Income Inequality and Fiscal Redistribution in New Zealand
To examine the redistributional impact of taxes and transfers in New Zealand requires inequality measures of pre- and post-tax, and pre- and post-transfer, incomes. This, in turn, requires a suitable income measure. We use the income data available from the Household Expenditure Survey (HES) analysed using Treasury's microsimulation model, TaxWell. This is a non-behavioural model, and hence conclusions must be treated cautiously. Nevertheless it provides some information on the likely impact effects (sometimes referred to as ‘static’ effects) of tax-transfer policy. Results presented below are based on the 2006-07 HES sample of around 2550 households which have then been scaled up using Statistics New Zealand weights to represent the New Zealand population as a whole.
HES income data can be decomposed into taxable and non-taxable incomes, which may be ‘private/personal’ (such as earned/unearned incomes) or ‘public’ transfers from government; see Table 1. Important for present purposes is the distinction between taxable and non-taxable government transfers, where the latter affect total income but do not interact directly with the tax system. In considering the distributional impact of alternative tax and transfer policies governments could trade-off changes in taxable and/or non-taxable transfers and/or income taxes.
|
Income source:
|
Private/Personal | Public |
|---|---|---|
| Taxable |
I. Personal income |
II. Govt benefits |
| Non-taxable |
III. Some unearned income |
IV. Govt transfers |
The analysis begins by comparing the distribution of private (earned plus unearned) income with the distribution of gross taxable income (GTI) where the latter is private taxable income plus taxable benefits.[10] To avoid confusion, the term ‘benefits’ is used to refer to taxable transfers from government (a component of GTI) and ‘transfers’ is used to refer to non-taxable transfers such as Working for Families and Accommodation Supplement.
For most of the analyses below the distribution of GTI is treated as the base income definition against which the distributional impacts of tax and transfer changes are compared. Thus taxes are first deducted from GTI, and then non-taxable transfers are added, to yield distributions of post-tax, and post-tax-and-transfer, incomes. In considering the distributional aspect of the social welfare system, the analysis therefore does not generally examine the benefit system though this can readily be done.
One reason for this choice relates to the assumption, implicit in all the comparisons below, that the distribution of pre-tax-and-transfer income is unaffected by these government interventions. This is a questionable assumption but is especially inappropriate for incomes prior to the receipt of government benefits such as pensions. For example, in the absence of a government pension and benefit system, the level and distribution of private income could be expected to be very different. However, this means that in considering hypothetical policy trade-offs which maintain constant inequality, these trade-offs do not include benefit changes.
Notes
- [10]The HES incomes examined here relate to individuals 15 years and over.
