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

2  Personal Income Taxation

This section first shows how income taxation has evolved within the New Zealand tax system since the beginning of the twentieth century, introduces a number of marginal tax rate definitions used later in the paper, and discusses some key historical aspects of the New Zealand income tax system that affect calculations of the various MTR measures.

2.1  Sources of Government Revenue

Over the course of New Zealand's fiscal history the sources of government revenue have changed as the economy has developed and the role of government increased. While taxation is only one source of government revenue, it is the most important, though the proportions of expenditure financed by taxes, charges for services and borrowing have varied considerably over the years.

The composition of tax revenue has changed significantly over the last century. In the early colonial period it was based heavily on customs and excise duties; these accounted for more than 90 percent of tax revenue in 1875-76, with the balance being provided by stamp duties. Excise duties were charged on commodities such as alcohol, tobacco and sugar.[2] At that stage in New Zealand's history customs duty acted similarly to a general sales tax on commodities since a very high proportion of commodities was imported.

In the last years of the nineteenth century taxation was extended into two new areas: an excise on beer, and taxes on land and property. Customs and excise duties remained the predominant source of revenue, but from 1891 income was introduced as a new tax base in the Land and Income Tax Act. Nevertheless, during the early part of the twentieth century the government continued to rely on customs and excise duties for revenue, and it was not until the on-set of the First World War (WWI) that income taxes began to contribute a substantial share of total revenues.

These trends can be seen in Figure 1 which shows the changing composition of the tax revenue base from 1903 to 2011.[3] Taxes are split into customs and excise duties, personal income tax, company income tax, land tax, estate and gift duties, and ‘other taxes'.[4]Note that data on the revenue share of sales and company taxes is not available before 1950. The Figure shows that over an extended period, the share of customs and excise duties fell - from 74% of tax revenue in 1903 to 7% in 2011. The largest falls were associated with WWI, the early 1930s depression and around World War II (WWII).

Land tax also fell from a high of around 15% of revenue in 1910 to close to zero by the 1940s, with the largest declines occurring in the 1930s as ‘other taxes' became more important. Estate and gift duties similarly became less significant over time, making up only 1% of tax revenue by 1979 and 0% by 2011. The first broad-based sales tax was introduced in 1933, at 5% of the value of the goods sold.

Figure 1 - Government tax revenue by source, 1903 - 2011
Figure 1 - Government tax revenue by source, 1903 - 2011   .

There was a large increase in the revenue share of personal income tax over the period, rising from 6% of total taxation in 1903 to 67% by 1981, before falling to 46% in 2011. Not surprisingly, WWI brought about a substantial increase in the personal income tax share with some of this being reigned back again in the 1920s. The further boost to the income tax associated with WWII (when the income tax share reached around 45%) appears to have been followed by a fairly steady increase in the personal income tax share, largely at the expense of customs and excise duties.

Income taxes continued to increase as a proportion of government revenue in the post-war period until the early 1980s. A large part of this increase was as a result of fiscal drag. Pay As You Earn (PAYE) was introduced for income tax in 1958 which reduced the administrative burden of income taxes. The 1980s then saw a reduction in the reliance on income tax for government revenue, especially in association with the mid-to-late 1980s reforms.

Consumption taxes increased to fill the gap: a comprehensive goods and services tax (GST) was introduced in 1986, initially at 10%, subsequently increased to 12.5% in 1989 and, more recently, to 15% in 2010. As a result the sales tax/GST share rose from around 10% of revenue in 1986 to 26% by 2000.

In common with many other OECD countries, the size of New Zealand's tax revenue as a proportion of GDP has also increased markedly since the early 19th century. In 1900 tax revenues were approximately 8% of GDP. They rose to 28% of GDP during WWII and to a high of 37% in 2006. Currently tax revenues make up around 29% of GDP.

Notes

  • [2]See Goldsmith (2008) for data on tax revenue shares during the nineteenth century from 1840.
  • [3]The figure uses data from several different sources. From 1903 to 1949 data is taken from New Zealand Official Yearbooks. These did not include categories for company tax or sales tax. From 1950 to 1979 data is from the New Zealand Planning Council (1979) and included company and sales tax. From 1980 to 2011 data is taken from New Zealand Official Yearbooks and the Government's Financial Statements.
  • [4]Other taxes included: motor vehicle frees and road user charges, withholding taxes, gaming duties and entertainment taxes.
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