57% effective tax rates on term deposits

I recently read the Tax Working Group’s interim report.  Led by Sir Michael Cullen, the tax group’s interim report covers a lot of ground which has been trodden before, but unlike the past, has focussed on bringing so called “capital income” into the income tax regime.

I will deal with capital income in another post.  What has struck me about the report is that while it claims to have a focus on fairness, it does not come up with an answer to an obvious distortion in the tax system – the taxation of bank deposits.  There is discussion about the issue but then it is put in the too hard basket.

By way of example a $100,000 term deposit earning 4%, with a nominal tax rate of 30%, is in reality taxed at 57%, when you remember we have inflation of 1.9%.   By modern standards that is punitive.  It affects hundreds of thousands particularly those who are retired and advised to reduce the risk profile of their investments, including this writer.

The paper rightly points out if you adjust for inflation, what do you about full deductibility of interest for businesses and the boundary issues with bonds etc.   I accept all of that but that is why we have experts in IRD etc to find solutions to a real world problem.

If you want people to save for retirement then why penalise them by over taxing term deposits?  By skipping around this issue the Tax Working Group leaves itself open to the allegation it simply wants to provide the Government with another revenue raising option.


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