September, 2003

August 2003

Comment

CTU policy is in support of progressive taxation both from an equity point of view and as a means of funding health, education and other vital social services. Government revenue overall including SOEs is $55 billion in an economy with GDP of $128 billion. Tax revenue is $43 billion with $15.6 billion (36%) from PAYE, $6.4 billion (15%) company tax, $11.6 billion (27%) from GST and $2.3 billion (5%) from excise taxes. In terms of PAYE, top marginal tax rates in most OECD countries range between 37% and 60%. There have been very large cuts here to the top income tax rate. It was 66 cents in 1986. It is 39 cents today. It was 33 cents from 1988 until 2000. Although broadening the tax base and having higher levels of economic activity and employment can significantly raise tax revenue, there is no doubt that higher marginal tax rates also increase government income. The increase in the top tax rate to 39 cents has realised just over $1 billion in extra tax revenue in its first two years.

Some would argue that the tax system is effectively redistributing income. For instance, a Treasury study for the 1997/98 tax year looked at who pays direct personal income tax, and indirect consumption taxes and also look at who receives social policy expenditures (health, education, social welfare transfers and housing expenditures). If individuals are ranked by equivalised household disposable income, then the top four deciles are from households that are nett payers of tax. In plain language this means that the top 40% of households pay more tax than they receive back in benefits or social expenditure.