Over the weekend Max Rashbrooke’s latest book Wealth and New Zealand was released, giving a rare insight into the wealth of New Zealanders. We don’t see this sort of information very often because of lack of data. Because we tax some forms of cash income, we have oodles of data on that. But of course the wealthiest Kiwis often arrange their affairs to have very little taxable income so there’s a paucity of information on wealth. That’s a shame because it’s wealth after all, not income, that determines an individual’s material wellbeing.
Rashbrooke’s work provides useful information about wealth in New Zealand, and more importantly highlights where we don’t have equality of opportunity. This includes putting the spotlight on both poverty and the gaping loopholes in our tax system, which allow some people to accumulate wealth more quickly than others.
Who has the wealth?
In 2010 the wealthiest 1% of Kiwis owned 18% of the wealth, the wealthiest 10% had 54%, and the wealthiest 50% had 96% of the wealth. In other words the least wealthy half of the population had 4% of the wealth. Around 8% of the population – 271,000 people had negative net wealth. In other words they owed more than they own; their average debt was around $27,300 each.
In terms of international comparisons, our level of wealth concentration is middle of the pack – our top 10% own similar proportion of total wealth as the top 10% in Germany and Canada, more than in the UK and less than in the United States.
Wealth is different to income
Wealth is more concentrated than income; according to the 2014 Household Incomes Report the top 10% of income earners earn 25% of all income, whereas as we have seen above, the top 10% of wealthy people own 54% of the wealth.
[quote align=”right”]the bottom 40% of income earners own 27% of the wealth[/quote]However, it is important to note that people with high incomes are not always the same people as those who are wealthy. From 2003 data we know that the bottom 40% of income earners own 27% of the wealth – that suggests that there are some very rich people among our lowest income earners. This is borne out by tax data, which suggests that half of New Zealand’s richest people don’t pay the top rate of income tax.
At the moment we tax the high income earners relatively heavily while leave the wealthy relatively untouched. Given that as a society we maintain a progressivity in our tax regime it is clear we wish to tax more those with a higher ability to pay. Why otherwise would we have such progressivity? But the data is telling us that taxing high income earners is at best, a clumsy way to achieve that objective.
What’s Changes Have Emerged Over Time?
It is hard to know for sure as wealth data is so patchy. Over time it seems New Zealanders have on average become wealthier in absolute terms, but the distribution of that wealth has changed quite a bit.
Brian Easton has done a lot of work on wealth concentration using very old data, which told us that in colonial New Zealand wealth (mostly land) was very concentrated – the top 1% had 55-60% of all wealth – similar levels to Victorian England. Over time government policies brought that down to around 18% in 1966 – similar levels to today.
The best data we have is for 2004-2010. Over this period the wealth of the top 1% didn’t grow as fast as the average so their share of the total wealth dropped from 20% to 18%. This is probably due to the drop in share values during the global financial crisis. Shares have since rebounded, so in the next survey we should see the percentage of wealth held by the top 1% rebound. The rest of the top 10% stayed relatively the same.
The middle class – the next 40% – got a lot richer. In fact they were the real winners of the 2004-2010 period. This was probably due to the housing boom of that period. Since then housing prices cooled off in most of the country except for our biggest city, so in the next survey we would expect that trend to continue for those living in Auckland.
The relative wealth of the poorest half of Kiwis dropped slightly.
Is inequality a bad thing?
Is wealth inequality, or income inequality for that matter, really a big deal? What level of inequality is ideal? There’s no definitive answer. Some inequality in both is to be expected if we want to live in a society where people are rewarded for hard work and good ideas. As we’ve discussed before, the real concern is equality of opportunity – making sure all kids have a fair go and get the resources they need to fulfill their potential.
With this in mind, Rashbrooke’s work highlights two concerns. The first is poverty – particularly the 8% of Kiwis that owe more than they own. We need more work on poverty statistics to understand how many people have both low wealth and a low income (remember some people with low income have plenty of wealth) and hopefully we will see this in forthcoming surveys. The other issue highlighted is making sure we have a level playing field, so that the people that are getting ahead are doing so for the right reasons.
New Zealand’s biggest asset – by far – is the value we ascribe to the housing we live in. The Reserve Bank puts owner occupied housing at 48% of total assets. As the mortgage gets paid off, owner occupied housing increasingly generates huge benefits for the owner in the form of both rent that’s untaxed and long term tax free capital appreciation (rising house prices). So how can any tax regime that claims to be fair continue to ignore owner occupied housing as a major source of unearned wealth accretion?
When we include investment properties that figure climbs to a whopping 60% of our total assets. While the rental returns from investment properties are taxed we know that as an asset they are generating poor returns – the real benefits to owners come from tax write-offs, capital gains and the privilege of not having to pay their “rent” from tax paid income. Similar issues exist with another massive part of our assets – farmland. Such loopholes make a mockery of fairness in our tax system.
The answer to this conundrum is clear. New Zealand desperately needs to close these loopholes in our tax base. It is the only way that we will stem the rise in wealth inequality, rising land prices and the falling rate of house ownership.