Taxation in New Zealand

After a severe and protracted economic crisis in the late 1970s and early 1980s, New Zealand radically reformed its tax and banking systems, while also reducing regulation and protectionism, and liberalizing free trade. The results are impressive; the Heritage Foundation’s 2010 survey ranked New Zealand fourth in the world for economic freedom.The New Zealand government also had a tax surplus from 1994 to 2008.

New Zealand does not have capital gains or inheritance taxes. Interest and dividends are taxed as regular income. For individuals, very few expenses are deductible. For example, you cannot deduct mortgage interest or capital losses. The income tax form is short in comparison to the equivalent forms in the United States; for 2010 it consists of forty one “lines.” Property taxes (called “rates”) are low, and apply only to land, not to improvements or other forms of business property. Local city councils collect and spend rates.

[[MORE]]If you make a living working in a certain field, then New Zealand does not consider earnings from that work to be capital gains. For example, if you trade stocks for a living, then those gains would be taxable, whereas if you only make occasional investments in stocks while having a job in another field, then they would not be, nor would losses be deductible.

There are four personal income tax rate brackets. The rates for 2009 ranged from 12.5 to 38 percent, with the maximum rate applied to earnings over NZ$70,000. The rates declined slightly in 2010, and now range from 10.5 to 33 percent. You can claim a credit for income under NZ$9,880, with the effect that if you earn less than that, you will not owe any income tax. Seventy five percent of New Zealand residents are in the intermediate 17.5 percent bracket (up to NZ$48,000). The corporate tax rate is a flat 30 percent, and will be decreasing to 28 percent in 2011.

New Zealand bases personal income taxes on individual income only; there are no “joint” returns or brackets. As an example, assume a husband works and his wife stays at home and they have a joint savings account. The husband will owe tax on his earned income plus half of the interest income. His wife will owe tax only on half of the interest income, potentially at a much lower rate than her husband will.

Employers deduct most income taxes at the source, through the pay as you earn (PAYE) program. Banks and other financial institutions deduct taxes from interest and dividend payments through the resident withholding tax (RWT) program. One way that PAYE differs from RWT is that PAYE includes an additional 2% fee for no-fault accident insurance (ACC). Although New Zealand has a publicly funded healthcare system, people injured in an accident can receive additional benefits, such as physical therapy or compensation for lost wages.

One advantage of New Zealand’s approach to income taxes compared to the United States is that the end-to-end system is reasonably comprehensible by the public. It is possible to estimate accurately the impact of changes in income or tax rates on yourself as well as others. This helps facilitate better economic planning, which is important for a well-functioning economy. If you cannot plan, or if your planning is error prone, it is easy to make a wide variety of financial mistakes. For example, you might end up with a level of debt you cannot afford to service, or you might unnecessarily defer the purchase of assets that you could have put to good use.

The motivation for not taxing capital gains stems in part from a respect for property rights, as well as from a desire to limit the benefits government receives from inflation. When capital gains are taxable, inflation alone can cause a nominal gain, even when there is a loss of purchasing power. For example, if you buy an asset for $1,000, and after one year without inflation, you sell the asset for $900, you would have a $100 capital loss. Now assume that there is 20 percent per year inflation. The sales price would be $1,080; you would have an $80 capital gain, even though there is a loss in constant dollar terms. Inflation plus a capital gains tax will amplify your losses (and your gains) compared to depreciation alone.

New Zealand has a national sales tax called the goods and services tax (GST). Items that you purchase overseas and import into the country are also subject to GST, with a NZ$50 minimum threshold per transaction. Instead of the government providing exemptions for companies and individuals who collect GST on the goods and services they sell, those entities file periodic GST returns where they can claim a credit for GST they have paid. If they pay more in GST than they collect, they receive a refund.

Only a few goods and services are exempt from GST, such as donations to non-profits, which they then sell, financial services such as bank fees, and rent for a residential dwelling. The most interesting exemptions are for fine gold, silver and platinum. The combination of no capital gains tax and no GST has the potential of enabling a form of penalty-free trading using precious metals as money, although such a market has not yet materialized.

