Key tax changes for a better future

What is the problem we’re trying to fix?

Wealth inequality has spiralled out of control. Over time, more and more of New Zealand’s resources have been bought up by a small group of increasingly wealthy people. Now, the wealthiest 1% of New Zealanders now hold 26% of all assets, while the poorest 50% own just 2% of assets. This inequality is only getting worse, causing the living standards and opportunities of ordinary people to get worse too.

Most people don’t own much wealth, but for those who do, their wealth grows at 4-5% each year without them doing anything. Assets can generate income that’s used to buy more assets, and get more income, and buy more assets. 

Wealth held in assets and income from that wealth largely goes untaxed. This widens the gap between the wealthiest, and those who work to earn their income and are taxed on every dollar. Research has shown that the wealthiest families pay an effective tax rate of 9%, while the middle-income wage earner pays around 20%.

How does a wealth tax work?

A wealth tax is an annual levy of 1-3% paid by only the wealthiest people. 

For example, a wealth tax could apply to those who have $2 million in net wealth - that is what they own, minus any debt like a mortgage. So if all your major assets are worth $2 million, but you have $1.4 million in debt, your net wealth would be $600,000 and you would not be caught by the wealth tax. Often family homes are excluded from wealth taxes.

Why would a wealth tax make things better?

A wealth tax improves the fairness of our tax system, ensuring those whose income comes from owning things, rather than working, pay their fair share. 

It would also generate significant revenue to fund the things that support everyone to lead good lives, like great schools for our kids, functioning hospitals and efficient transport systems.

A wealth tax requires an annual valuation of assets, but there are a number of overseas models we can learn from. A very small group of people who are asset-rich but cash-poor could find it challenging to pay the tax. To address these situations, the payment of wealth taxes can be deferred. And exit taxes can be put in place to mitigate “capital flight” of wealthy people moving their assets offshore to avoid the tax.

Ultimately, a wealth tax would tackle extreme wealth inequality more directly than other taxes. It targets the wealth of those at the top that grows by itself, constantly expanding the portion of our collective resources that are owned by the wealthiest few, while ordinary people’s wages aren’t even keeping pace with the cost of living and most have little or no wealth.

What is the problem we’re trying to fix?

Most people make their income from working a job and receiving wages or a salary. Every dollar of this income is taxed. 

Some people make income from buying assets that increase in value over time and selling them later for a profit. Common examples of assets are investment properties and company shares. Unlike income from working a job, income from selling assets is not usually taxed in New Zealand. 

This means people who can afford to buy and sell expensive assets are often taxed at a lower rate than people who work hard for a living. In fact, the richest New Zealanders effectively only pay a  9% tax rate, on average middle-income people pay 20%! Not only is this unfair, it also deprives the government of the money it needs to improve education, healthcare, and other public services for everyone.

How does a capital gains tax work?

A capital gains tax is a tax on the profit people make from selling assets. For example:

Jo buys a house for $500,000 and sells it five years later for $600,000 (without having made any improvements to it). Jo's profit is $100,000. Under a capital gains tax rate of 28%, Jo would pay $28,000 in tax when Jo sells the house. Jo would still get to keep the rest of the profit ($72,000) as income.

Capital gains on investment property is a good start. We think capital gains taxes should also apply to other big assets like company shares and bonds. The family home would not be included, and you could still sell small assets like furniture, appliances, and the family car without being taxed.

Why would a capital gains tax make things better?

A capital gains tax is a common-sense way to make the tax system fairer. There are details that would need to be worked out (such as which assets would be included), every other developed nation has some form of capital gains tax. 

A capital gains tax should encourage people to invest in more productive assets, rather than investment property speculation. And because a capital gains tax only applies when a person makes a profit from selling an asset they have the means to pay.

Although a capital gains tax can take a while to start bringing in revenue for the government, because it only applies when people sell their assets, over time it will generate resources to enable our government to pay for things that matter, like hospitals, schools and infrastructure.

What is the problem that this change would seek to address? 

In 2024 the government decided to allow landlords to subtract the interest they pay to the bank for their mortgage on an investment property from the tax they owe - known as “interest deductibility". 

This was essentially a $2.8 billion dollar tax cut that went to landlords - who by definition are wealthy enough to own a property they don’t live in, whereas ordinary people are not able to subtract the mortgage interest on their family home from their tax bill. What’s more “interest deductibility" encourages investing in property, which has the effect of making housing more unaffordable.

