Effective Marginal Tax Rates

This section examines the range of effective marginal tax rates (EMTRs) associated with the NZ tax-transfer structure and considers the number and types of taxpayer subject to those rates. While these cannot identify efficiency costs, they can indicate where some of the incentives to adapt behaviour in response to existing or reformed tax levels are greatest.[26] To illustrate, Figures 5 and 6 show EMTRs and EATRs for secondary earners in a family with two children aged 5 and 3 years. Figure 5 shows EMTRs for secondary earners deciding to work an additional day per week (0 to 1 day; 1 to 2 days, 2 to 3 days, etc) based on an hourly rate of $15 per hour, where the primary earner is earning 67, 100 and 150 per cent of the average wage. The chart shows the EMTR associated with working an extra day per week: from 0 to 1; 1 to 2 and so on.

Figure 5 – Effective Marginal Tax Rates for Primary and Secondary Earners

Figure 6 – Effective Average Tax Rates for Primary and Secondary Earners

It can be seen that secondary EMTRs are typically between 35 and 41 per cent except where the primary earner is relatively highly paid or low paid. In the former case WfF has fully abated when the secondary earner works 4 days at the $15 wage rate. In the latter case, the combined income of the primary and secondary earner exceeds the WfF abatement threshold only when the secondary earner is working 1 full day per week.

Figure 6 shows EATRs for primary and secondary earners. These are likely to be more relevant than EMTRs for secondary non-earners considering entering the labour market. The Figure reveals that though average tax rates for primary earners are negative until he or she earns around the average wage, for secondary earners EATRs are typically in the 30-40 per cent range, depending on primary earners' wages.

Of course, the significance of these tax rates depends, in part, on the numbers of taxpayers for whom they are relevant. Figure 7 shows EMTRs affecting significant numbers of taxpayers, based on an analysis of HES data using TaxWell. These EMTRs represent the sum of the effective marginal income tax rate, the abatement of WfF (20 per cent), and the ACC levy (1.3 per cent). They do not include benefit abatement such as for unemployment. These data should be interpreted with caution; for example, the EMTRs shown for non-earners represent TaxWell assumptions regarding the wage that a non-earner would face should he or she decide to enter employment. The large numbers on an EMTR of 16.3 per cent reflect TaxWell's assumption (which is unrealistic for many people) that those individuals would face the minimum wage if working.

Figure 7 – Numbers of Taxpayers by Type and EMTR

Despite this, some non-earners face an EMTR of 36.3 per cent because of WfF abatement. The addition of secondary to primary (and other) income is sufficient to cause WfF to abate.[27] Of particular interest is the fact that many of those facing lower EMTRs are beneficiaries or superannuitants, while many primary and secondary earners face EMTRs of 39 per cent or more. The data suggest that almost 40 per cent of primary earners (and over 20 per cent of secondary earners) face EMTRs of 39 per cent or more, even though the statutory 39 per cent tax rate affects only around 13 per cent of all earners.

Notes

• [26]Measurement of the efficiency effects of direct taxes, paying attention to population heterogeneity and the wide range of behavioural responses, requires the use of a behavioural tax microsimulation model, such as the Australian MITTS model; see Creedy et al. (2002) and Creedy and Kalb (2006).
• [27]Where relevant, TaxWell implicitly assumes that WfF abates against primary earnings first and abates against secondary earnings only where primary earnings are insufficient.