The GST tax rate started out at 10% when New Zealand introduced it in 1986; it went up later to 12.5 percent. As part of the legislative package that decreased income tax rates in 2010, GST increased from 12.5 to 15 percent.

In addition to GST, the government also imposes excise taxes (duties) on a number of imported items, including alcohol, tobacco, fuels, carpets, footwear, hats, apparel, bedding, cosmetics, amplifiers, and so on. Typical rates vary from 5 to 10 percent of cost.

A duty used to be payable on gifts over a certain amount. The government has decided to eliminate that tax in 2011, largely due to the high cost of administration compared with the relatively small revenue that was taken in. As a result, gifts of any size are now tax-free. This change also fits with not having an inheritance tax; the idea is that you pay taxes only when you earn the money, not when you give it away, either voluntarily or upon death.

The government raises roughly 45 percent of its total revenue from individual income taxes, and about 20 percent from GST. Corporate taxes, duties, investment income and other taxes make up the remainder.

New Zealand’s central bank is the Reserve Bank of New Zealand (RBNZ). The government restructured the RBNZ charter in 1989, in the aftermath of the financial crisis in the early 1980s. The law under which the government chartered the bank defines its primary function as providing stability in the general level of prices. New Zealand was the first country to adopt a formal inflation target. Unlike the Federal Reserve, the RBNZ charter does not include managing the level of employment or other aspects of the economy. New Zealand does not provide FDIC-like bank deposit insurance, whether through RBNZ or otherwise.

The combination of not allowing mortgage interest to be deductible, having a central bank focused on controlling inflation, and a lack of bank deposit insurance superficially discourages debt and inflation. Even so, it was not enough to prevent the country from having a modest real estate bubble; prices have roughly doubled over the last ten years.

Having lived with the New Zealand tax system since moving here from the United States four years ago, overall I find it to be a breath of fresh air. Eventually, I would like to see the country move to a more limited government that is entirely funded by voluntary fees. The purpose of government should be to protect our rights. Taxation requires force or the threat of force to enforce it. As a result, through this implicit or explicit force, government is violating our rights. This puts government in a constant state of both internal and external conflict: “violating your rights in order to protect them.”

In the near term, on the path to a voluntarily funded government, there are many things New Zealand could do, in addition to the often suggested “cut spending and taxes.” To encourage saving, which helps minimize the true cost of capital, I would like to see taxes on interest income eliminated. To help reverse the decline in domestic industrial growth, the government could reduce personal and corporate income taxes, and offset the revenue loss with an increase in import duties. Import duties are potentially avoidable, so they are a more moral option than income taxes. Import duties could also be made uniform, so they do not damage or benefit one industry more than another.

Example of conservative investing results in New Zealand

Let's look at what would have happened if you bought New Zealand dollars (using US dollars) 4 years ago, held them in a savings account in a bank, and sold them today. To keep the math easy, let's assume you're in a low tax bracket and don't pay taxes (hey, that's half the US now, right?).

mid-2007: Buy US$100 worth of NZ dollars. Exchange rate = 0.68 USD/NZD, so net = NZ$147.06
mid-2007 to mid-2008: Interest rate for savings account 7.4%, so NZ$157.94 at the end of the year
2008 to 2009: 7.2% --> NZ$169.31
2009 to 2010: 6.0% --> NZ$179.47
2010 to 2011: 5.0% --> NZ$188.45
mid-2011: Exchange NZ$188.45 back to USD. Current exchange rate = 0.81 USD/NZD, so net = US$152.64

That's a 52% gain over 4 years, or 11% compounded annually. 19% of the gain came from a weakening USD vs. NZD alone.

For comparison, gold has about doubled in USD terms over the same period, but pure USD deposits are up only a few percent.

Social commentary via TV

I was born and raised in the US, and lived in California for most of my life. In late 2006, I moved with my wife and two kids to New Zealand. Even though I've traveled quite a bit, I didn't completely know what to expect living in another country. One thing that surprised me was how I slowly began to see the US in quite a different way when I could see it from the outside.

I've had a difficult time explaining this to my friends and family, but I've recently had an experience that I thought I would share, to see if it might help get some small part of it across.

