Business as Usual: Understanding tax with Trent Smith (Department of Economics, University of Ota...

and now we are back with Trent Smith from the Department of Economics here at otago University for this week's installment of business as usual on R1 news today we'll be talking about tax reflecting on the last tax year if people are avoiding tax and what we're paying tax for CA Trent how are you good Maria I'm fine thanks so in New Zealand we have a progressive tax uh system or a payers you earn taxation system to redistribute the burom of tax in regard to people's income does this work and what are the Ben benefits of a progressive tax system um yeah well right so the word Progressive means tax system means that the word Progressive means that as you make more income your marginal tax rate Rises right so so it scales in accordance it does it scales with your income and and and the marginal bit means that it's the tax rate charged on the last dollar of income you made right so we're all so so you know the bottom tax bracket only pays 10 and a half% I think uh um per right for for every dollar they make uh but then if once you make once you make more than 14,000 uh a year you jump into the next tax bracket which is what 177% or something like that um but so that sounds scary jumping to a next the next tax bracket right oh no all of a sudden I've got more tax but it's really just the dollars above the 14,000 where you're paying that higher rate right right so even I like when my tax is calculated I'm still paying you know and I'm on a you know High floating lecturer salary poverty wages by International econ Economist standards but uh but I don't know not so bad for denen um so even my so even my income like that first 14,000 is still charged I still pay 10 and a half% on that um and so one of the benefits of a pro Progressive the reason to make your Progressive uh Inc make your income tax system Progressive is for for one thing that it's sort of people think it's just right it's a fair thing to do so the the people who make more money pay more tax cool last year the top personal income bracket was lifted from 33 to 39 cents on the dollar and the in Inland Revenue Department expects that the average self-employed person might declare 133% less income than they did the year before to avoid making it into this tax bracket what kind of impact will this have do you think yeah so so that's interesting so they're probably right they're probably like high income people probably will do some of this shifting around of of uh you know costs and revenues to to um to avoid paying that higher tax rate and the ird has cool data that shows that this happens at the edge of every tax bracket especially for self-employed people right so if you're self-employed and a person um and you when you're running this The Way businesses are taxed is uh or the way your business income is taxed is it's Revenue Minus cost right and so uh if I'm a self-employed person part of my life is running this business right and I'm going to be so you know I might have other income outside of self-employment and that's just I just pay tax at the regular tax rates um but in my business I you know I only pay on the excess excess Revenue above cost right so revenues might be set in stone right a dollar comes in a dollar comes in you know then it comes in but um but my cost you know there there's there's often some wiggle room around a particular expense was that personal or was it for my business MH and when there's and I mean and when there's ambiguity around those that sort of thing I mean you would expect people to shade them in the direction of oh that was a business expense right and it's not that you're necessarily committing tax fraud when you do that it's just that there's some am there's always am ambiguity in how you interpret tax laws true yes so that's sort of a little sort of the little um hidden secret of business taxation that if you're taxing profit then there is to sort of make it look like you have less profit okay go on the table now act runs on the policy of cutting taxes so that the permanent income tax would drop from 30 to 17.5% what kind of impact would this have on the economy on people's Health everything um well so there's a very long answer to this question pretty long there's actually it's pretty interesting the way New Zealand is managing it its economy it's like much of the world is but it's sort of um it's a it's slightly I'd argue it's slightly behind the times so um there's sort of this um the you know Milton Friedman's monetarism from the 1970s that says oh for one thing it's most you should mostly use monetary policy to manage your economy through recessions and um and you know and the softer versions of that of that theory say that well you could still do a little bit of of of spending taxing and spending adjustment during recessions to help you get through but in the long run you should be trying to balance your budget and so that was sort of the governing uh conventional wisdom in economics since the 70s pretty much um but it's changing and especially since the global financial crisis um like like the um you know there's you know Harvard Economist Jason Ferman who was a you know an Obama adviser in the US like here wrot this white paper after the financial crisis like pointing out that you know that old you know fredman's monetarism like we don't actually believe it anymore at the at the policy level like those of us who are actually setting macroeconomic policy like we actually think that you probably don't necessarily have to worry about balancing your budget you can actually spend a lot more money and you probably need to spend a lot more money than we used to think so paying off government debt isn't like the main purpose so here in New Zealand right it's still everybody assumes it's true oh you've got to pay off this debt some you've got to like it's but New Zealand like is a you know a sovereign has a sovereign currency we issue our own currency there's like there's literally no reason there's no there's literally it'd be literally impossible for New Zealand to default on its debt oh wow that's really interesting Stu no it is kind of mind-blowing yeah this whole logic around you have to balance your budget it's based on this metaphor of you know governments are like households and right you can only spend so much and of course it's true that you can't spend unlimited amounts of government dollars but there's often some slack in the economy where people are unemployed and resources are being unused and you know you could as a government you could hire those things boost up the economy without causing inflation or the other things that the economists worry about thank you so much for coming on to speak about such complicated things such as taxes my pleasure thank you so much