And this decision also reduced our collective resources to pay for things like hospitals and schools by $2.8 billion! 

How would reversing interest deductibility work?

We would simply remove the ability for landlords to subtract the interest they pay on their mortgage for investment properties from their tax bill - this was the status quo before 2024. 

Why would this be better?

This would create a more level-playing field, removing a tax advantage for landlords and an incentive to invest in property. This may encourage investment in productive businesses that create jobs and reduce the pressure on the housing market.

Importantly, this will replenish our collective pool of resources with billions that can be spent on the things that support everyone to succeed, like free school lunches and doctor’s visits.

What’s the problem we’re trying to fix?

GST is a tax of 15% on most products and services. It makes up one quarter of our government’s income, so it’s pretty vital! 

But people with the least ability to pay contribute the biggest portion of each dollar they earn through GST.  For example, if you earned $500 per week after paying income tax and spend $230 on food, power, and other essential goods and services, you’ll be paying $30 in GST.

Contrast this with someone earning $1000 per week. They’ll likely spend a similar amount on essentials. They can save or invest that extra money, and they don’t pay GST on these investments. So the proportion of their income paid in GST would be about half that of the person earning $500!

How could we make GST better?

Options to address the impact of GST on the least well off (the “regressive” effect of GST) include:

• Lower the GST rate
• GST refunds to the least well-off at point of purchase of goods and services, or through a periodic tax refund

We also recommend that the government investigate applying GST to financial services - this is a major hole in our GST system, that likely benefits those who are already well-off the most.

Why would these changes to GST make things better?

Lowering the rate would reduce the impact of GST on the least well-off. However, those with the least ability to pay will still give the highest proportion of their income under GST. So the least well-off could be refunded the GST they have paid, and this change could be paired with other tax changes to fill the revenue gap and ensure that those that have more to contribute, pay their fair share . 

GST refunds for those on lower incomes would maintain GST as a significant source of revenue to fund our schools and hospitals, while making sure contributions come from those who can afford to contribute the most.  To ensure the refunds reduce the impact of GST on the least well-off, we need to create good protections to maintain the refund rates over time and alongside inflation. 

Removing GST from essentials is another option that is often proposed. While this could make some important things more affordable, it would not address the unfair, disproportionate impact of GST on the least well-off. It can also be difficult to draw a clear line between essential and non-essential items - although there are examples of this being done in other countries, like the UK and Australia. 

What is the problem that this change would seek to address? 

More and more, there is a big difference in wealth between the richest families and average families in New Zealand. Kids from the least well-off families in New Zealand start at a disadvantage, and it is getting harder for young families to buy a home unless they get gifted or inherit wealth from their parents - wealth is transferred to them. Effectively this is untaxed income. People whose parents don't own a house or other valuable assets are at a big disadvantage, through no fault of their own. 

We can tackle this inequality by taxing large inheritances and gifts over a certain amount. The revenue can be used to fund things that support everyone to build a better future for themselves and their loved ones, like public schools and free health care. 

How do inheritance taxes work?

There are lots of practical ways to tax gifts and inheritances, and most developed countries have some kind of inheritance tax. New Zealand used to have an inheritance tax, but many people used to avoid paying the tax by gifting their wealth to their families before they died, so we would need to close this loophole. An example of an inheritance tax that fixes this problem is Ireland's 'lifetime transfer tax'. 

A lifetime transfer tax requires people to report how much they receive from significant gifts and inheritances over their life. Once a person has received more than a certain amount, any gifts they receive from then on are taxed like any other income. 

Kids could still receive gifts or inheritance from their parents - but people with ultra-wealthy parents would pay tax once the amount they receive meets the large gifts or inheritances threshold.

Why would this be better?

Understandably, people want to be able to pass wealth on to their family when they die. But, this needs to be balanced with making sure we don't bake in inequality from one generation to the next, meaning kids from the least well-off families can never get ahead! 

Overall, a wealth transfer tax would help close the gap between the super rich and ordinary families. Making our society more equal will help everyone to live better lives and build a stronger economy.

What’s the problem we’re trying to fix?

In New Zealand, trusts are widely used to hide wealth and pass it between generations untaxed, increasing inequality and depriving everyone of revenue to fund our schools, hospitals and infrastructure.