[[MORE]]I think we can use TV shows to gain insight into the societies that create them. They tend to reflect our morals, priorities, interests, etc. Even if we don't agree with the themes and content of a specific show, the standards that are used in script writing are relatively consistent from one show to another, and many themes are repeated time after time: pro-police, pro-government, pro-military, etc, etc. I'm not talking so much about cable or pay-TV shows, since they have enough freedom to do things differently from time to time. I'm talking about advertiser-sponsored broadcast TV; there's a lot of content that sponsors won't allow, on top of limits (censoring) by the FCC, and of course the priorities of the TV networks and the people who run them.

A few weeks ago, I discovered something that I thought was interesting. There is a very popular TV show in New Zealand, called "Outrageous Fortune." It's shown on broadcast TV here, complete with advertising (both traditional and product placement). It's in its sixth season, and I've heard that roughly 1 in 4 people in the country watch it. With that level of success, someone decided that it would be worth showing it in the much larger US market (4M people here vs. 300M there). However, the show as-is has a lot of NZ cultural references (things like Maori terms and local slang) and other "quirks," so they decided to do a remake, which is called "Scoundrels," now in its first season. The scripts are almost, but not quite, identical -- and it is precisely those differences that make for a very interesting social commentary.

Here's a short video that previews the third season of Outrageous Fortune, to give you an idea of what it's like:

http://www.youtube.com/watch?v=94OawKbP6bc

What I'd like to suggest is the following: first, watch at least the first two, but hopefully the first 3 or 4 episodes of Scoundrels. Then, watch the same number of eps of Outrageous Fortune, from its first season (available on DVD or torrent). Try not to get distracted by the acting. Instead, listen to the script and look for the words and scenes that were changed, and at the theme and feeling of the story. Then ask yourself why the people who run broadcast TV in the US don't want you to see and hear the things they censored.

One small example is swearing. The usual argument I remember in the US in favor of censorship is that parents supposedly don't want their kids to copy those words; yet shows about violence are perfectly OK. So we're supposed to believe that the kids will uncontrollably copy swearing, but won't copy the violence? That somehow TV will circumvent or replace morality? And yet most normal kids are exposed to swearing regularly in everyday life.

Another example is how sex is portrayed. The NZ version is reasonably explicit at times, including showing topless women and the type of (simulated) sex scenes you might see on HBO or Showtime in the US. Those scenes have been "sanitized" in the US version.

The result is that US TV lives in this "vanilla-ized," conflicted world that tries to portray (semi)-realistic environments, but with a bunch of the stuff that actually happens in reality filtered out; that, in turn, substantially reduces the level of entertainment they provide. A major foundation of entertainment is being able to relate on some level to a show and its characters. The more detached a show is from reality, the less entertaining it becomes.

I'm not sure this will make any sense -- at least not at first. But if you have a chance to watch both shows, I would love to hear your reaction.

How the health care system in New Zealand works

Here's the way the health care system in New Zealand works, in a nutshell:

Emergency care is free; routine doctor's visits to your GP are heavily subsidized (cost is about US$20 per visit); most drugs are heavily subsidized (US$2 to $10 per course); most lab work is free; most in-hospital care is free. That's the so-called "public" system. The problem is that because it's free, the supply is limited, which means rationing. The existence of rationing is readily admitted by everyone. The impact of rationing is long waits. In my area, it can take 3 months to get an MRI scan, or up to 6 months to get in to see the one-and-only neurologist in town.

[[MORE]]To help make the system more palatable -- which also means providing it with badly needed money -- there is a parallel "private" system. Doctors can choose to offer some of their time on a private basis, or not. Most do, but some, like the neurologist I mentioned above, do not. Private fees are still reasonable by US standards: maybe US$45 for a 15-minute visit. There are also private hospitals, since docs aren't allowed to use public facilities for their private patients. Fees there are higher; closer to what they charge in the US. You can buy health insurance that covers private costs. Unlike in the US, pre-existing conditions are never covered by private insurance; there is no "time out" period. Insurance costs are moderate-to-low by US standards, and insurers are also much more picky about who they accept.

