3 New Zealand's Income Tax System
The relative stability of the personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for attempting to estimate the elasticity of taxable income. New Zealand's income tax system was transformed with economic reforms that began in 1984. These reforms were designed to improve efficiency while raising revenue by broadening the tax base and lowering marginal income tax rates; see, for example, Evans et al. (1996). The tax base was broadened by introducing a comprehensive goods and services tax (GST) and a fringe benefit tax, and by eliminating many tax concessions, exemptions, and investment and export incentives. The top personal marginal income tax rate was cut from 66 per cent to 33 per cent and the number of tax brackets was reduced from eleven to three.[6] Aggregate tax revenue actually increased despite the reductions in the tax rates. The tax scales for 1994 to 1999 and 2000 to 2008 are plotted in Figures 1 and 2. The 'composite' years, 1997 and 1999, are years when a tax rate or income threshold change came into effect during the income tax year, which starts on 1 April and ends on 31 March.
- Figure 1 – Effective Tax Rates 1994 to 1999
- Figure 2 – Effective Tax Rates 2000 to 2008
New Zealand's personal income tax system introduced during the reforms remained virtually unchanged until 2001, although during 1994 to 2001 the middle income tax bracket was subject to some threshold and rate adjustments. However, in 2001 a new top personal marginal tax rate of 39 per cent for income above $60,000 was introduced, with the company and trust rates remaining at 33 per cent.[7] This policy change provides a useful natural experiment for studying the responsiveness of taxpayers to changes in marginal tax rates. Furthermore, over the period 2001 to 2008 no threshold or rate changes were made to the other tax brackets.[8] As a result of income growth a large number of taxpayers experienced an increase in their marginal rate because they moved into a higher tax bracket. These fiscal drag effects enable the difference-in-differences estimator discussed in the previous section to be used.[9]
Notes
- [6]The company tax rate was lowered from 48 per cent to 33 per cent.
- [7]The average monthly exchange rate for 1994 to 2008 was US$0.60 per NZ$1.
- [8]Changes to the Working for Families (WfF) package began in October 2004 and were implemented in stages through 1 April 2007. They included changes to in-work incentives and family entitlement and support to meet childcare and accommodation costs. Low- to middle-income families were the key target group for these changes.
- [9]The rates used here do not reflect the effects of benefit abatement rates in view of the concentration on the top end of the income distribution.
