QI have often heard it expressed by the well-to-do that New Zealand is an over-taxed country.
Harking back to when I was growing up in the 1950s, there was milk in schools, the Family Benefit (which could be capitalised for a loan on a first home) and compulsory military training for all medically fit 18-year-old males.
All these were provided courtesy of the NZ taxpayer. There was no GST either.
One has to wonder how the rate of tax then compares proportionally with tax payable today.
Under 16-year-olds then were not required to pay tax as they do today. I received an “Irishman’s rise” on turning 16!
ATake off your rose-tinted glasses.
Setting aside the issue of whether military training was good — and many would debate that — we are taxed more now, and we get more from the government now.
“Your correspondent has an approximate memory,” says Prof. Gary Hawke, head of Victoria University’s School of Government, who taught me economic history many years ago.
He doesn’t think there was any period when capitalised family benefits and compulsory military training overlapped.
“The detail is obviously not important, but the point that memories are selective and unreliable is important.”
Turning to your main point, “The level of tax relative to income quickly becomes complex,” says Hawke.
Broadly speaking, though, “the ratio has risen from about 25 per cent in the 1950s to somewhere around 30 to 35 per cent now.
“There have been many changes in what we expect to be provided through the public sector and what we finance by tax — which is not the same since public sector activities can also be financed by fees, and some public sector service provision may be contracted to the private sector,” says Hawke.
He gives three examples of major changes in what the government does for us:
- “In the 1950s, old age pensions were means charged and universal superannuation at age 65 was at a very low level.”
He notes, too, that the proportion of the population who lived for long in retirement was much lower then.
- “The health services available in the 1950s were much more limited.” There were fewer drugs, and hospital services were much less complex.
- A lot fewer people did five years of high school and beyond, and schools had a lot fewer resources.
Hawke sums it up this way: “Given a free choice, I am confident that very few people would choose to return to the material circumstances of the 1950s, or to the public sector of that era.”
QI wonder if you could tell us, some time, just what we are getting when we have a term deposit.
We are given an annual interest rates, but what is the actual after-tax rate, and how much does that become at the end of the year?
It would be good to have a chart that showed, for $5000 for one year at different interest rates, the after-tax rate and dollar amount of interest for those paying 19.5 per cent tax, 33 per cent tax and 39 per cent tax.
ARather than showing you for just $5000, I’ll give you some formulas that you can use on any amount of money and any interest rate.
The way the tax system works, it’s more accurate to say those with taxable income of less than $38,000 are in the 21 per cent tax bracket, rather than 19.5 per cent.
So what we have is the following:
- With taxable income of less than $38,000 (tax bracket 21 per cent), multiply the interest rate by 0.79.
Example One: If interest is 5 per cent, multiply that by 0.79 to get 3.95 per cent after tax.
To get the dollar amount of interest on a term deposit, first divide the after-tax rate by 100, which comes to 0.0395. Then multiply that by the amount of the deposit. On $5000, you would get $197.50 a year.
Example Two: If interest is 7 per cent, multiply that by 0.79 to get 5.53 per cent after tax.
Divide that by 100, which comes to 0.0553. Multiply that by the amount of the deposit, this time $200, and you would get $11.06 a year.
If your calculator can’t cope with that many decimal points, and rounds the numbers to, say, 0.04 and 0.06, don’t worry about it. Your answer will be near enough.
- With taxable income of $38,000 to $60,000, (tax bracket 33 per cent), multiply the interest rate by 0.79.
Example One: If interest is 5 per cent, multiply that by 0.67 to get 3.35 per cent after tax.
Divide that by 100, which comes to 0.0335. Then multiply that by the $5000 deposit to get interest of $167.50 a year.
Example Two: If interest is 7 per cent, multiply that by 0.67 to get 4.69 per cent after tax.
Divide that by 100, which comes to 0.0469. Multiply that by the amount of the deposit, this time $200, and you would get $9.38 a year.
- With taxable income above $60,000, (tax bracket 39 per cent), multiply the interest rate by 0.61.
Example One: If interest is 5 per cent, multiply that by 0.61 to get 3.05 per cent after tax.
Divide that by 100, which comes to 0.0305. Then multiply that by the $5000 deposit to get interest of $152.50 a year.
Example Two: If interest is 7 per cent, multiply that by 0.61 to get 4.27 per cent after tax.
Divide that by 100, which comes to 0.0427. Mulitply that by the amount of the deposit, this time $200, and you would get $8.54 a year.
A good tip with any calculations like these is to check your answer is roughly right — to make sure you don’t have too many zeroes, or too few.
In our first example, for instance, 3.95 per cent is close to 4 per cent. Note that 4 per cent of $1000 is $40, so 4 per cent of $5000 will be $200. Is that close to your answer of $197.50? Yes!.
You can also use the numbers above to calculate how much tax-deductible interest costs you.
Let’s say you have a rental property and you pay mortgage interest of 8 per cent. Multiply the 8 by 0.79, 0.67 or 0.61 — depending on your tax bracket. That is the after-tax cost of your mortgage.
Example: If you’re in the middle, 33 per cent, tax bracket, an 8 per cent mortgage costs you 5.36 per cent.
Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.