So, this all works OK if you only ever see your GP, get a few lab tests and a few prescriptions and maybe go to the emergency room once every few years. But as soon as you have anything complicated happen that requires a specialist or expensive test equipment like an MRI, then your care is rationed. The waiting times for certain surgeries in the public system is notoriously bad: 2 yrs or more in some cases. If you're lucky, and you can afford it or have insurance, then you can get private care. But private care isn't always available, and even when it is, there may still be a waiting list.

What's your is yours, right?

I had an interesting conversation with a friend here in New Zealand today. He told me about a meeting he had with one of the local city Council members about an emergency generator that he had recently installed. They were talking about emergency preparedness, and he asked what the city would do in the event of an extended, wide-scale power outage. The Councilman said they would go around to local firms and individuals with generators, claim them under an emergency declaration, and take them where they were "needed".

[[MORE]]My friend subsequently wrote to our MP to ask if that was true and if they could provide assurances that it wouldn't happen. He responded by confirming it was true, and that they could not provide any assurances. Right after that, he sold the generator in an auction. What good is it if you can't be sure that you can use it?

I have no doubt that something similar would happen in the US.

The moral of the story: in a mixed economy, what you think you own, you really don't. Someone bigger and stronger, including your own government, can walk in at any time and claim it for "emergency" purposes. Not just generators, but food, clothing, weapons and even housing.

Short summary of moving to New Zealand

Here's a short summary of what it took for us to move to New Zealand:

-- It took about 9 months to get the visas. Would go much faster if you had a job first.
-- It's much easier to do when you're under 55 and your kids are under 18. The rules change after that.
-- It was challenging to find a job here while still in the US, but it wasn't impossible. Pay is well below California averages.
-- We hoped living expenses would be lower. Unfortunately, while they turned out to be lower in some areas (housing, insurance, property tax), they were much higher in others (food, clothes, imported goods).
[[MORE]]-- Making a real lifestyle change takes a lot more than just moving. We're still struggling with that in some ways.
-- There are a lot of odd quirks about moving to a new country: strange laws, new holidays, odd customs, new foods (and the loss of previous favorites), licenses, taxes, forms, the legal system, the medical system (prescriptions, appointments, who pays for what, etc) -- and even small things, like how you interact with trades people and what they call certain things (like "Panel Beater" instead of "Body Shop")
-- There's a lot of "hidden" work after you move, like finding new stores, a new attorney, doctor, dentist, bank, insurance broker, accountant, etc, learning your way around the town, learning the new driving rules (and how to drive on the left). This is from someone who has lived in 15 or 20 different places before (but they were all in California).
-- Getting household goods shipped was a challenge and a half: lining up movers, shipping to the right port, customs and biosecurity clearance, lining up local movers -- a ton of details, and very easy to make costly mistakes
-- Banking is very different: mostly electronic here, checks are rarely used, bill paying is different, new frequent customer programs, new credit card
-- Finding and buying a house: finding a real estate agent, shopping for homes, getting prices (sellers sometimes prefer auctions or other formats where prices aren't published), totally different negotiation process, no escrow (all handled by the lawyers), a very short sales contract, somewhat different process of finding a loan

Just one quick story -- the loan process might be of interest. First I was referred to a local lender by my real estate agent. It was a "building society," rather than a bank. The approval process consisted mostly of a short interview; the paperwork was basically a formality since we were borrowing much less than the purchase price. But the interesting part was what happened after the loan was approved. Rather than just signing the contract and that being the end of it as in the US, our attorney called and walked through the loan agreement with me, paragraph-by-paragraph. Home loans in NZ are full-recourse, for example, which was good to know. After the lawyer finished with me, he then had the same conversation with my wife. He did the same thing for the other legal documents associated with the purchase (the original purchase agreement was only 4 pages long). He explained that this was standard practice in NZ; I thought the whole thing was very cool.

I'm still a US citizen. I still have a US passport. I still have to pay US taxes on all income. I have family and friends in the US, and will always have deep connections there. I think of myself as an American, not a Kiwi.

I also have Permanent Resident status in NZ. After passing through all of the hoops (which took 2 yrs), I have the same privileges as a New Zealand citizen. I can do everything they can except certain government jobs (security clearance, etc); I could even serve in the military. I also pay income taxes here. My family and I are covered by the national health system, we're eligible for government benefits, we can vote, travel out of the country indefinitely and then return to stay permanently, etc.

