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1 Introduction

A focus on marginal tax rates (MTRs) is ubiquitous among studies of the numerous economic outcomes that can be affected by taxation. The ‘outcomes' of interest are often at the individual taxpayer level; eg, labour supply choices, personal taxable incomes, consumption-savings choices, individual welfare costs. The aggregation of these micro-level behaviours in response to MTRs into macro-level outcomes has become an important focus of research in recent years. It includes a now extensive literature on the effects of taxation (and public expenditure, deficits, etc) on aggregate GDP, national savings, investment, and other macro-level outcomes.

The recent global financial crisis in particular has prompted macroeconomists to reconsider the effectiveness or otherwise of fiscal stimulus packages on GDP and other macro variables, with analysis and evidence on this issue dominating recent debate in the US over the merits of tax cuts and stimulus spending. Similarly, for New Zealand, recent tax and spending reforms, including changes to key MTRs have implications for net fiscal injections and future fiscal deficits. In addition, the literature testing the impacts of fiscal policy on longer-run economic growth has increasingly investigated the importance of MTRs faced by different agents and types of economic activity, and the impact of exogenous changes in public expenditures.[1]

Among the difficulties confronting those macro-level studies are problems measuring the ‘true' marginal tax rates of interest. Lack of suitable data has often meant that ‘implicit' average tax rates are used, obtained using tax revenue data. As a consequence, the endogenous relationships among ‘true' marginal tax rates, tax bases and GDP - (which together determine tax revenues) - become difficult to disentangle. Recently Barro and Redlick (2011) have proposed ways to help overcome these endogeneity concerns. First, they estimate multiplier effects on US GDP over a long period (1917-2006) and consider both taxes and public spending simultaneously. For the latter they use public defence expenditures and expected defence expenditures (“defence news”) to help overcome spending endogeneity. This requires a number of war episodes to assist with identification. Second, on the tax side, following methods developed by Barro and Sahasakul (1983, 1986), they argue that an economy-wide ‘average marginal tax rate' (AMTR) using taxpayer income shares as weights provides a suitable marginal tax rate measure to capture the potential aggregate responses of GDP to changes in individual personal tax incentives.

The present paper reports estimates of a number of MTR measures for New Zealand, focusing especially on the Barro and Sahasakul AMTRs for personal income taxes. The estimates cover around a century of New Zealand's personal income tax regime, from 1907 to the present. The paper contributes to the literature in three main areas. First, we provide a comprehensive time-series database of various marginal income tax rate variables over more than 100 years. We calculate effective marginal income tax rates by adjusting for various additional taxes (social security, war taxes etc) and exemptions. The inclusion of the impact of social welfare benefits was beyond the scope of our analysis; however, we have provided a point estimate for 2008. Second, we extend the limited database on incomes (available from Inland Revenue from 1981) to include aggregate level income data by income class from 1907 assembled from Statistical Yearbooks and other primary sources. Third, we propose a methodology to construct a Barro-Sahasakul type measure of AMTRs using the data available for New Zealand. This dataset has the potential to form a useful basis from which to answer a number of empirical questions relating to the output effects of fiscal policy in New Zealand.

The paper is organised as follows. Section 2 discusses New Zealand's personal income tax system, putting it in historical perspective. Sub-section 2.1 begins by putting the income tax in the context of New Zealand's overall revenue-raising regime of which income taxation was initially only a small part. Since a number of tax rate definitions are used throughout the paper, sub-section 2.2 introduces those definitions, including the Barro-Sahasakul AMTR measure. In view of the important role of income-weighting in the AMTR measure, section 3 introduces the available income data and its distribution across income classes over the period. Section 4 then describes the methodology used to construct the AMTR series for New Zealand, and section 5 presents and discusses the AMTR results.

Notes

  • [1]Recent contributions include Lee and Gordon (2005), and Angelopoulos et al. (2007), Romero-Avila and Strauch (2008), Romer and Romer (2010), Gemmell et al (2011a,b), Beetsma and Guiliudori (2011), Arnold et al (2011), Ramey (2011).
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