2.2  Effective Marginal Tax Rates

Table 1 shows the estimated distribution of individuals by Effective Marginal Tax Rates (EMTRs) and benefit receipt for 2003-04. Figure 1 shows the same data in the form of a graph. The estimates in table 1 and figure 1 are based on 2000-01 HES data inflated to 2003-04 by TaxMod.

The calculation of EMTRs can be complex. EMTRs cannot always simply be calculated as the sum of the personal income tax rate, the Low Income Earner Rebate, ACC earners’ levy, net benefit abatement rate, and the Family Assistance abatement rate. (Appendixes 1 and 2 describe the key features of these programmes.) This is because net welfare benefits abate against increases in gross income and the personal income tax rate applying to benefit income may differ from the rate applying to non-benefit income (a method for calculating EMTRs is explained in appendix 3). Also complicating the calculation of EMTRs is that while personal income taxes are levied on individual income, social welfare benefits and the Family Assistance Tax Credits abate against family income. The EMTRs in table 1 are calculated for adults in single and partnered families. When calculating the EMTRs of a person in a partnered family, his or her partner’s income is assumed to remain constant.

Table 1 shows the numbers of individuals (excluding all those aged under 15 and dependents aged over 15) who face certain EMTRs and who receive main benefits, the Accommodation Supplement, the Family Assistance Tax Credits, New Zealand Superannuation, and none of these forms of assistance. A person can be present in more than one column except when they are in the ‘none of the above’ column. The EMTRs categories have not been divided into even ranges but have instead been divided into ranges reflecting the frequency with which certain EMTRs occur.

^Π    Unemployment Benefit, Domestic Purposes Benefit, Invalids’ Benefit, Sickness Benefit, and Widows’ Benefit
*     Family Support Tax Credit, Child Tax Credit, and Family Tax Credit. Excludes Parental Tax Credit
**   Too few observations to disclose Source: 2000-01 HES data inflated to 2003-04 by TaxMod

Source: 2000-01 HES data inflated to 2003-04 by TaxMod

Figure 1: Distribution of Individuals by EMTRs and Benefit Receipt (2003-04)

Figure 1 is based on the data contained in table 1. As the EMTRs in table 1 have not been divided into even ranges, the horizontal axis in figure 1 is not drawn to scale. The numbers of people in each column have, however, been scaled in order to account for variations in the ranges of the columns.

The estimates in table 1 and figure 1 are only based on the abatement of major benefits, thus some EMTRs may be underestimated (e.g., where recipients receive Disability Allowances or Special Benefits).

High EMTRs occur when people pay both personal income taxes and face abatement of social assistance programmes. People who do not receive social assistance thus generally have lower EMTRs than families who do receive such assistance. It is estimated that over 99% of people who receive no social assistance have EMTRs below 41%. These EMTRs are given by the interaction of the personal income tax scale, the Low Income Earner Rebate, and the ACC earners’ levy. Further, recipients of New Zealand Superannuation (provided irrespective of income or means to all qualifying residents) also have generally low EMTRs.[10] An estimated 87% of New Zealand Superannuation recipients face EMTRs below 23%. These EMTRs are given by the interaction of the statutory personal income tax scale, the Low Income Earner Rebate (which applies to all income (both employment and passive income) of superannuitants), and, where applicable, the ACC earners’ levy.

The Family Assistance Tax Credits are the most widely received government income tested transfer payment. Many working families receive these credits without any other form of assistance so their EMTRs are a combination of the personal income tax scale, the Low Income Earner Rebate, ACC earners’ levy, and the abatement of the Family Assistance programmes. The distribution of EMTRs among Family Support Recipients is bimodal. It is estimated that approximately 39% of Family Support recipients face EMTRs below 23%, which indicates that these families do not face Family Assistance abatement, while approximately 28% of Family Assistance recipients face EMTRs in the range of 52% and above. The Family Tax Credit automatically results in very high EMTRs of over 100% but very few families actually qualify for this programme.

For the population who receive other forms of government income tested transfers the pattern of EMTRs is more complex due to the range of benefits and supplementary assistance measures, the range of administrative rules and abatement regimes, and variations in family circumstances.

The majority (an estimated 61%) of recipients of income-tested main benefits face EMTRs of below 23%. These EMTRs are given by the interaction of the personal income tax scale, the Low Income Earner Rebate, the ACC earners’ levy, and the abatement-free zone for non-benefit earnings. People who face these EMTRs include both beneficiaries with declared non-benefit income (and whose non-benefit incomes are below the threshold at which the benefit starts abating) and beneficiaries without declared non-benefit incomes. The remaining recipients of income-tested main benefits are distributed reasonably evenly among the range of EMTRs, with an estimated 9% of recipients facing EMTRs from 23% to 40.9%, 17% facing EMTRs from 41% to 51.9%, and 13% facing EMTRs of 52% and above.

The majority (an estimated 55%) of Accommodation Supplement recipients face EMTRs in the range of 41% to 51.9%. The remaining recipients of the Accommodation Supplement are distributed reasonably evenly among the EMTR range.

Thus for the vast majority of the population the EMTRs created by the interaction of the personal income tax and social assistance systems are less than 48%. There are, however, a small number of demographic groups at certain income levels who face EMTRs in excess of 48%. These groups include a number of recipients of income-tested main benefits, the Accommodation Supplement, and the Family Assistance programmes. To identify those people who face high financial disincentives to work in greater detail, the following section of this paper shows the EMTR profiles and budget constraints that face five different family types at two wage rates.