The Treasury

Global Navigation

Personal tools

Treasury
Publication

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

3 New Zealand Income Distribution Data

To calculate aggregate level AMTRs requires suitable income distribution data to enable the income-weights to be generated. Income distribution data used here for the purpose of estimating AMTRs have largely been sourced from the New Zealand Official Yearbooks (NZOYB), which in turn were sourced from income tax returns filed with Inland Revenue. We have been able to identify data from the early 1900s through to the early 1980s and over this period the data presented in the NZOYBs have evolved. Income data were not separately sourced after the early 1980s. Instead we have utilised AMTRs estimated from more reliable unit record data by Inland Revenue for the period 1981-2009, and we examine a three year overlap as a cross-check on the alternative approaches.

3.1  Income Data

There are three important aspects to the income distribution data for our purposes:

  1. how income is distributed across the tax brackets/rates for which we have tax schedule information;
  2. how exemptions against tax are distributed across income levels and tax brackets; and
  3. how far NZOYB income distribution data, generally only available for tax filers until the PAYE regime from 1958, can be supplemented to capture non-filers’ incomes.

We assembled NZOYB income data on individual taxpayers (for example, wage and salary earners, and self employed), but excluding companies. We focus on the distribution of income for aggregate gross income (before exemptions), aggregate earned and unearned income, and income tax exemptions.[13] We also used data on the number of tax returns filed to estimate the size of non-filed income (see below).

Of course, available income and tax data vary in quality and coverage over the period of the personal income tax, and we have found no suitable income data prior to 1907. Appendix 2 discusses the nature and quality of the income data over various sub-periods during 1907-1983, highlighting the main methods and assumptions adopted.

Figure 3 provides an example of how the income distribution data are organised, in this case for 1925. It shows total assessable income, not numbers of taxpayers, on the vertical axis, with income classes on the horizontal, where the class widths are not standardised. The distribution of gross assessable income is shown with separate histograms for total, and earned, income. Where tax brackets do not coincide with the relevant income classes, aggregate income within the income class is divided on a pro rata basis to allow each segment to be taxed at the appropriate rate. Note that the spike in income in bracket 1,000-1,999 is due to the larger size of this and subsequent brackets.

In 1925, earned income below a certain threshold was taxed at a lower rate compared to unearned income (applicable through the first half of the 20th century). In addition, certain income was exempt from tax depending on a taxpayer's circumstances. Data on tax exemptions, distributed by size of income, first appeared in the NZOYB in this period and are described further in Appendix 3.

Figure 3 - Distribution of total and earned assessable income, 1925
Figure 3 - Distribution of total and earned assessable income, 1925.

3.2  Exemptions Data

Until the 1970s exemption of some income from personal income tax was a feature of the New Zealand tax system. A portion of income was exempt from tax for a specified set of circumstances, including: low income (the ‘general exemption'), and exemptions for child/dependent, wife/spouse, housekeeper and insurance (related to life insurance and superannuation fund contributions). This had the effect of reducing individuals' tax liabilities, for given gross income, depending on their individual circumstances, thereby affecting their average tax rates. It directly affected their effective marginal tax rates to the extent that exemptions were income-dependent (eg, were withdrawn in association with increasing income). It would also have affected the relevant statutory tax rate where exemptions shifted a taxpayer between MTR bands. In Appendix 3 we describe the exemptions data further and section 4 below discusses how we use data on the distribution of exemptions by income levels in the AMTR calculations.

Notes

  • [13]The NZOYB also has data on taxable income (ie, gross income less exemptions), income tax assessed, and similar measures of income and tax for companies. The NZOYB ceased publishing final income data from 1973, though provisional estimates of income were included. Instead, for the 1970s and early 1980s we source income and exemption data from the separate SNZ Report onIncomes and Income Tax.
Page top