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The Elasticity of Taxable Income in New Zealand WP 12/03

Publication Details

  • The Elasticity of Taxable Income in New Zealand
  • Published: 3 Aug 2012
  • Status: Current
  • Authors: Claus, Iris; Creedy, John; Teng, Josh
  • Pages: (1),vi,34
  • ISBN: 978-0-478-39656-0 (Online)
  • Ref. No: WP 12/03
  • Pub. type: Working Papers
  • Responsible units: Tax Strategy
  • Copyright: © Crown Copyright
  • JEL Classification: H24; H31
 

The Elasticity of Taxable Income in New Zealand

Published 3 Aug 2012
Page updated 3 Aug 2012

Authors: Iris Claus, John Creedy and Josh Teng

Abstract

This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Generally it was higher for men than for women. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate.

This Working Paper is available in Adobe PDF and HTML. Using PDF Files

Contents

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Executive Summary

1 Introduction

2 The Elasticity and Estimation

3 New Zealand's Income Tax System

4 Empirical Results: Introduction of 39 Per cent Rate

5 Empirical Results: Fiscal Drag

6 Some Comparisons

7 Marginal Welfare Costs

8 Conclusions

Appendix A: The Data

Appendix B: Data for Calculation of Welfare Costs for all Income Tax Brackets

References

twp12-03.pdf 544 KB) pp.vi,1–34

Acknowledgements

We should like to thank Steve Cantwell, James Browne, Raj Chetty and Mario Di Maio for helpful comments on an earlier draft.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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