Conclusions
The paper has sought to make two contributions to the analysis of the equity and efficiency effects of tax policy in New Zealand. Firstly, it considered the available methodologies to measure tax redistribution and efficiency and has applied these to the New Zealand income tax and transfer system using Household Economic Survey data for 2006-07 and the Treasury 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 of tax-transfer policy, and illustrates how using equity and efficiency measures of the impacts of taxes and social transfers can assist with the design and evaluation of income tax and transfer policy.
The Gini measure of inequality of gross (taxable) income was found to be 0.391 using adult-equivalent incomes as the unit of analysis. The tax and transfer system produces a distribution of post-tax-and-transfer income with a Gini that is lower by around 0.06 in absolute terms, or a 15 per cent reduction. In terms of the abbreviated social welfare function associated with the Gini measure, this is equivalent to a 9.5 per cent increase in arithmetic mean income. This would appear to result in a less equal distribution than is observed in Australia. It is important to recognise that these inequality measures require value judgements by the policy-maker or evaluator regarding their aversion to inequality as well as their view regarding the measure of wellbeing, or the welfare metric, to be used (including the choice of income unit and equivalent adult scales).
On the efficiency side, measures of tax efficiency tend to be either comprehensive, in allowing for the effects of distortions to behaviour, but difficult to calculate in practice (for example, excess burdens), or simple but partial and hence should be interpreted cautiously (for example EMTRs, which give an indication of one aspect of the incentives facing individuals in making their labour supply decisions). The analysis of effective tax rates for New Zealand suggested that disincentive effects may be relatively high for large fractions of primary and secondary earners, though further analysis would require the use of a behavioural model.
Finally, the paper has examined the characteristics of low-income taxpayers in New Zealand. A decomposition by individual and household characteristics shows that different low income taxpayers are likely to be affected quite differently by various aspects of the tax/transfer system. To help those most in economic need, tax-free zones appear less suited than positive initial tax rates or more targeted welfare measures.
