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by Paul Goldsmith

New Zealand’s tax take puts it roughly in the middle of tax rates in developed countries. Tariffs began when British sovereignty was proclaimed in 1840. The government spends a large share of its tax revenue on health, education and social security. In the early 2000s taxes were around 39% of the country’s gross domestic product.

Taxation – 1840 to the 1880s

First taxes

New Zealand has had taxes ever since formal government was established. When Lieutenant-Governor William Hobson proclaimed British sovereignty over the North Island on 21 May 1840, the New South Wales customs tariff – a tax on imports – came into effect.

In 1841 New Zealand became a Crown Colony separate from New South Wales. The Customs Regulation Ordinance, which established New Zealand’s first tariff from 1 July 1841, was the third law passed in the new colony.

Customs duties

Customs duties (taxes on imports, including tariffs) were the major taxes until the 1870s.

Over 60% of tax revenue came from alcohol and tobacco. Sugar was next. Most tax was voluntary. If you didn’t smoke, drink alcohol or tea, or use sugar, you paid very little tax.

By modern standards taxation levels were light. One estimate in 1860 put the yearly tax burden at 4% of the country’s yearly production (known as gross domestic product, GDP). This averaged out at £1 8s a head (around $170 in 2020). In 2005, the tax burden was 37.8% of GDP, around $16,000 per person.

Stamp and death duties

The first permanent tax taken directly from the taxpayer – rather than indirectly, for example through customs duties (which are recouped through increased prices) – was forced on the population by the cost of the 1860s New Zealand wars. The wars were funded largely by borrowing. New taxes helped to repay these loans and interest costs.

Stamp and death duties passed into law in October 1866. Stamp duties are taxes on documents such as mortgage deeds; death duties are taxes on inheritances. Death duties varied depending on the closeness of people’s relationships, rather than on the size of the overall estate – widows were exempt, but someone who was not a relative paid 10%.

Local government taxes

In 1874 ‘rates’ – taxes paid to local government – represented around 7% of total local and central government taxation, similar to the figure in the 2000s. Around 300 road boards levied landowners to raise funds for road construction and maintenance.

Protection racket?


At least one early settler, F. E. Maning, regarded the gifts and work he gave his Māori chiefs in return for their protection, prior to the Treaty of Waitangi, as a form of indirect taxation. Taxation in the usual sense of the term did not exist prior to 1840, because there was no central administration to collect it – or spend it.


Land taxes

Through the 1870s Premier and Treasurer Julius Vogel borrowed heavily to build infrastructure. By 1877 there were long and serious Parliamentary discussions on who was benefiting most from government spending, and who was paying the most tax to support it.

In Parliament Sir George Grey argued that the tax system was unfair as it was based primarily on customs duties. The poor paid the same duties as the rich, but they earned less, so they paid a greater percentage of their incomes on taxes. Grey wanted a shift towards more proportional taxes – so the more you earned or owned, the more tax you paid.

Grey became premier in 1877, and the following year his treasurer, John Ballance, announced a land tax in his first budget, raised at a halfpenny in the pound on the unimproved value of land for large estates.

Improvements were exempt from this land tax. Ballance rejected the idea of penalising industry and entrepreneurial behaviour by taxing the investment of capital or labour in the land. Government wanted to tax only the ‘unearned increment’ – the rise in land values that resulted from public investment in rail or roads and other public works.

Poll tax on Chinese


The Chinese Immigrants Act 1881 imposed a £10 poll tax (equivalent to more than $1800 in 2020). A poll tax is a tax on individuals – in this case only on Chinese immigrants. It usually took them some years to repay the debt – especially after the poll tax was raised to £100 in 1896.


Property tax

Grey’s timing was unfortunate. In 1879 a £1 million ($172 million) hole opened up in the national accounts. Ballance and Grey fell out, and lost the 1879 election to Harry Atkinson. Atkinson replaced the land tax with a broad-based property tax, which captured the value of land, together with mortgages, bank balances, herds and personal possessions.