How this happens is a little complex, so we’ve got a handy explainer for you. 

A trust is a legal arrangement between:

• a settlor (who deposits assets into a trust)
• trustees (who manage the assets) and
• beneficiaries (who benefit from the assets, including the income they generate over time). 

Trusts are not transparent. There are an estimated 650,000 trusts in New Zealand, many of which we know nothing about. Those which have to report to the Inland Revenue (Tax) Department collectively held half a trillion dollars ($528bn) or 18% of our wealth in 2023. But those are estimates. We know almost nothing certain about these trusts, including how much wealth they hold in total. And you can’t tax wealth if it’s hidden.

Unlike individuals, trusts hold assets across generations. So they escape important taxes that provide revenue to fund the things that matter, improve fairness and support a more productive economy.

How so? A person who owns assets will eventually either:

• sell the assets
• gift the assets or 
• keep the assets until they pass away, and they pass to inheritors. 

These ‘transfer events’ could be taxed by a capital gains tax or wealth transfer tax (neither of which we have yet in NZ). However, assets owned by a trust may never pass hands across generations - because the trust itself owns the assets. This places assets held in trusts outside the scope of a capital gains tax or inheritance tax. 

It also means that trusts are a key tool for private wealth to be passed down to generations who have done nothing to earn that wealth.They are also a key way that income-generating wealth (such as shares in a large corporate group) is held by wealthy owners which makes it easier for them and their families to minimise the tax they pay.  This makes our society more unequal, puts the less-well off at an unfair disadvantage and starves New Zealand of revenue to pay for the public goods that make everyone’s lives better.

How can we tax trusts better?

Create transparency with a trusts register. A comprehensive register would identify who is involved in a trust, in particular who are the ‘beneficial owners’ - those who would benefit from the trust. A register would also identify all the assets held in the trust,  above a certain wealth threshold. 

Charge a levy on trusts. To address the taxation ‘gap’ that trusts fall into, we could put in place an annual “intergenerational levy” of 1% on trust assets above $5 million. Taxing trusts is crucial for any capital gains tax or inheritance tax to function effectively - otherwise trusts will be used to dodge those taxes. 

Why would this make things better?

We can’t tax trusts properly without transparency - and we must tax trusts properly if we’re going to have a fair tax system. A trusts register would provide us with the information we need to do so.

Trusts are a key mechanism for increasing wealth inequality and the unfairness of our tax system, by allowing wealth collected by one generation to pass untaxed to another generation, who has done nothing to earn that wealth. Generation after generation less well-off people, who don’t happen to have wealthy parents and grandparents, and who work for their income are at an ever increasing disadvantage. Trusts are also one of the most important methods used by the rich to minimise tax. Taxing trusts is an critical tool, alongside other taxes, to address unfair  intergenerational wealth transfer.

What’s the problem we’re trying to fix?

Half of our collective pool of resources is raised from income taxes.  It’s super important that everyone contributes their fair share - those who can afford to, contribute the most, and we address the impact of income tax on the least well-off. At the moment we haven’t got this balance right. 

How could we make income taxes better?

Lower taxes on lower and middle incomes - making our tax system more “progressive” - and raise additional revenue to pay for the things that matter, through:

• A tax-free band for almost everyone - except a small number of people on super high-incomes. For example, this could mean we don’t pay tax on the first $5000 we earn.
• Change tax brackets to more accurately reflect ability to pay - Introducing more gradual tax brackets for those earning between $15-80,000 and moving the highest income tax threshold down to $150,000, from the current rate of $180,000
• Increase the tax rate paid by the highest income earners by instituting a new highest tax threshold

Why would this be better?

• • Big gains for equality - everyone’s work counts and those who can afford it, contribute more
  • For the majority of people, tax rates are lower or the stay the same
  • Lower income earners (below $80,000) pay less tax, and move up tax brackets more slowly

• Increases on the highest income earners mean better funding of schools, hospitals, and clean rivers that benefit everyone

What problem are we trying to fix?

Increasingly large corporations are making extremely high profits. Often they make windfall or excessive profit by taking advantage of times of public emergency by raising prices on essential goods (e.g. facemasks during the COVID pandemic) or exploiting a lack of competition (e.g. supermarkets, banks and electricity companies). 

