8 Conclusions
This paper has provided estimates for New Zealand of the concept of the elasticity of taxable income, with respect to changes in the net-of-tax marginal tax rate. This concept has the advantage of measuring, in a reduced-form context, all possible responses to tax rate changes and of enabling the efficiency effects to be measured. Results were obtained using a special dataset constructed from a random sample of New Zealand taxpayers.
Two approaches were used to estimate elasticity values for different groups of taxpayers. First, the introduction of an additional top marginal tax rate bracket provided a useful policy change as a natural experiment. Secondly, the stability of the tax structure over recent years enables the effect of fiscal drag, in shifting some individuals into a higher marginal tax rate bracket, to be considered. In using the first approach, it was particularly important to consider the possibility that some observed responses to tax changes may involve the timing, rather than the total amount, of taxable income declared, particularly in anticipation of announced changes taking effect. Furthermore, in estimating the elasticity, care needs to be taken to avoid attributing some of the changes in declared income to marginal tax changes, when they may have arisen from other dynamic factors. Non-tax-related income movements were observed, particularly when attempting to base estimates on tax rate changes arising from fiscal drag and the movement into higher tax brackets.
In view of these complications, the results should be treated with caution. Nevertheless, it was found that the elasticity of taxable income is substantially higher for the highest income groups. Indeed for lower deciles of the income distribution, the elasticity was found to be negligible. Generally the elasticity was higher for men than for women. This may be largely because the taxable incomes of men are systematically above those of women. Changes in the timing of income flows for the higher income recipients was 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 found 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, for appropriate values of the elasticity of taxable income.
