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Average Marginal Income Tax Rates for New Zealand, 1907-2009 WP 12/04

Executive Summary

Estimates of marginal tax rates (MTRs) faced by individual economic agents, and for various aggregates of taxpayers, are important for economists testing behavioural responses to changes in those tax rates. Numerous research papers testing for impacts of taxes on labour supply, investment, productivity or economic growth use a variety of tax rates applicable at individual or aggregate levels. For macroeconomic level studies of the determinants of economic growth, Barro and Sahasakul (1983, 1986) proposed a method to calculate an ‘aggregate' average marginal tax rate (AMTR) faced by personal income taxpayers. This approach was applied to US data by Barro and Sahasakul (1983, 1986), and more recently by Barro and Redlick (2011), to identify impacts of marginal tax changes on GDP growth. These calculated rates largely avoid the endogeneity problems of more commonly used aggregate-level MTRs based on tax revenue data.

This paper adapts the methodology proposed by Barro, Sahasakul and Redlick to derive a similar aggregate marginal tax rate measure for New Zealand. This involves construction of an income-weighted average of individual-level marginal tax rates, having first accounted for various factors that allow effective, rather than statutory, marginal tax rates to be estimated.

We construct the AMTR measure for 1907-2009. Our approach is largely dictated by data availability - Statistics New Zealand income distribution and tax data for 1907-1981 and Inland Revenue taxpayer unit record data for 1981-2009 (with a 3 year overlap period, 1981-1983 as a cross-check). We combine data on the income tax schedule, taking account of income tax rates, thresholds, exemptions etc, with data on the distribution of incomes and exemptions from Statistics New Zealand's Official Yearbook, Report of Incomes and Income Taxes, and New Zealand Censuses. These sources enable AMTRs to be calculated for most years from 1907-1983, with varying degrees of accuracy.

The resulting AMTR evidence shows that the nature of the tax schedule has changed dramatically over the period, and the contribution of income weighting from different income classes of taxpayers has also played a role. The AMTR series varied substantially over the whole 1907-2009 period, but with a generally increasing trend. Unsurprisingly, the AMTR rose especially during the two World Wars, fell modestly in the immediate aftermath of war but soon stabilised, or rose again quickly thereafter. After the immediate post-WWII reduction, the AMTR increase from around 25% in the mid-1940s to around 45% by the early-1980s, with a major interruption when AMTRs declined in 1961 and, to a lesser extent, in the early 1970s. From the early 1980s a substantial decline in the AMTR occurs, in part associated with the later '80s reforms, reaching under 30% by 1990. The data also confirm the small but sustained rise in the AMTR (from 26% in 2000 to 31% in 2008) following the increase in the top rate of personal income tax from 33% to 39% in 2000, and the impact of fiscal drag thereafter as income tax thresholds remained fixed in nominal terms.

An Excel spreadsheet containing all of the main estimated tax rates accompanies this paper.

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