Liberal Party taxes – 1890 to 1912

Income tax and progressive rates

The Liberal Party was in power from 1891 to 1912. It promised tax cuts on customs duties and property tax for most middle-income earners – although at that time few of these people actually paid much direct tax – and new progressive taxes to extract more money from a small, wealthy minority. The promised tax changes would abolish the property tax which quite a few people paid, and replace it with a land and income tax that fewer people would pay.

The Liberals’ ordinary land tax and their graduated land tax for large estates were aimed at breaking up the great land estates, and capturing at least part of the increase in land value.

Single taxers

The Liberal party never went as far as some wanted. ‘Single-taxers’ were followers of Californian Henry George, whose widely-read 1879 book, Progress and poverty, advocated doing away with all other taxes, including customs duties, and replacing them with a single tax on all land, without exemption. This, he argued, would win for the community the unearned increment.

The Liberal Party legacy of income tax and progressive rates (the more you earn the higher rate you pay) introduced in 1891 became central aspects of the New Zealand tax system.

Income tax, 1891

For income tax, individuals were exempt if they earned less than £300 per annum ($50,000 in 2008). This was most of the population. The top tax rate was 5%. Companies paid 5% on profits. Dividends (payments by public companies to their shareholders) were not taxed.

During Parliamentary debates, Opposition MP John Bryce fell back on the long-standing moral objection to income tax. He argued that as soon as there is income tax people must declare their income. As income is easier to hide than land and other forms of wealth like assets, many would yield to the temptation to make false tax returns.

By 1900 tax revenues had increased from 6.4% to 8% of GDP. The tax system and the size of the state were very different from modern times. Before the First World War the top rate of income tax was 6.65%.


Māori were free from the property tax and successions duties, and also entirely free from local body rates until the Rating Act 1882, and the Crown and Native Lands Rating Act 1882, were brought in as a means to capture some rates in Māori land near the towns. Māori did not have to pay the unemployment poll tax introduced in 1930, but only got unemployment relief if they did.

In 1952 a commission of inquiry found that the different treatment of income from Māori land was fair and reasonable due to the unique characteristics of Māori land, such as multiple owners with very small shares. The rules for taxing Māori land were still in effect in the 2000s. But in all other respects Māori are taxed the same way as everyone else.

War, depression and increased taxes – 1914 to 1935

First World War and tax

During the First World War income tax revenue increased eleven-fold. It overtook customs duties to become the most important single tax in New Zealand (as it did in other countries involved in fighting). But people still only paid income tax if they earned over £300 (around $40,000 in 2008) – around 12,000 people out of an adult population of about 700,000 paid the tax. An average plumber earning £150 per year (around $20,000) did not pay income tax.

Progressive rates

The war ushered in new thinking. The sense of duty that underlay conscription carried with it a strengthening of people’s ideas of community obligation. Parliamentarians began to quote English economist Arthur Pigou who applied the so-called ‘marginal revolution’ in economics to welfare and taxation: an additional pound means more to someone earning £100 than it does to someone earning £1,000, so higher income earners should be taxed more. The top income tax rate rose from 6.67% in 1914 to 43.75% in 1921.

Income taxes ease

During the 1920s there was a gradual decline from wartime levels of tax on higher incomes, companies and large landowners. It subsided to 22.5% by the mid-1920s. Income tax revenues showed the same trend, largely as a result of a 1922 taxation committee dominated by businessmen. They lobbied hard for tax cuts and got them – but the retreat was only partial. This reflected a trend that repeated over time: when tax rates were raised and subsequently cut, they didn’t usually fall back to their original levels.

Company taxes

The greatest impact of higher taxes was on companies. During the 1920s and 1930s New Zealand taxed companies directly at higher rates than many other countries. This made it difficult to build enterprises by reinvesting retained profits. Successive tax commissions criticised the practice, to no avail.

Depression taxes

A poll tax was introduced in 1930 to fund unemployment relief. Every male over the age of 20 paid £1 10s a year (around $126 in 2008). The logic was that every taxpayer would feel that unemployment affected him personally. The government soon needed more money. In 1931 an ‘Emergency Unemployment Charge’ at a flat rate of 1.25% on all income was added on top of a £1 poll tax.

