Income, taxes, and gaps
Today’s ‘Divided Auckland’ story in the NZ Herald is on taxes, claiming that taxes on the rich are lower and taxes on the poor are higher here than anywhere else in the OECD. Now, I moved from another OECD member country about eighteen months ago, and while I’m not in the John Key category I would be safely in the upper 20% of household income both here and in the USA. There is no question that I pay more taxes here — and I’m fine with that.
The comparison of top marginal rates is misleading because the US has so many deductions. The most obvious one is for mortgage interest, which covers a big chunk of income for the lower end of high income, but as you move up the scale more options appear. As Canadian economist Stephen Gordon writes “Taxing the rich is harder than you think”. That’s why presidential candidate Mitt Romney can pay only 15% of his income in taxes, even in a year when he knows his tax returns will be up for public scrutiny. Warren Buffett has been making this point for years — he pays less in total taxes than any of the other people in his office.
In principle, the NZ tax system is not very progressive, but in practice it is not too bad at actually extracting payment of taxes from people with money. This isn’t to disagree with the main argument of the article — I think a capital gains tax (as long as it had some sort of inflation adjustment so it measured actual gains) might well be a good thing for New Zealand.
A related issue, raised by a StatsChat reader in email, is whether the statistics quoted by the Herald in this series really tell us there is something wrong. Specifically
By 2006, the number of area units with median incomes over 30 per cent above the regional median had trebled from 16 to 46, and the $48,800 median in the richest area, now St Marys Bay, was almost double the regional median.
A generation ago, in 1986, median incomes in the vast majority of the region’s 300-odd census area units – specific geographical suburbs and areas – were bunched tightly around the average….
…By the last Census in 2006, that bunching had completely disappeared.
I think this is written unclearly — on a quick reading it gives the impression that rich people used to cluster together in the same neighbourhoods, and now don’t. In fact, the reverse is what the writer is trying to say. It used to be that different neighbourhoods had pretty similar median incomes, but now the wealthy neighbourhoods are much wealthier than the poor neighbourhoods.
Part of this will be an increase in inequality, and part of it may be an increase in geographical clustering of income, perhaps driven by school zones. I don’t know the NZ data, but in parts of the US the school-zone effect is very strong. The graph, from Statistics New Zealand, shows the distribution of median income across areas in Auckland. I don’t think a density plot is the best way to do this, but if you are used to density plots you can see that the 2006 distribution is more spread out. You can also see that essentially all neighbourhoods have had an increase in median income — it’s important to remember that inequality is not the only economic statistic we care about.
The same web page has maps, so you can see which areas have become wealthier and which have not. What’s less clear from these data is how much the wealth increases in particular neighbourhoods are due to increased income for people already living there rather than wealthier people moving in. For example, Oranga and Onehunga have moved well up the scale over the fifteen year period, but a lot of that is due to people moving in.
Thomas Lumley (@tslumley) is Professor of Biostatistics at the University of Auckland. His research interests include semiparametric models, survey sampling, statistical computing, foundations of statistics, and whatever methodological problems his medical collaborators come up with. He also blogs at Biased and Inefficient See all posts by Thomas Lumley »