New Zealand energy and telecom investments

Here's an update on New Zealand from an energy and telecom-oriented investment perspective:

-- Broadband Internet is widely available in NZ. Fiber roll-outs are starting. Speeds of 3 Mbps are common in cities; higher in areas where cable is available. Hotspots aren't perhaps as widely available yet, and when they are, they tend to be outrageously expensive. NZ ISPs charge for data transfer, which does add to the costs. Vodafone and Telecom are perhaps the two largest, but they are by no means the only ones.
-- Electricity is relatively cheap in NZ because most of it comes from hydro power, esp. on the south island
-- NZ gets much of their own natural gas from the offshore Maui fields. Much more exploration and development has been going on over the last few years.
[[MORE]]-- One advantage of using gas canisters instead of piped-in gas is that you are much more independent that way. I have two canisters that I use only for cooking, and haven't had to recharge either one after 18 months.
-- Most NZ homes north of Canterbury (the region around Christchurch) and outside of the mountain regions don't have central heat. It's just not needed. A few electric space heaters work just fine for most people, and at a fraction of the cost. In older homes, insulation is relatively uncommon. (Kiwis are a fairly hardy bunch).
-- There are plenty of industry and investment opportunities in NZ. Check out PRC (Pike River Coal) and NZR (New Zealand Refining) on the NZ Exchange, for examples.
-- NZ has some interesting tax advantages: no taxes on capital gains (for anything from the sale of a house to the sale of stocks, etc), no inheritance taxes and very, very low property taxes. The government ran a surplus this year.
-- The NZ central bank runs independently of government, and has a mandate to fight inflation. That's why interest rates are high (over 8%), and why home prices have been declining.
-- The country is entering what looks like a gentle recession. Unemployment is up, but only modestly. It's still very low by global standards.
-- NZ has a no-nuclear policy. They are proud of their "clean and green" image; rightfully so, I think. They won't even allow US warships to dock here because of the US policy of not saying which of their ships carry nuclear materials.
-- NZ has a lot of farmers, millions of sheep, and a big and powerful dairy industry. It's also fairly rich in other commodities -- lumber, coal, etc. In a SHTF scenario, that could be considered a good thing.

Why I like New Zealand

-- Very against the Iraq war (even use of an Air NZ jet to just ferry Australian troops to Saudi Arabia caused a huge flap in parliament)
-- Anti-nuclear (they don't allow US warships to dock anywhere in NZ, since the US Navy refuses to certify that don't carry nukes)
-- Simpler tax system (income tax form is like 4 pages long, no death taxes, no capital gains taxes on the sale of your home, extremely low property taxes)
-- A sane legal system that doesn't grant obscene financial awards
[[MORE]]-- The country isn't run by lawyers (the contract paperwork to buy a house is like 4 pages long)
-- Of course it's beautiful
-- Only 4M people in a country that's about two-thirds the size of California (only 1M people on the entire south island)
-- English-speaking
-- Low levels of violent crime
-- Gun ownership is legal (although they do have a strict safety-focused licensing system) and there are lots of hunters in the country
-- They understand and appreciate personal liberty, and have been known to demonstrate or riot when the government tries to pass laws that might undermine those rights
-- They have one of the strongest currencies in the world (it's a commodity-oriented currency, like the Australian and Canadian dollars)
-- Their politicians have a reputation of being among the most honest and least corrupt in the world
-- They have run a tax SURPLUS for the last few years
-- No one hates NZ; they're not quite as neutral as Switzerland, but close
-- People here know how to fix things and keep them for a long time; it's not a throw-away consumer society

One way to look at emigration is to think about what our forefathers did. When the government in England got messed up, they left and found someplace better. When Germany and the rest of Europe went crazy during the World Wars, lots of people left there to come to the US. It's really just the natural flow -- why stay and support a system that's crumbling and that you don't really believe in?

Motivations for moving to New Zealand

I moved from California (Silicon Valley) to New Zealand in Dec 2006, with my wife and two kids.