Everyone directly taxed

The poll tax and flat tax, although light, established the principle that all people should pay some direct taxation. Every male had to go to the Post Office and hand over some money to the government. Income tax rates were also raised in 1930 taking the top rate to 29.25%. Annual income exempt from tax was lowered to £260. Finance Minister William Downie Stewart began the practice of diverting part of petrol tax for general purposes.

On 8 February 1933 Finance Minister Gordon Coates introduced a sales tax of 5% of the value of goods sold, on top of any customs or excise duties. (An excise duty is a tax on a particular domestic product such as cigarettes.) These sales taxes were among the first indirect taxes that were not levied at the border. The Beer Duty Act charged 3d per gallon of beer when it was introduced in 1880.

First Labour government taxes – 1935 to 1949

Welfare state

The Labour Party elected in 1935 had promised to scrap the sales tax and reduce taxation generally. Instead it retained all the new taxes. Finance Minister Walter Nash reintroduced the graduated land tax at high rates. By 1939, prior to the war, the top rate for income tax was 42.9% (and 57% for ‘unearned income’ such as rent, interest or dividends).

Higher taxes

The establishment of the social security fund from 1939 set a course for higher tax revenues. The social security tax was essentially a continuation of an earlier emergency unemployment fund. Labour inherited a 3.33% flat tax and lifted it to 5% on all income, alongside an annual £1 poll tax, which Nash now called a ‘registration fee’.

Second World War

New Zealand’s involvement in the Second World War was costly. Nash resolved to pay for most of it by taxing the nation ‘to the limit that is practicable’1 – which worked out at about 28% of GDP. Nash was reluctant to fund the war effort through borrowing. New Zealand’s involvement in the First World War was largely funded by borrowing, with a legacy of burdensome interest repayments through the 1920s. During the height of the Second World War low income earners paid 12.5% tax, but the highest income earners faced a top rate of 90%.

Keynesian thinking


The 1942 Budget, which raised taxes, was the first time Keynesian thinking was explicitly followed in New Zealand. Economist John Maynard Keynes advocated the use of government spending and taxation to influence the performance of the economy. Prime Minister Peter Fraser justified his tax increases partly through the need to restrain inflation by withdrawing surplus buying power from people’s pockets.


Small businesses

High taxes were particularly acute for small business in the 1940s. New Zealand’s unique progressive company tax scale meant that doubling a £4,000 profit before tax to £8,000 yielded only £434 more for the company, because a higher tax rate kicked in.

Tax relief

Nash gave some tax relief in the election-year Budget of 1946, but spent most of a windfall tax revenue on the universal family benefit. With surplus funds in 1948, Nash introduced a new concept – to give every taxpayer a £10 rebate. A rebate is a refund of a fixed amount – this was deducted from people’s income tax bills. If the income tax bill was less than £10, people paid nothing.

Treasury secretary Bernard Ashwin worried about the risks of very high tax rates. He wrote to Walter Nash, saying that the evasion of tax was widespread and likely to get worse.

When the Labour government left office in 1949 the top income tax rate was 76.5%. The working class paid little tax. A top-ranked butcher on £460 ($35,200 in 2021 terms) a year, with two children, paid no income tax after exemptions and rebates. He paid a £34 social security charge, but received £52 a year family benefit for his children. The tax system was very friendly to families.

    • Appendices to the Journals of the House of Representatives, 1940, B. 6, p. 2. Back

Post-war taxation – 1950 to 1959

Taxes only ease slowly

From 1930 to 1950 the rise of Labour’s welfare state increased the percentage of GDP taken in tax from 15% to 26%. Sidney Holland’s National Party came to power in 1949 promising reward for effort. It gradually eliminated the remaining 15% war surtax (an add-on tax) that had helped fund the war. Yet aside from a few other tweaks, income tax rates remained virtually unaltered through the 1950s.

In 1951 a tax committee chaired by Theodore Gibbs, a Wellington accountant and company director, recommended a lower overall tax take, and reduction in the top income tax rates. The government and subsequent administrations largely ignored this advice. The National government was committed to the welfare state and that commitment had to be funded. This limited its ability to cut taxes.

The overall tax burden as a percentage of GDP did drop around 2% over the decade.

