Analysis of individuals

This subsection focuses on the 1.4 million individuals with taxable income below $18,000 per annum This is just below the income from working 30 hours per week at the minimum wage of $18,720. These low income individuals are allocated to one of eleven mutually exclusive categories based on key characteristics. Each category is then assessed to consider the extent to which low taxable income is likely to reflect low economic wellbeing and whether tax policy is a good redistributive instrument.

It would appear that up to 90 per cent could be characterised as those who receive social welfare payments and are therefore unaffected or less affected by tax design at low income levels (superannuitants and beneficiaries), or those relying on other economic or disposable income (self-employed, recipients of working for families, many secondary earners and 15-17 year olds) or those likely to have temporarily low taxable income (18-24 year olds and students). As in previous sections, Taxwell is applied to 2006/07 HES data to analyse information on income sources for each individual (for example, wages and salaries, self-employment) as well as their family and household characteristics.[28] The eleven mutually exclusive categories to which individuals were allocated - to help identify whether they belong in Groups A or B above - are outlined below. The categories were selected sequentially from 1 to 11, with individuals allocated to categories in the order shown in Table 5.

Further details of the above eleven categories are as follows.

1. New Zealand Superannuation (NZS) is the major source of income. Tax changes at low incomes affect NZS in the short term only. In the medium term - between 1 to 3 years - tax changes at the average wage have the greatest impact on net NZS as a result of the legislative formula that involves annual CPI adjustments and requires the net married couple rate to be between 65 - 72.5 per cent of net ordinary-time weekly average earnings.[29] (Group A1)

2. Core benefit is the major source of income: Net-of-tax benefit rates are set in legislation. This means that tax changes which reduce tax paid on benefit income are compensated by an equivalent change in gross benefit payments to leave after-tax benefit payments unchanged. (Group A1)

3. Self employment is the major source of income:While reported taxable income from self employment might be low (and tax payable minimal), economic income will in many cases be much higher (e.g. business profits retained within a company, or losses used to offset personal income etc). Low taxable income may also be temporary.[30] Some self-employed will however experience low economic wellbeing associated with their low taxable income. (Most Group A2; some Group B).

4. Aged 15-17: Economic wellbeing for most 15-17 year olds is dependent on their parents' income. (Group A2).

5. Students: Students are most likely to have temporarily low income as they forego market income while engaged in study. Other policy instruments, rather than tax changes, provide better targeting to increase student income, such as increasing levels of student allowance and changes to student loan policy. (Most Group A3; possibly some Group A2).

6. Secondary earner in a family with taxable income greater than $50,000: Although family income of $50,000 might not be considered high, a secondary earner in such a family would enjoy higher economic wellbeing than suggested by their low taxable income. (Group A2).

7. The family is eligible for working for families tax credits:Families with low taxable income that receive working for families may pay little or negative amounts of tax. Individuals within this group do not receive benefits as a main income source but have family income of less than $50,000. While disposable income might be low, economic wellbeing can be increased through more targeted policy levers. (Group A2).

8. Aged 18-24: Low taxable income might be temporary for many, either reflecting recent entry into the workforce (i.e. part way through a year) or an expectation of higher future earnings. For some however low incomes will not be temporary and may reflect low economic wellbeing. (Most Group A3; some Group B).

9. Majority of income is from non-taxable sources:While taxable income is low, the majority of income is derived from other sources. In many cases this other income may be taxable but data limitations prevent it being classified as such.[31] (Most Group A2; some Group B).

10. Secondary earner in a family with taxable income less than $50,000: Individuals in this category are more likely to suffer low economic wellbeing associated with their low taxable income. They do not have children (so are not eligible for WfF) and are unlikely to be in full-time work. (Most Group B; some Group A3).

11. Primary earners: These individuals are most likely to face low economic wellbeing associated with low taxable income. They derive a majority of income from sources other than benefit, NZS and self-employment, and are not members of higher income households. Almost all individuals in this category with taxable income below $10,000 worked full-time (30 or more hours per week) for less than 6 months, with many not working at all. However, individuals entering the workforce (or country) part way through the year may fall within this category so low taxable income may be temporary, arising in the current survey period only.[32] (Most Group B; some Group A3).

The proportions of individuals with low taxable income within each category are shown in Figure 8: the category numbers shown (1 to 11) are those listed above. Hence group A1, comprising categories 1 and 2, form 39 per cent of taxpayers with income below $18,000 per year. Group A2, made up of categories 3, 4, 6, 7 and 9, form 19 per cent; and categories 5 and 8 which make up group A3, form 31 per cent.

Thus group B, comprising mainly categories 10 and 11, represents only up to 11 per cent - or around 164,000 individuals - where low taxable income may represent low economic wellbeing and tax may be an effective redistributive instrument. This number most likely represents an upper bound however, since individuals entering the workforce part of the way through the year would have low income for the survey period although many would subsequently be in full-time work. Also some individuals could be temporarily out of the workforce during at the time of the survey; indeed a large proportion of those in category 11 worked for only a small part of the year. Conversely, some individuals within other categories, such as the self-employed and 18-24 year-olds, may face low economic wellbeing as a result of low taxable income. Unfortunately the data do not allow these groups to be decomposed further.

Therefore, while around 11 per cent of individuals falling within Group B might benefit especially from a tax cut on low incomes such as a tax-free zone compared to other policy options, for nearly 90 per cent of individuals earning less than $18,000 a tax-free zone would be poorly targeted. This is consistent with the conclusions of the 2001 Tax Review, which argued against a tax-free zone.[33]

Figure 8 – Composition of Individuals with Incomes Below $18,000 p.a.