Are our personal tax rates high in New Zealand?

On average New Zealand workers earn just below the OECD average income (in USD) and pay a high proportion of average personal income tax. However, they do get to take home a higher percentage of their gross wages compared to workers in many countries where substantive compulsory social security contributions may be levied on employees.

In New Zealand, the average personal tax is 19% of gross wages, which is the 6th highest in OECD for a single worker and 4th highest for a family (two earners with two children) (see OECD report). Australia sits at 4th and 3rd highest respectively.

But if employee social security contributions are also factored in, New Zealand’s average personal tax rate is actually 7th lowest in OECD (Australia sits 12th from the bottom). The highest is Germany at 39.3% and the average across all OECD countries is 25.9%. That makes sense as compulsory social security contributions in New Zealand are non-existent but are substantial in many European countries.

If the employer social security contributions are also factored in, New Zealand has the 2nd lowest ‘tax wedge’ of all the 36 OECD countries for a single worker (4th lowest for a two earner family with 2 children).

The tax wedge measures the difference between an employer’s labour cost and the employee’s take home pay- i.e. after direct taxation, employer/employee social security contributions, payroll taxes less any cash benefits to employees.

1 comment

  1. Iain Blakeley
    June 29, 2020 at 6:39 pm

    Thanks Ranesh and Mark, this is fascinating. It illustrates how complex tax design can be. As you’ve pointed out, merely picking out headline rates doesn’t give the full picture. I wonder if there’s an “income tax” effect of VAT/GST? I believe NZ has the highest rate of GST to GDP in the OECD. With GST being essentially a consumption tax imposed on tax paid income it seems to me it acts as a proxy for income tax in some ways. So, effectively, when you consider the total tax collected from all sources in NZ as a percentage of GDP I think we sit pretty much smack in the middle of the OECD.
    I hope you are both well and doing well in your new practice. Would love to catch up some time.

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