Pay as you earn

Pay As You Earn (PAYE) was introduced for income tax in 1958. Under PAYE tax began to be deducted fortnightly from the pay packets of wage and salary earners, and people never saw the money. Previously income tax had been calculated on gross earnings for the year and this was then due in a lump sum the following year.

The introduction of PAYE was against the advice of the 1951 Gibbs Report. It had warned, ‘Deduction of taxes at the source tends to remove the full appreciation of liability. The taxpayer does not feel the direct weight of the tax.’1

Company tax

The second Labour government’s infamous ‘Black Budget’ of 1958 introduced taxation of dividends, on top of direct taxation of companies. Company income was double-taxed until the introduction of imputation credits during the 1980s tax reforms (an imputation credit is a tax credit given to a company for tax it has already paid on its profits, which helps prevent shareholders being taxed twice, first on company profits, and then on dividends paid out of profits).

The ‘Black Budget’


The fact that the second Labour government had only one term in office (1957–60) may in part be attributed to its 1958 ‘Black Budget’. Taxes on beer and cigarettes were doubled (or more than doubled) and sales taxes on petrol and cars were also raised. These ‘sin taxes’ did not go down well with the average man in the street – especially as Finance Minister Arnold Nordmeyer neither smoked nor drank.


Economic tool, or vote buyer?

From the mid-1950s the government used taxation increasingly as a tool for economic management – and, the cynical would say, to buy votes. The size of tax rebates went up and down as finance ministers attempted to give the economy a boost, or applied the brakes.

The danger from the annual tax rebate lottery was the temptation it laid before politicians. In the 1957 election campaign National offered £75 ($3,827 in 2021). The Labour opposition led by 75-year-old Walter Nash offered £100 ($5,103). In the campaign’s last week Labour’s newspaper, the Standard, asked, ‘DO YOU WANT £100 OR NOT?’ Labour won the election.

    • Quoted in Paul Goldsmith, We won, you lost, eat that! Auckland: David Ling, 2008, p. 222. Back

Gradual complication of the tax system – 1960 to 1984

Tax incentives

During the 1960s the National government’s rhetoric was critical of excessive taxation, yet it actually changed little.

There was a growing awareness that New Zealand’s economic performance was falling behind other developed countries. The majority of the government favoured retention of high progressive income taxes, but wanted special tax treatment for selected industries. This led to an era of tax incentives for farming, tourism and export marketing. For example, the 1962 Budget allowed export manufacturers to deduct 150% of expenditure on export promotion from their income. This became seen as a junketeers’ charter. Once one sector of the economy got preferential tax treatment, others also sought tax relief.

The 1967 tax commission

In 1966 Auckland accountant Lewis Ross chaired another tax commission. Its report, released in 1967, proposed reducing income tax rates, abolishing land tax, and introducing a comprehensive tax on sales and services. New Zealand, the commission found, collected 69.5% of its revenue through direct taxes – a very high rate compared to other countries such as the United Kingdom and Australia, which collected only about half their revenue in direct taxes. New Zealand’s use of indirect taxes to collect revenue was, conversely, low.

The commission was also critical of tax incentives like those for exporters, saying they encouraged wasteful expenditure and were inequitable. Like the 1951 Gibbs report, the Ross report was ignored by the government.

Robert Muldoon and ad hoc taxes

National had portrayed itself as the party of low taxes throughout the early 1960s. From 1966 imports became more expensive and the country earned less for its exports. The government found it increasingly difficult to balance its books but was reluctant to court unpopularity by introducing new taxes.

Robert Muldoon was finance minister from 1967 to 1972 and prime minister and finance minister from 1975 to 1984. He did not favour indirect taxes as he felt these penalised those on lower incomes, and led to expectations of wage increases which would make it difficult to rein in inflation. Muldoon introduced ad hoc taxes to try to raise more revenue. He introduced a payroll tax in 1970: companies were taxed on the number of employees they had. This tax was unpopular with business and contributed to National losing the 1972 election. In May 1979 he imposed sales taxes of 10% to 20% on a wide range of goods, including petrol, lawnmowers, caravans and boats.

