain unsurprisingly sparse.

However, there is no doubt where the inclinations lie on tax policy. When asked straight after his election whether raising taxes would be an election policy, Mr Cunliffe’s answer was “You bet.”

In previous interviews and press conferences he has explained that “Labour’s policy argues for a more progressive [income] tax and I support it” and hinted at what kind of tax increases he had in mind: “That’s a matter for the caucus and modelling and our numbers. What we did last time round was 39c with a pretty high threshold of$150,000. So we weren’t hitting middle New Zealand, we had a top rate for the wealthiest.”

One might agree with Mr Cunliffe that increasing the top rate for the highest incomes would not hit middle New Zealand.

But such a policy still has adverse side effects, not least New Zealand’s competitive position vis-a-vis Australia.
According to Roy Morgan’s latest state of the nation report, the income gap between Australia and New Zealand has been widening over the past decade. Last year, the average fulltime Australian worker earned 24.1% more than the average fulltime New Zealand worker. Expressed in absolute figures, the average fulltime salary was $A75,700 in Australia and $61,000 here.

The pay gap was such a concern that Labour’s finance spokesman, David Parker, even issued a press release. “How to work a four-day week? Move to Australia,” it said. “The wage gap with Australia is now so large that Kiwis across the ditch earn a New Zealander’s weekly pay in just four days.”

What both Roy Morgan and Mr Parker missed, however, is that comparing salaries takes more than just a look at the headline figures. For a start, there are purchasing power parity discrepancies that favour New Zealand.

The online cost-of-living database Numbeo estimates consumer prices here are almost 10% lower than in Australia and rents almost 30% lower. Mind you, New Zealand is an expensive place – but Australia plays in a league of its own.

It would be foolish to overlook another important factor: the big gap in personal income taxation. Australian rates tend to be quite a bit higher. The Roy Morgan figures for the national average incomes shows the difference. The effective tax rate (including income tax and the Medicare levy) is 2.8%. In New Zealand, it is 20.3% (comprising income tax and the ACC premium).

For higher incomes, the tax gap widens, which compensates for much of the wage gap. A senior management job, say, would pay $A250,000 across the Tasman but only $216,329 here. That reflects the salary gap of 24.1% at the current exchange rate. Based on these salaries, there would be $A160,203 left after tax in Australia and $152,086 in New Zealand. The effective tax rate is 36% in Australia but only 29.7% here. Despite the pay gap, a New Zealand employee in this position would be no worse off than his or her Australian counterpart.

This also makes New Zealand competitive for high potentials and well-paid professionals. If we did not offer lower taxes, the higher Australian salaries would attract even more New Zealanders.

Unfortunately, the pull is stronger the higher the salary. The tax advantage of working in New Zealand is also stronger at the top end of the pay scale. Our top rate of income tax at 33% for incomes over $70,000 compares with Australian rates of 34% (including Medicare) for incomes above $A37,000, 38.5% above $A80,000 and 46.5% above $A180,000.

For these reasons, Mr Cunliffe’s ideas about raising income tax rates, even if just for top earners, are dangerous. They send precisely the wrong signal to those people New Zealand should be trying to keep and, ideally, attract: highly talented entrepreneurs, professionals and business people who are mobile enough to consider employing their talent in either Australia or New Zealand.

If we want these people here, if we want them to contribute to our economy and create jobs, and if we want them to do so despite the disadvantages that a smaller market with lower average salaries implies, then we need to offer them something in return. That something is a tax system that is far more attractive than Australia’s.

Plans to increase the top rate of income tax may be good populist policy – they may even win elections. But they would be a sure disaster for the New Zealand economy by robbing us of one of our key competitive advantages over Australia.

Mr Cunliffe would do well to reconsider this issue before it becomes an election pledge.

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