Lifetime Tax (post budget update)

Total Lifetime Tax A briefing paper on the total cost of taxes, and how long they take to pay.

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This briefing paper calculates the average amounts of tax paid by different households over a typical lifetime. It updates the previous Taxpayers’ Union briefing paper published on 22 May 2017 but adjusts for the tax threshold changes in Budget 2017. These changes come into effect on 1 April 2018.

Calculations are based on the new proposed tax thresholds applied to a standard working life of 44 years (age 21-65) and a standard retired life of 15 years (life expectancy approximately 80). The estimates include direct taxes and indirect taxes.

Households are broken down by income decile (where households are split into ten groups ranging from lowest to highest income) to see which groups are most heavily burdened by tax.

KEY FINDINGS • The average household will save $80,000 in tax over their lifetime because of tax threshold changes in Budget 2017. They will now pay $1.4 million in tax over a typical lifetime (at 2016 prices).

• The average top decile household will take approximately 14.2 years to pay their lifetime tax bill, a reduction of 0.8 years compared to before the budget. This is equivalent to a 5.32% saving.

• Over the average lifetime, approximately $780,000 is paid in income tax (54% of total tax bill – compared to 56% previously).

• The average top decile households will save $120,000 in tax over their lifetime because of tax threshold changes in Budget 2017.

They will pay $3.55 million in tax over a typical lifetime.

• The average top decile household will take approximately 19.7 years to pay their lifetime tax bill, a reduction of 0.66 years compared to before the budget. This is equivalent to a 3.26% saving.

• This is the smallest reduction of any group despite having the biggest lifetime tax.

• They now spend approximately 2 years more of their life paying tax than any other group.

• Over the average lifetime, approximately $2.06 million is paid in income tax (62% of total tax - compared to 65% previously).

• The average bottom decile household will save $16,000 in tax over their lifetime because of tax threshold changes in Budget 2017. They will now pay $422,230 in tax over a typical lifetime.

• The average bottom decile household will take approximately 17.7 years to pay their lifetime tax bill, a reduction of 0.7 years compared to before the budget. This is equivalent to a 3.79% saving.

• Over the average lifetime, approximately $146,000 is paid in income tax (33% of total tax - compared to 34% previously).

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PRE VS POST BUDGET The smallest lifetime tax saving from Budget 2017, in years, are for top income households (the group that already has the largest tax burden).

The biggest lifetime tax saving from Budget 2017, in years, are for middle income households (who already have the smallest tax burden).

When consideration is made to Working for Families (and other benefit) adjustments in Budget 2017, the lifetime tax savings for lower decile households lifetime will be larger than shown here, however, top income households will not change.

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Post-budget

Pre-budget 0.66

YEARS OF EARNINGS TAKEN TO PAY LIFETIME TAX

20

19 0.70 18 0.87 0.68

17 0.87 0.69 16

0.83 0.82 0.82

0.78

5

6

15

14 1

2

3

4

7

8

9

10

AVERAGE HOUSEHOLD INCOME DECILE

2

3

$5,787

$8,286

$364,592

Annual Indirect Taxes

Annual Total Tax

Total Working Life Tax

$2,394

$3,842

$57,637

$422,230

Annual Indirect Taxes

Annual Total Tax

Total Retired Life Tax

Total Lifetime Tax

$23,800

$422,230

17.74

0.7

Annual Income 2016 NZD

Total Lifetime Tax

Years to Pay Lifetime Tax

YEARS SAVED

1

2

0.87

16.29

$484,582

$29,750

2

$484,582

$79,039

$5,269

$3,108

$2,162

2

$405,543

$9,217

$6,080

$3,137

Total Lifetime Tax

$1,449

Annual Direct Taxes

1

Retired Life

$2,499

Annual Direct Taxes

1

Working Life

0.69

15.44

$642,173

$41,599

3

$642,173

$105,865

$7,058

$4,100

$2,958

3

$536,308

$12,189

$7,436

$4,753

3

0.82

14.72

$807,242

$54,850

4

$807,242

$119,843

$7,990

$4,691

$3,298

4

$687,399

$15,623

$8,879

$6,743

4

0.82

14.34

$998,340

$69,600

5

$998,340

$145,486

$9,699

$5,704

$3,996

5

$852,854

$19,383

$10,283

$9,100

5

0.78

14.25

$1,215,149

$85,300

6

$1,215,149

$174,061

$11,604

$6,551

$5,053

6

$1,041,087

$23,661

$11,813

$11,848

6

7

0.83

14.92

$1,531,452

$102,650

7

$1,531,452

$234,051

$15,603

$8,961

$6,642

7

$1,297,401

$29,486

$13,924

$15,562

Household Income Decile

0.87

15.48

$1,922,447

$124,150

8

$1,922,447

$322,392

$21,493

$11,735

$9,758

8

$1,600,055

$36,365

$15,199

$21,165

8

0.68

16.2

$2,566,627

$158,400

9

$2,566,627

$368,361

$24,557

$12,951

$11,607

9

$2,198,265

$49,961

$17,942

$32,019

9

0.66

19.72

$3,552,841

$180,200

10

$3,552,841

$873,279

$58,219

$22,491

$35,728

10

$2,679,562

$60,899

$21,712

$39,187

10

0.8

14.17

$1,400,602

$98,818

Average

$1,400,602

$160,274

$10,685

$6,462

$4,223

Average

$1,240,328

$28,189

$12,667

$15,522

Average

METHODOLOGY AND SOURCES • Household Income decile data is from Household Economic Survey 2016, Statistics New Zealand.

• Average bottom decile income is likely overestimated, and average top decile likely underestimated due to nature of reporting. Could assume less or more but would be arbitrary, therefore have left as is.

• Retirement Income is linearly interpolated from quintile data for over 65 year olds.

• Income includes government transfers. This includes working for families tax credits but not at the new adjusted rates announced in Budget 2017. We are unable to account for these adjustments because the distribution of benefit entitlements, and which benefits specifically, are not measured in the Household Economic Survey.

• Expenditure data is from 2013 and 2016 Household Economic Survey. Where data is missing for 2016, we have inflated 2013 figures forward at the average growth rate from 2013-2016 for the average household (data is complete for average household in 2016).

• Tax rates are from various sources. Most of which is publically available from IRD/Customs New Zealand/New Zealand Transport (i.e. GST, Fire Levy, Alcohol Excise Tax, Petrol Excise etc.)

• We have assumed a 44 Year working life (i.e. age 21-65), and 15 year retired life (based on average life expectancy of approximately 80).

• Due to lack of specific household expenditure data for retired households, we have assumed the same proportions of income on expenditure types as is spent prior retirement.

• We have accounted for savings depletion (or dissaving) at an annual rate of 5%. Therefore with a retired life of 15 years, they consume approximately 54% of life savings (=1-0.9515).

• Because the data is not available from Government agencies the figures do not account for changes to Working For Families, Independent Earner Tax Credit or the Accommodation Supplement. However, it is clear that if these changes were included, the reduction to the lower deciles would be larger than modelled and further support the conclusion of this paper that high income earning households received disproportionately less from the change in thresholds.

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