Fiscal child abusers


For the decade after 1975 the government did not collect enough tax to cover its spending. Labour finance minister Bob Tizard ran a deficit of 9% of GDP in 1975/76. National’s finance minister during this era, Robert Muldoon, also ran budget deficits. Governments borrowed money to make up the shortfall. Effectively this passed the burden on to future taxpayers – the children of the 1970s would pay the bill over the 1980s and 1990s. Ruth Richardson, a finance minister during the 1990s, dubbed the practice ‘fiscal child abuse’.1


Muldoon tinkered with the tax system rather than reforming it. Many professionals who earned high incomes but had limited scope for deducting their business expenses poured their profits into tax-exempt kiwifruit orchards so as to avoid a 66% income tax rate. After a number of years they sold the orchards for large profits. Muldoon moved to close the tax loophole by introducing the Income Tax Amendment (No. 2) bill in 1982. This was very unpopular with National supporters, who saw it as both a capital gains tax and retrospective legislation.

Tax exemptions

As the country faced increasingly difficult economic times the government tried to use exemptions, incentives and subsidies to increase exports and so raise overseas revenue. The list of exemptions and incentives that farmers enjoyed stretched to many pages by the early 1980s. Domestic manufacturers were also protected by tariffs (taxes on imports). People found loopholes in all these exemptions and incentives. Many business decisions were taken to reduce or avoid tax, not because they made business sense. Incentives led to business behaviour that was not productive – consumers and producers were not exposed to the true costs of decisions.

By the 1980s some could use the loopholes, exemptions and incentives extensively to minimise their tax payments while others could not. Not only was the tax system unfair, it was distorting the economy.

    • Quoted in Paul Goldsmith, We won, you lost, eat that! Auckland: David Ling, 2008, p. 266. Back

Labour government reforms – 1984 to 1990

Shift to income tax

Over the 25 years from 1960 the burden of taxation had shifted so that a heavier load was carried by personal income tax. This happened through what is known as ‘fiscal drag’. The tax scale did not change, but incomes increased, elevating people into higher tax brackets each year. While they earned more money, they paid higher tax rates, and in real terms inflation eroded their purchasing power. By 1985 middle-income earners, such as school teachers, were paying high marginal income tax rates. Fiscal drag had severe political consequences.

Uneven tax distribution

By the early 1980s tax revenues had reached 30% of GDP and the distribution of the tax burden was very uneven. Some people paid a lot, others very little. Company tax revenues had withered, due largely to avoidance through the concessions, incentives and loopholes. Some people, particularly ordinary wage earners, paid high rates of tax, while others, like farmers and the self employed, were able to avoid most tax.

Broadening the tax base

The solution preferred by most tax experts in New Zealand and elsewhere was to broaden the tax base. This meant having greater indirect taxation. Closing loopholes in income taxation would allow reductions in the top rates of income tax. (This was essentially the advice given some 20 years earlier by the 1967 Ross report on taxation.)

The incoming Labour government of 1984 did this. Between 1984 and 1993, the tax system moved from a narrow-base, high-rate regime, in the direction of a broad-base, low-rate regime.

Don’t tax my house, mate


New Zealand is unusual in lacking a capital gains tax, and although this has been proposed no government has been brave or foolhardy enough to impose one. For most New Zealanders their house is their biggest asset (and investment), and a tax on its (usually) rising value would be unpalatable for much of the electorate.


Goods and services tax

The tax base was broadened by such measures as taxing fringe benefits from 1985. This is a tax on benefits that employees receive as a result of their employment (like work cars or contributions to superannuation schemes). Labour eliminated the tax incentives for business. It introduced a goods and services tax (GST) of 10% on 1 October 1986 (increased to 12.5% in 1989 and to 15% in 2010).

The flip side of introducing new indirect taxes was to drop income tax rates – initially from 66% to 48% for the highest earners. Finance minister Roger Douglas tried to go further with a flat tax proposal in December 1987. The result was a civil war within the Labour party. A compromise saw a two-step income tax scale of 24% on incomes up to $30,000, and 33% above that – 33% was the lowest top marginal tax rate since the early 1930s, a massive drop.

Douglas rejected any idea that wealth redistribution had been abandoned. He argued that he was replacing a system that appeared progressive with one that actually was, with loopholes for tax evasion and avoidance now closed.

