A tax take (broken mental model)

[marsden_online]

I've recently paid a significant amount of money on a home renovation. My mental model for where that money goes is pretty simple - I pay someone, they pay income tax.

It's missing several steps from the reality.

[edit] Virtual chocolate fish to exiledinpn for immediately pointing out the glaring flaw in my new mental model. Feel free to ignore everything except the end of the post.[/edit]

I pay someone what they invoice, they pay the GST, they pay business tax, and when they get around to paying themselves out of what's left after business expenses then the government takes another bite in income tax.

How much of that is going to the government before income tax? Lets look at a simple example assuming pure labour, no materials.

$115 billed - $15 GST + $28 business tax + $72 what the tradie has left before overhead and income tax. Note how this is structured - GST is actually calculated on top of the other tax.
(15 + 28)/115 = 37.4% of what I believe I'm paying them is actually going to the government.

Compare this to the price of of petrol which most people are aware has a large tax component.
209.9 c/L currently (AA) must include 27.4c GST and also contains 59.129 c/L duties/taxes/levies (MED)
(59.1 + 27.4)/209.9 = 41.2% Not that much different on the numbers. A world of difference in perception.

If you ever wondered why it seems so expensive to get anything done in this country, there's part of your answer. Not that tradepeoples are making out like bandits.

Now you can say "but you're not paying the tax, the business is". And I respond that's a technicality. All that money came from me and others like me who believe we are paying someone else to do something, the business has just been co-opted as a collection agency.

And 37% is not a small chunk to be seeing vanish from every invoice. I'm in favour of moderate taxes, I start to get twitchy about the 20-25% mark for incomes below about $100kpa (as a nice round more-money-than-anyone-should-need-to-live-comfortably number). I wouldn't cope with 30-40% at my current level of invoicing. (And that's one of several reasons I'm not registered as any sort of business.)

Yes a business may be making well over $100k, but remember I'm not paying a business. I'm paying a person. I want to see them taxed fairly on what I pay them, and this fails the sniff test.

~~~
This post has been germinating for a little while, since a brief furor last month about not paying cash prices to tradesmen. I/S said then

That money you save by aiding and abetting a tradeperson's tax fraud? That's money that would normally go to schools, hospitals, and public services. You might as well be going down there and smashing some windows yourself.

Cynically I say that's money which is just as likely to be going into some govt slush fund, in the same way as you can't say "we're/they're borrowing to fund x y or z". But my real gripe is about transparency.

- If the government wants/needs me to pay for schools, hospitals, public services
- and and the prevailing model is to tax income (which conceptually it is in NZ at present)
- then they should tax me directly with an appropriate rate not by stealth through the people with whom I do business.

That way we the public get to feel honestly how much we are paying for, and perhaps take a keener interest in just what these people we elected are actually doing with our money.

Comments

[exiledinpn.livejournal.com]

I pay someone what they invoice, they pay the GST, they pay business tax, and when they get around to paying themselves out of what's left after business expenses then the government takes another bite in income tax.

Bzzzt! Wrong!

You pay someone what they invoice, they pay GST (but claim back GST on their inputs), they pay themselves (because wages are an expense) and pay income tax on that, and anything left over after other expenses becomes profit and is also taxed (however, if it is paid out as a dividend, its effectively tax-free, due to imputation credits). They get taxed once on their income, not twice.

[marsden-online.livejournal.com]

I said I had a broken model :-/ Thanks for pointing out what should have been bleeding obvious to me.

Claiming back GST on their inputs is a bit irrelevant - their costs are whatever their costs are and I deliberately avoided recursion. The 15% I'm interested in is the one I'm paying.

[meataxe.livejournal.com]

Yeah, you need to be look at both sides of the ledger, not just one side or things get really askew.

However, that said, tradespeople do not have the cushy number that folks might think. It is a hell of a lot tougher to make 40k as a tradesperson than it is going and doing a 9-5 job and that's not even taking into account all the extra work they have to do keeping their paperwork/invoicing in check once they "finish" their days work.

[meataxe.livejournal.com]

Oh, and personally I'd be quite happy with higher tax rates to fund some areas that currently need it but that's just me, I realise that not everyone has the fat available to take tax increases from.