4.2 Elasticity Estimates (continued)
Figure 8 shows that the sharp increase in taxable income of the top percentile of income earners in 2000 was due to a rise in dividend income during that year. Under New Zealand's imputation system, credits are attached to dividends for income tax that has been paid at the company level. The introduction of the 39 per cent top personal marginal rate and nonalignment with the company tax rate meant an additional 6 per cent tax liability for earners with income above $60,000. As a result, companies paid out large profits before the 39 per cent top personal rate came into effect. Figure 8 also shows a decline in shareholder employee salaries following the introduction of the 39 per cent top marginal rate.
- Figure 8 – Top Percentile Income Share and Composition and Average Marginal Tax Rate
Table 2 reports the elasticities of taxable income for the top percentile of taxable income earners compared with 1999 and 2000. The elasticities of the top percentile of income earners are higher than those of the top decile earners. Values for the 90-99th percentile were found to be negligible, suggesting that most of the response of the top decile income earners is due to the top percentile earners. Again the values using 2000 as the base year are unrealistically high as a result of the bringing forward of taxable income between the announcement of the policy change and its implementation.
- Table 2 – Elasticity of Taxable Income: Top Percentile of Incomes
The difference-in-difference estimator of the elasticity of taxable income is reported in Table 3. It is the elasticity of taxable income for the top decile of income earners compared with the next decile.[11]The difference-in-difference estimator produces similar orders of magnitude compared with the taxable income share elasticity for the top decile of taxable income earners.
- Table 3 – Difference-in-Difference Elasticity of Taxable Income: Top Decile versus Nineth Decile of Incomes
Notes
- [11]Due to the flat income tax scales in New Zealand the top percentile versus the 90-99 percentile of earners could not be calculated. This is because the 90-99 percentile of earners is not a meaningful control group for the top percentile of earners. Most of them, and at the end of the sample all of them, faced the same marginal tax rate as the top percentile of earners.