The modern inheritance

The reforms of the 1980s and early 1990s strengthened the legislative ability to counter tax avoidance. A tax review carried out in 2001, chaired by tax specialist and businessman Rob McLeod, spoke of the restored credibility of company tax since 1981. Tax rates had fallen, from 45% for resident companies and 50% for non-resident companies, to 33% for all. Meanwhile company tax as a percentage of total tax revenue had increased from 5% to 15%.

Fifth Labour government, 1999 to 2008

The election of the fifth Labour government in 1999 ended the slight downward drift in tax revenues that had set in during the 1990s. Tax rates increased, with a new top income tax rate of 39%. Fiscal drag did its work and total tax revenues, including local government, increased from 33.6% of GDP in 2000 to 36.5% by 2006.

Tax, ideology and international comparisons

Taxes and politics

People ask three big questions about taxes. Who will the state take money from? How much will it take? What will it spend it on?

The size and impact of taxes, and what governments spend the money on, have varied enormously over the decades. The introduction of the welfare state in the late 1930s was a watershed. Until then taxation mainly involved taking money from people to fund activities such as law and order, or defence. Infrastructure was usually funded by borrowing.

Since the 1930s, the fundamental dynamic has shifted in stages to a situation where the state primarily takes money from some people and gives it to other people. In the 2006/7 year most government expenditure (funded mainly by taxes) went on social security and welfare (29%), education (14%) and health (14%).

National party promises of bigger tax cuts contributed to its win in the 2008 election.

Do high taxes harm the economy?

Low taxation lobbyists quote research that suggests high taxes reduce economic growth. Supporters of greater government investment point to Scandinavian countries which have much higher tax rates than New Zealand, and prosperous economies. Successful economies can have higher taxes and higher government investment (for example Sweden, Finland), or lower taxes and lower government investment (USA, Korea).

How heavily are New Zealanders taxed?

Within the OECD, a grouping of thirty developed economies, New Zealanders are just above average in the amount of tax they pay. This is measured as the ‘tax burden’: the percentage of the total tax take to GDP (the total value of services and products a country produces in a year). New Zealand’s tax burden has been 30% or above since 1980. Between 1995 and 2005 New Zealand’s tax burden rose 1%.

Labour-led governments have taxed more heavily than National-led governments – but not by much. Since 1980 the tax burden as a percentage of GDP has averaged 34.8% in the years when Labour was in office, and 33.8% when National was in office.

The Department of Tāke


In Māori the name of the Inland Revenue is Te Tari Taake. The Inland Revenue Department chooses to spell Taake with its long vowel marked with two ‘aa’s rather than one ‘ā’ with a macron, to distinguish it from the English word ‘take’.


New Zealand’s tax system

New Zealand has a relatively simple tax system when compared to other countries. There are very few tax incentives and other loopholes that complicate the tax systems in other countries – incentives, which are meant to encourage desirable behaviours, can also create opportunities for tax avoidance and increase the administrative costs of collecting taxes.

Government revenue

Tax makes up the majority (around 95%) of government revenue. In 2007 government’s taxation revenue came from:

  • income tax from individuals – 44%
  • GST – 20%
  • income tax from companies – 17%
  • other indirect tax (e.g. customs duties) – 9%
  • other tax (e.g. ACC levies) – 6%
  • other income tax (e.g. tax on investment income) – 4%.

Income tax

From 1 October 2010 individual income tax was paid as follows:

  • 10.5c per $1 on income up to $14,000
  • 17.5c per $1 on income between $14,001 and $48,000
  • 30c per $1 on income between $48,001 and $70,000
  • 33c per $1 on income $70,001 and over.

In 2011 the company tax rate dropped from 30% to 28%.


GST of 15% is paid on almost all goods and services. There are only a few exemptions to this, such as renting for domestic accommodation and financial services.

Hononga, rauemi nō waho

More suggestions and sources

How to cite this page: Paul Goldsmith, 'Taxes', Te Ara - the Encyclopedia of New Zealand, (accessed 22 July 2024)

He kōrero nā Paul Goldsmith, i tāngia i te 11 o Māehe 2010, updated 2 o Hepetema 2016