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Saving in New Zealand - Issues and Options

Getting the saving environment right

Some government policies may be acting as a disincentive to private saving

Any government's policies will have both intended and unintended impacts on individuals' saving choices. It is worth considering whether the Government should change any policies to support rather than hinder good saving decisions by individuals, households and businesses.

Removing tax distortions

Taxes introduce a number of distortions that affect individuals' decisions, including decisions to save and invest. The 2010 Budget reduced tax distortions to saving and investment by switching away from taxes on income, saving and investment toward taxes on spending. This switch was achieved though reductions to personal and corporate income tax rates and an increase in the rate of goods and services tax (GST).[14]

Taxes tend to have more impact on how people save, rather than how much people save

International evidence suggests that tax is likely to only have a modest impact on how much people save and invest, but tax can have a very significant impact on how people save and invest.[15] This means that tax changes may have a part to play in a wider package of reforms to promote increased and more efficient national saving, but are unlikely to on their own deliver a significant increase in the level of national saving.

The New Zealand tax policy framework

The overall aim of New Zealand's tax policy is to finance government expenditure at the lowest possible economic cost while meeting the government's distributional objectives.

A key goal of tax policy is to make the tax system as efficient as possible. For this reason, successive governments have applied a broad-based, low-rate (BBLR) tax policy framework. The Tax Working Group also endorsed the BBLR framework as a means to reduce the economic distortions created by the tax system.

Tax policy principles suggest focusing on minimising negative tax effects on saving and investment decisions, rather than on providing targeted incentives to increase the level of private saving. This section considers options that have the potential to remove tax distortions, although the extent to which each option does this will need to be carefully considered by the SWG.

A later section considers tax subsidies for saving. The broader impacts of moving away from tax neutrality would need to be carefully considered; it would need to be clear that the benefits outweighed the costs.

Different forms of saving are taxed differently

The current tax system distorts saving and investment decisions in two main ways:

  • Different forms of saving and investment are taxed in different ways and at different rates. For example, capital gains are not taxed and PIE investments are taxed at a lower rate than direct investments.
  • Returns on saving that accumulate over a long period are taxed at high effective rates. For example, an interest-bearing account taxed at 33 per cent and held for 60 years would face a effective tax rate on future consumption of 68 per cent when the taxes on interest earned over that period are taken into account.[16]

The effect of inflation on tax

Even a modest rate of inflation can significantly increase the effective tax rate for some forms of savings. This is because the tax system taxes nominal rather than real returns. Real returns are nominal (actual) returns that have been adjusted for inflation.

A tax system that does not adjust for inflation has differential effects on different forms of income, for example:

  • Interest income is overtaxed.
  • The deduction for interest expenses is overly generous. This creates an incentive to fund investment largely through foreign debt rather than equity.
  • Inflation also creates an inbuilt tax bias favouring investment in longer-lived assets ahead of shorter-lived plant and equipment.

The simplest way to reduce the distortionary impact of inflation is to keep inflation low using monetary policy. Other options are outlined on the next page.

New Zealanders' preference for housing may be partly explained by current tax rules

These tax features can distort the way people hold their savings and may have played a part in New Zealand households holding a large proportion of their assets in houses, as it is tax preferred over debt or equity. Figure 11 illustrates different real effective tax rates (taxes as a percentage of real income) for investors on 17.5% and 33% marginal tax rates:[17]

Figure 11 - Real effective tax rates
Figure 11 - Real effective tax rates.


  • [14]New Zealand Treasury (2010) Technical Note on the Basis of Assumptions Regarding the Effect of the Tax Package on Forecast and Projected Economic Growth expected that the increase in GST would reduce non-housing consumption by 3%; and that the decrease in the personal income tax rates would boost household savings by approximately 1.5%.
  • [15]OECD (2007) OECD Tax Policy Studies No. 15: Encouraging Savings through Tax-Preferred Account; Bosworth, B. & Burtless, R. (1992) Effects of Tax Reform on Labor Supply, Investment, and Saving, Journal of Economic Perspectives.
  • [16]Assumes an initial investment of $100, no withdrawals, and a consistent nominal return of 6% over 60 years and a marginal tax rate of 33%.
  • [17]Assumptions include: true inflation is 2 percent per annum; investments are financed with an individual's own capital; all investments provide a nominal return of 6 percent. For rental housing, 50 percent of the return is assumed to be in rents and 50 percent in non-taxable capital gains.
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