Revenue Effect of Changes to Key Tax Rates, Bases and Thresholds for 2009/10

Notes

• [1] These estimates are intended to provide rules of thumb for small changes in tax rates and thresholds. Composite proposals involving large changes will generally have different revenue effects from the estimates presented here because of interaction between tax types and greater behavioural responses. The response to a price change in terms of altered consumption is often quite different over a long period of time compared with a short period. Where applicable, these estimates are based on the short term responses.
• [2] The calculated changes to tax revenue have been rounded to the nearest five million dollars.
• [3] These estimates allow for the effect on indirect taxes through changes in consumption and on direct tax through changes to company profits, but do not incorporate possible second round effects on wages and profits. Fiscally neutral changes in tax paid on benefits are excluded. The aggregate labour supply response is assumed to be zero in the short term.
• [4] The tax rates referred to here are those currently used in the NZ personal income tax regime and are based on annual taxable income: 12.5% up to $14,000; 21% between $14,000 and $48,000; 33% between $48,000 and $70,000; 38% above $70,000.
• [5] When the company tax rate changes, so does the rate at which imputation credits are attached for shareholders. If personal tax rates remain unchanged when the company tax rate increases/decreases, the imputation credit for the individual shareholder will be a greater/lesser offset against their personal tax liability. Consequently, while company tax revenue increases/decreases, there is some offset through personal tax revenue decreasing/increasing. In calculating this offset, we have assumed the average shareholder is in the 33% personal tax bracket.
• [6] It is assumed that nominal spending remains constant and that a 1% adjustment to GST will change consumer prices by 0.80%. An allowance for changes in company and personal tax, as a result of changing the GST rate, is also included.
• [7] The same percentage change in both private consumption, residential investment and public consumption, ie government spending, is assumed.
• [8] Only a change in private consumption and residential investment is included, ie no change in government consumption.
• [9] The estimate of the revenue effect of changing the GST rate includes the impact of immediately adjusting benefits to account for the effect of the GST change on the CPI.
• [10] Changes in government expenditure generated by changes in the GST on public spending are offset by equal and opposite changes in GST revenue, ie they are fiscally neutral. The effect of a change in the GST rate, on private expenditure only, gives the net impact of this tax change to the government.
• [11] The estimates of the revenue effects of excise rate changes include GST on excise duty and assume equal changes in excise-equivalent Customs duty rates applying to these products.
• [12] Estimates allow for a 0.5% fall/rise in beer consumption for each 1% increase/decrease in retail price and a 1% fall/rise in other alcohol consumption for each 1% increase/decrease in retail price.
• [13] Estimates allow for a fall/rise in consumption of 0.5% in response to a 1% increase/decrease in retail price. A $10 change per 1,000 cigarettes is equivalent to a change in the cost of 20 cents per packet of 20 cigarettes.
• [14] Estimates allow for a fall/rise in consumption of 0.015% for each 1% increase/decrease in retail price. The medium-to-longer term impact on consumption is likely to be larger as fuel prices affect future vehicle choices.