What happens when fewer workers are left to support a growing population of retirees? It’s not just a question for economists - it’s the fiscal tightrope New Zealand faces in the coming decades. Picture this: by 2040, nearly one in five Kiwis will be over 65, but the pool of working-age taxpayers funding healthcare and superannuation will have shrunk dramatically. In its latest Long-Term Insights Briefing (LTIB), Inland Revenue tackles this looming demographic challenge head-on, and asks whether our current tax system is fit for the future.

On 26 June, Inland Revenue published its second-ever Long-Term Insights Briefing, a document that explores the long-term resilience of New Zealand’s tax system. More than just a policy paper, the LTIB is a chance for the department and the country to think beyond election cycles and consider how we fund public services in an aging society.

At the centre of the issue is our aging population. According to the Retirement Commission projections, by 2040 there will be just 2.8 people aged 15–64 for every person over 65, down from 4.2 in 2020. The change in demographic will increase both superannuation and healthcare costs.

Can the tax system solve this problem?  This is a difficult question. While spending cuts and borrowing remain politically sensitive levers, tax reform is equally fraught, especially for any government hoping to stay in power.  

To its credit, the LTIB doesn’t shy away from tough conversations. Rather than offering prescriptive answers, it presents a menu of options and weighs their trade-offs — a vital step in preparing for future fiscal challenges.

A dual tax system: a Nordic approach

One option drawing attention is a dual income tax system, similar to the one used in Norway. Under this model, labour income is taxed at progressive rates while capital income is taxed at a flat, lower rate.

Advocates of the Nordic system argue that it’s fairer and more efficient:

• It discourages income restructuring and tax arbitrage
• It promotes investment by taxing capital income more lightly
• It allows clearer integration between personal and company taxation

However, introducing such a system in New Zealand would likely require a significant shift — starting with a comprehensive Capital Gains Tax (CGT). Currently, capital gains are only taxed in limited circumstances and treated like other income. A dual tax model without a CGT is difficult to implement coherently.

While some tax commentators support a CGT as a fairer solution, any proposal to broaden taxes, especially on capital faces fierce political resistance. Still, the LTIB may lay groundwork for future reform by reframing the debate.

What about Goods and Services Tax?

Another option explored is increasing GST. GST in New Zealand is a very efficient tax. It has few exemptions, so is a good example of a broad base and lower rate tax. 

However, GST is set at a flat rate and is not progressive.  Any increase in GST rate would need to come with other changes. The paper seems to favour using cash transfers to offset the effects of a GST increase for lower income earners. This was the approach taken by the Government in 2011 at the time of the last GST increase.  

An alternative is to reduce the rate of GST on some essential items.  This would provide some compensation to lower income earners but would not maintain the simple and broad GST regime which has been so effective at revenue collection to date.

Future proofing begins now

Inland Revenue’s LTIB doesn’t deliver concrete policy, nor should it. Its role is to raise the right questions and offer a framework for evaluating options. In this, it succeeds.

New Zealand faces long-term fiscal pressures that cannot be solved with short-term thinking. Whether future governments will act on the LTIB’s ideas remains uncertain. But one thing is clear: ensuring a fair, flexible, and resilient tax system is no longer optional — it’s essential.