The drive to make ever increasing profits by these corporations contributes to unaffordable rises in the cost of living and makes it even harder for ordinary people and small businesses to survive through a crisis.

How does a windfall or excess profits tax work?

An excess profits tax applies an additional tax or higher tax rate when a company’s profits go above a level considered normal. The tax applies to the portion of the profits above the normal level, the portion of profits below that level are charged at the normal rate. Excess profits taxes are often imposed on sectors where there is a lack of competition, like the supermarkets, banking and energy sectors. 

A windfall tax is a version of an excess profits tax. The tax is a one-off levy on large corporations that are taking advantage of unusual circumstances to generate higher than normal profits. The tax redistributes some of the unusually high profits of large corporations to help respond to the emergency, support people and small businesses to recover.

Why would this be better?

An excess profits tax can be a way to discourage excess profit making. The tax only applies on the profit over the normal rate of return - the excess profits - so it shouldn’t impact the profitability of businesses or motivations to invest.  

While we would need to define what “excess” profits are, this has been done before and studied by economists, so there are models we can learn from.

It can increase the progressivity of the tax system and reduce inequality. Any excess profits reclaimed can be used to pay for free public services that can reduce the cost of living for whānau, like school lunches and free public transport.

As a one-off and retrospective tax it is simple to implement once the excess profit threshold is determined, can’t be passed on to consumers and sends a message to corporations about the community’s expectations.  Although, as a one-off measure a  “windfall profits tax” will not resolve our underlying need for more revenue, any revenue generated can be specifically directed to supporting people affected by the crisis and harmful corporate behaviour.

What is the problem we’re trying to fix?

There are several problem scenarios where a corporate tax surcharge might be a solution.

• “Too big to fail”: Some sectors pose particular risks in an economic downturn and could bring the economy down with them if they were to fail (e.g. banks), and so the government would have to bail them out using our collective pool of resources, generated from our taxes. 
• “Critical infrastructure or services”:  Some companies own or manage vital infrastructure and service provision where the government would have to step in if the company failed (e.g. electricity generator-retailers).
• “Lack of competition”: Some sectors lack competition (e.g. supermarkets) which enables these companies to earn higher profits that would be the case if there was real competition.

How does a corporate surcharge work?

A corporate tax surcharge is a charge on the profits of the relevant sector or company in addition to standard corporate tax. These surcharges target sectors or companies that are making high profits, and can be made to apply to profits over a certain amount - so will not affect small or medium sized businesses.

For example, in the UK there is a banking surcharge of 3% on top of the standard 25% corporate tax rate, and applies to profits over £100 million (for banking groups).

Why would this be better?

Surcharges ensure certain sectors and companies that pose risks to our economy make a fair contribution - it is like insurance in the event the government has to bail them out using revenue generated from our taxes. 

The surcharge is focused on companies earning large profits, so wouldn’t affect small or medium sized businesses. As a small percentage of high profits it does not affect the viability of the business, which will still retain the majority of their profits.

While governments have to make calls about which sectors or companies face surcharges, this is appropriate given it is governments who will have to cover the costs using public money if the businesses fail. Further, the charges could be determined by an independent body like the Commerce Commission.

What is the problem that this change would seek to address? 

In Aotearoa New Zealand the public, and sometimes governments, have limited or not information on the taxable income and how much tax corporations should be paying. Without this information it is difficult to make good policy and enforcement decisions to ensure big corporates are paying the tax they owe.

How could we increase transparency on corporate profits?

We could take a leaf out of Australia’s book and require all New Zealand companies to file publicly available financial statements if their assets and revenue exceed a certain threshold, or if they had a significant contracts or revenue from government. IRD should be required to publicly report on the taxable income and tax payable by companies with revenue over a certain threshold, e.g. $100 million.

In terms of multi-national corporations, again we could follow Australia’s lead and adopt public country-by-country reporting, which requires multi-nationals to provide information to tax authorities in their countries of residence, which then report to tax administrations in other countries. 

Why would this be better?

These changes would both improve our ability to enforce existing tax obligations and gather much needed revenue, and also identify where we need to make changes in our corporate tax laws to close loopholes. 

They would also bring us into line with other countries, like Australia and EU Member States.

What is the problem that this change would seek to address? 

