The New Zealand Personal Tax and Transfer System, 2006-07
Before examining the redistributive impact of New Zealand taxes and transfers we summarise the key aspects of that system in 2006-07, the year for which we examine HES data. Personal ‘taxable’ incomes were subject to tax rates of 0.195, 0.33 and 0.39 above income thresholds of $0, $38k and $60k per year. That is, income is taxable from the first dollar received, with no initial tax-free zone as in Australia and most other OECD countries. However, for incomes below $38k there was a ‘low income rebate’ (LIR) which effectively reduces the individual's marginal tax rate to 0.15 for incomes below $9.5k and raises MTRs to 0.21 for incomes between $9.5k and $38k.[15]
The main non-taxable transfer is Working for Families, WfF, which is composed of a number of family-related tax credits.[16] The largest credit in revenue terms is the Family Tax Credit (FTC) which pays a fixed amount per child depending on the number and age of children in the family and the size of total family taxable income. In addition an In-Work Tax Credit (IWTC) is paid to families provided one member of the family works 20 hours per week or more (or two family members work 30+ hours per week). In 2006-07 the FTC was around $3,700-4,400 per year for the first child (depending on age) and around $2,400-3,900 for a second and subsequent child (depending on age). IWTC also depends on the number of children in the family and was around $3,100 per year when there are 1-3 children with additional payments for extra children. For family incomes above $35,000, the FTC and IWTC abate at a rate of 20cents per dollar of additional family income. As a result, effective marginal tax rates facing WfF recipients in this income range are raised by 20% compared to non-recipients.[17]
Notes
- [15]The LIR is worth 4 cents per dollar of earned income up to $9.5k but then abates at 1.5cents per dollar to $38k. Wages, salaries and self-employment incomes are also subject to an accident compensation (ACC) levy of 1.3 per cent. The LIR was removed a part of the Budget 2008 reforms.
- [16]In addition there is a Minimum FTC that guarantees a minimum net income for sole parents working more than 20 hours per week (couples working more than 30 hours). Other non-taxable transfers include the housing-related transfer, Accommodation Supplement. This is based on housing costs and depends on family income and area of residence.
- [17]WfF is abated against the primary earner's income first, and then, if necessary, against the income of the secondary earner.