NZ is 65% the size of California, but only has 10% of the population. Housing is less expensive, property taxes are 95% lower, there are no death taxes, no capital gains taxes on the sale of your home, and it's beautiful and relatively unpolluted. I'm new to NZ politics, but so far it seems much more under control than in the US. Special interests don't seem to dominate things here.

[[MORE]]
They do have socialized medicine -- but there's also a parallel private system that allows you to opt-out of the public one if you want to. Taxes are high -- but at least the tax forms and associated tax law are extremely simple in comparison to the US (the annual tax return is only about 4 pages long). The overall tax rates aren't directly comparable, but I'm sure I'll pay less here overall than I would in the US.

I haven't found the government to be anywhere near as intrusive as in the US. In foreign policy, they have been solidly against the war in the Iraq. Many laws are relatively lax compared to the US -- gambling is legal, the drinking age is 18, minimum age for a driver's license is 15, etc. It's legal to own guns here, although it requires a license. The courts don't allow the type of distorted settlements that happen regularly in the US. Million-dollar awards for "damages" are unheard of. For example, in an auto accident case, the person who was hurt is likely to be awarded lost wages plus a little extra. The result is that insurance costs much less than in the US.

My overall sense of New Zealanders is that they understand and support the idea of personal responsibility -- something that was lost in the US a long time ago.

Native Kiwis, please let me know if I'm off-track, or if any of this resonates with you.

Although I was attracted to NZ, I also felt driven away from the US. Who wants to live in a country that a large part of the rest of the world hates? That's a situation that isn't likely to end well. I don't want my tax dollars to continue to be used to support perpetual wars of aggression. The level of government intrusion and the loss of respect for personal liberty is really crazy.

US vs. New Zealand Tax Rates

Let's look at tax rates in the US vs. New Zealand, comparing apples to apples (highest tax bracket).  Here are the US rates:

Income tax: 35%
Sales tax in California: 8.25%
State income tax: 9%
FICA: 6.2%
E-FICA: 6.2% (paid by your employer on your behalf)
Medicare: 1.45%

Total = 66.1% (59.9% not including E-FICA)

[[MORE]]
You could argue that the second / hidden 6.2% FICA shouldn't be included since it's paid by your employer, but that's money your employer could be paying you if they didn't have to pay the tax.

vs. 39.5% income + 12.5% VAT = 52% for NZ

Except in NZ, the taxes also cover basic medical care. Insurance costs of all kinds are a small fraction of the US costs, and true inflation rates are lower (inflation is another hidden tax). Property taxes are around 0.1%, there are no capital gains on the sale of your home, and there are no inheritance taxes. The government has actually been operating at a net surplus for the last few years.

Yes, both tax rates are very high. I think the income tax should be abolished in both countries. But until that happens, NZ doesn't look too bad.

New Zealand isn't (very) socialist

After moving to New Zealand in Dec 2006, something I hear a lot from my friends in the US is: "why would you move to New Zealand? They're socialist!"  No, NZ isn't socialist. That's a common misconception in the US for some reason. They are really a mixed economy, much like the US, though arguably not nearly as bad.

[[MORE]]
They do have government subsidized medical care. They are a parliamentary democracy, and members of government have a reputation here of being extremely open and honest, with a very low level of corruption compared to other western countries, including the US. Unemployment and inflation are both low.

They do have high interest rates here (banks currently pay 7.6% for a savings account), partly caused by an attempt by their central bank to tone-down the recent housing boom. They have somewhat high income taxes (19.5% to 39.5%) and a 12.5% goods and services tax (GST), but very few hidden taxes (the US has a million of them), no state taxes, zero capital gains tax on the sale of your home, no inheritance taxes and very very low property taxes. They have a simple tax code: their income tax form is only about 4 pages long. The government raised something like NZ$4B more in taxes than it spent last year. They are very anti-Iraq war (there was a big flap here a few months ago about Air New Zealand being used by the Australians to fly soldiers to Iraq), anti-nuclear and pro-green (members of the Green party have even been able to get elected to parliament).

It's not perfect, of course. I would prefer a totally free-market society, but such a thing doesn't exist. I'm still an American at heart, though. If the politics in the US ever returns to something close to free-market capitalism, I will definitely consider moving back.