There is a practice of companies giving long-term loans to shareholders or associates which are not taxed in the way a dividend to a shareholder would be taxed. This practice also deprives us of much needed tax revenue.

Shareholder loans may also be a factor in the failure of companies, where there is inadequate reinvestment of funds into the business.

How would taxing shareholder loans work?

In the UK, if a “close company” loans money to a shareholder or other associate, it must  “loan” money to the government as a tax on the amount of the loan, this tax is charged at the UK’s upper dividend rate for shareholders (33.75%). The tax is repaid to the company when/if the loan is repaid by the shareholder.

There can be a threshold where shareholder loans are only taxed when all loans from the company exceed a certain amount (e.g. $10,000).

Why would this be better?

Taxing shareholder loans, like we tax dividends would be fairer and potentially generate more revenue.

By repaying the tax when/if a loan is repaid, this would incentivise the repayment of loans

What’s the problem we’re trying to fix?

Big corporations are making huge profits from harmful activities, and communities are paying the cost to repair the damage done to our people and planet.

How do remedial taxes work?

Remedial taxes increase the cost of harmful activities to corporate producers and individual consumers to:

• encourage positive changes in behaviour because harmful products become more expensive to produce, raising prices and reducing demand
• ensure producers and consumers pay the true cost of their activities to society
• raise funds to help remedy some of the harm done

Tobacco, alcohol and sugar taxes, waste disposal levies, and excess/windfall profits taxes and capital gains taxes (discussed above) can all fall under the remedial tax umbrella. 

Why would remedial taxes make things better?

Remedial taxes don’t have to raise a lot of money to be worthwhile if they change behaviours to improve our health or environment, and save us money in the long-run.

The revenue raised can be tagged to particular spending (“hypothecated”) that addresses the underlying harm. In some instances they can achieve multiple purposes, for example road and fuel taxes support the maintenance of roading infrastructure, but can also encourage public transport use, cycling and walking - which have environmental and health benefits.

But remedial taxes can have a disproportionate impact on those least able to pay, so the design of such taxes must address this issue. We should pair remedial taxes with measures to support changes in behaviour and address the impact on the least well-off. For example:

• Grants to switch to green energy solutions if we tax oil and gas
• Quit-smoking services if we tax tobacco
• Affordable and accessible public transport when we tax roads and petrol

What problem are we trying to fix?

Big tech companies and other large multinational corporations are making billions of dollars in Aotearoa New Zealand (NZ) and shifting their profits offshore to minimise the tax they pay here. This means we’re missing out on $100s millions in tax revenue that could pay for the things that help everyone to live good lives, like schools and public housing.

They do this through accounting tricks, like reclassifying most of their super profits as “service fees” that don’t get taxed. For example, in 2024 Google earned about $1.139bn but paid “service fees” of $1.052bn to a Singapore subsidiary, leaving just over $29m of taxable profits here - that means less than 3% of the profits they make in NZ are being taxed!

They are making these massive profits using our infrastructure, workers educated in our schools and cared for by our hospitals but are not paying their fair share to maintain these collective resources. Meanwhile local small and medium businesses that pay their taxes are struggling to compete.

How could we tax these multinational corporations better?

A 5% withholding tax can be enforced against the vast “service fees” that these corporations send overseas. These “service fees” are actually royalties paid for the use of intellectual property. Under existing laws and double taxation treaties withholding taxes must be paid on these royalties.

We can also increase transparency around profits made in NZ by introducing country-by-country reporting and amending the Companies Act to require all local subsidiaries of overseas-headquartered companies to file accounts publicly, so we know how much profit they’re making in NZ and can make sure they pay their fair share of tax here.

Why would this be better?

In the wake of the Trump administration’s trade retaliation against taxes on US tech companies our government dropped our planned Digital Services Tax, so using existing laws that are not targeted to big tech is a practical way to get around this issue.

Ultimately, international cooperation on taxing multinationals would be most effective, but such efforts through the OECD to establish a global minimum corporate tax rate and through negotiations towards a UN Tax Convention are slow moving and face many barriers. 

Enforcing existing tax obligations and increasing transparency requirements for multinationals are steps we can take right now to make big tech and other large multinationals pay their fair share.

This approach could raise $100s millions in additional revenue to fund school lunches for our kids, hospital beds for those needing elective surgeries and social housing units for whānau on the housing waitlist.