published in the NZ Herald (9 November, p.A13) as "Gloomy image of 1970s based on taxation myth"

Tax Myths and Welfare Misrepresentation

Keith Rankin, 6 November 1998


In his Friday Herald column "Rallies give glimpse of a system that was not so charming", John Roughan perpetuates a myth about taxes in the Muldoon era, while also creating the impression that universal welfare provision is based on ethically bankrupt insurance principles.

John Roughan states, with respect to the generation born in the 1920s and 1930s, that "for the next 10 years [1976-1986] they paid tax at 66c in the dollar and looked forward to 'national superannuation'."

The widely held belief that the welfare state in New Zealand in the 1970s was funded by a tax rate of 66c in the dollar has become an important symbol for those who wish to paint a gloomy picture of the pre-1984 years.

The top tax rate from the mid-1970s until 1982 was 60c in the dollar, not 66c. The 60c rate affected people whose taxable incomes exceeded $22,000. $22,000 in 1976 was equivalent to $122,000 today, while $22,000 in 1982 is the same as $53,000 today.

Following several years of high inflation, in 1982 many more people were paying some of their tax at the top tax rate than had been normal in the past. Very few people earned over $22,000 per annum in 1976, but a substantial minority did in 1982. This process of average tax rates rising during times of inflation was called "fiscal drag" or "bracket creep", and it particularly affected persons on middle to high incomes.

In 1982, Sir Robert Muldoon cut income taxes to correct for this bracket creep. Thus the tax cuts favoured those on high incomes, and hardly gave anything to those on low incomes. To be seen to be acting in a fair manner, Sir Robert introduced a 10% surcharge on the top two tax rates, temporarily raising them to 55% and 66%.

The number of people paying taxes at 66% in 1982 was very few. And the vast majority of those few paid 66% on only a very small proportion of their incomes.

Sir Robert followed the tax cuts with a wage/price freeze, designed to, among other things, minimise the extent of bracket creep in the future.

The 66% tax rate lasted for four years, until 1986. It was only following the 1985/86 wage round, which reached 20% for some public servants, that a significant number of people were affected by the 66% rate. Thus most of the revenue collected by the 66% tax was spent by the Lange-Douglas government, and not by the Muldoon government.

It is true that some members of the lucky generation that John Roughan writes about did see social security taxation as a means by which individuals contributed to an individual retirement fund, rather than as a means to create a prosperous future economy that would collectively fund, among other things, their generation in retirement. For these people, the "one shilling and sixpence in the pound" represented an individual insurance premium, and not a tax.

It is also true, that, as John Roughan states, by voting for the Muldoon superannuation scheme, they had no justification for continuing the pretence that their past contributions represented anything other than a contribution to a collective fund; a fund that supported an earlier generation of retired New Zealanders.

National Superannuation, as introduced in 1976, was an inter-generational social contract. Each generation in retirement would be funded by their childrens' contributions, not by their own. If we had understood that principle better, then it would have become obvious to all parties that the way to secure a prosperous retirement was to invest in our generation of children, and not to cajole parents into saving more.

The main difficulty that I have with John Roughan's overall argument is that, while painting a picture of a lucky yet selfish generation, he equates their individualist interpretation of the welfare state with universalism.

For me, a universal welfare society is something very different from that image. It is a society that upholds the two principles of equity - that equals should be treated equally, and unequals should be treated unequally. This means, in practice, that taxation should fund a universal social wage which includes non-means-tested public education and public health care.

It also means that dependent generations - the young and the elderly - are enabled to live without poverty, supported from the social wage fund. And it means that those who suffer from the misfortunes of unemployment, chronic illness or other forms of incapacity, will be supported through that period of misfortune without being subject to a wealth tax. Universal welfare provision recognises both birthright and circumstance.


© 1998

Rankin File | 1998 titles