The Composition of Low Income Taxpayers
This section examines individuals with low taxable incomes. One reason why this is likely to be of particular interest to governments is that those on low incomes are often targeted by tax policy aimed at reducing inequality or poverty. For example, New Zealand is unusual among OECD countries in taxing individuals' incomes from the first dollar rather than allowing an initial tax-free zone. By exempting low incomes from tax, such a zone is often presumed to reduce inequality. However, the analysis below suggests that, at least for New Zealand, it would probably be a poorly targeted instrument.
The analysis first identifies those individuals where low income is unlikely to indicate low economic welfare and/or their income is insensitive to tax policy changes (Group A). For the remainder (Group B), low incomes are likely to be a better indicator of economic wellbeing and are potentially affected by tax changes. The analysis suggests that the vast majority of individuals with low taxable income fall into Group A. This group can be further decomposed as follows:
A1. Disposable income is insensitive to tax changes at low income levels (for example, post-tax income is determined by a legislative formula);
A2. Low income individuals benefit from the income of others, or taxable income is quite different from an ‘economic income’ measure (for example, membership of a higher income household);
A3. Low taxable income is short-term only (for example, students).
