6 Some Comparisons

Many empirical estimates of the elasticity of taxable income have been produced for a large range of countries, as discussed by, for example, Saez et al. (2009). The values vary considerably, depending on the method of estimation used, the particular reform examined, and the country. After mentioning that a number of authors suggest a 'consensus value of about 0.4', Giertz (2004, pp. 14, 37) warns that this 'masks considerable variation in the estimates'. Indeed, there is no reason to expect the elasticity to remain unchanged over time, or to be similar across countries having different tax structures and regulations. Furthermore, the above results have demonstrated some heterogeneity among types of taxpayer, so that there seems little value in attempting to find a consensus value.

Another feature of many estimates is that much uncertainty is attached to them. After reviewing elasticities, Meghir and Richards (2007, p. 19) comment that 'the estimates of the effect of taxes on taxable income, whose purpose is to identify the impact of taxation on other dimensions of effort, should be regarded with caution'. Furthermore, Saez et al. (2009, p. 59) suggest that, 'there are no convincing estimates of the long-run elasticity'. The suggestion, by Saez et al. (2009) that some 'short-run' elasticity estimates obtained from tax reforms may perhaps capture changes in the timing of declarations, has been confirmed by the above analysis of the introduction of the 39 per cent tax rate in New Zealand.

The use of a 'reduced form' specification inevitably carries with it the difficulty that, when a parameter estimate is found to change from one dataset to another, there is no way of knowing precisely what has caused the change. It has been demonstrated above that examination of the various income components is important, particularly among the higher income taxpayers. Giertz (2004, p. 39) suggested that, 'much work is still needed in order to better understand the process by which incomes respond to changes'. This judgement was repeated by Saez et al. (2009) who stressed the need to look at the various margins involved in responses to taxation. The value of examining the different margins was indeed demonstrated in the previous section.

Where it has been possible to estimate elasticities for different income ranges, a common result is that they vary with income, being higher for higher incomes. This result has been confirmed by the present analysis, and it is perhaps not surprising in view of the fact that higher income groups may be expected to have more opportunities to shift income between sources.

Faced with the difficulty of obtaining data in New Zealand, there is only one previous study containing estimates of the elasticity of taxable income for New Zealand. Using a variety of methods, covering a number of tax structure changes, Thomas (2007, p. 22) obtained estimates which 'ranged from 0.35 to 1.10, with a preferred estimate of 0.52'; see also Thomas (2007, p. 18). The present results are thus broadly in line with those reported by Thomas. He found that the tax rate reductions in the mid-1980s produced substantial reductions in the excess burden from income taxation. Similarly, the increase in the top marginal rate in 2001 again raised excess burdens, though to levels below those of the 1980s. He reported marginal welfare costs of as high as $8 per extra dollar of revenue raised.[13]