The Treasury

Global Navigation

Personal tools

Treasury
Publication

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

5  Income-weighted AMTRs: 1907-2009

Using the tax structure and income distribution information discussed in previous sections, this section discusses the estimated values obtained using the methods described earlier - sub-section 5.1. Since the relationship between exempt and non-filer incomes is important for these calculations, this is discussed in sub-section 5.2. Sub-section 5.3 then uses a decomposition of the AMTRs to assess how far changes in tax structure and income levels or its distribution account for observed movements in AMTRs over time.

5.1  The Overall pattern of AMTRs

The changes in both the tax schedule and income distribution over the period from 1907 to 2009 have resulted in an AMTR series which varies substantially over the period. Figure 5 shows two AMTR series. The main series (in black) uses exemptions data to adjust the EMTRjs up to 1983, and reports IRD-based calculations from 1981. This series is also given in Table 3. A second series ignoring exemptions data (that is, individual EMTRjs are not adjusted using exemptions data) is shown in dotted red.

Both series ranges from 0.4% in 1907, the first year for which income distribution data are available, to a maximum of around 47% in 1982. It can be seen that in general the two series follow each other closely suggesting that exemptions adjustments play a limited role. The main period during which exemptions adjustments have a larger impact is 1954 to 1969. As discussed below, this was a period that witnessed a substantial increase in the initial tax-free allowance and other exemptions.

Based on the main series, the AMTR increases during WWI and its aftermath, reaching 5.4% in 1924. It then drops back to 2-3% in the second half of the decade. Thereafter during the inter-war period, the AMTR rises especially during the years of the Great Depression from 1929, reaching a maximum of 7.4% in 1933.

The most significant increase in the AMTR over the century, however, occurs at the beginning of WWII where the rate jumps from 11% in 1939 to 21% in 1940. The AMTR continues to rise thereafter to reach a local maximum of 30% in 1945. Though the AMTR drops in the immediate aftermath of the war, the lower AMTRs over the remainder of the decade are short-lived with an increase to 32% by 1951. Changes to the tax system from 1939 to 1953 were largely enacted through the use of additional war-related income taxes, ranging from an additional 2.5% to 33% added to individuals' final income tax bills. These had the administrative advantage of raising extra revenue without needing to adjust the basic income tax schedule; see Vosslamber (2009).

After WWII the AMTR follows a fairly steady upward trend till 1982, interrupted by two substantial declines: in 1961 and in 1971-3. Both declines largely reflect tax structure, mainly rate, changes but whereas the 1971-3 rate reductions mainly involved declines in top rates (see Figure 2), the 1961 case primarily reflected cuts in lower tax rates and increased exemptions. Both reductions in AMTRs were soon reversed, with exemptions subsequently curtailed in the mid-1960s, and the removal of the general personal exemption plus increased MTRjs in 1975 as the early 1970s oil crisis hit. Section 5.3 discusses the decomposition of AMTR changes in more detail.

Figure 5 - AMTRs for New Zealand 1907-2009
Figure 5 - AMTRs for New Zealand 1907-2009   .
Table 3 - Average marginal tax rates (in percent), 1907-2009
Year AMTR (%) Year AMTR (%) Year AMTR (%)
1907    0.4 1941 21.7 1975 39.3
1908 - 1942 27.3 1976 39.9
1909 - 1943 27.8 1977 38.5
1910 0.4 1944 27.7 1978 43.3
1911 - 1945 30.2 1979 42.1
1912 0.5 1946 25.4 1980 41.7
1913 - 1947 24.4 * 1981 42.6
1914 0.5 1948 26.3 1982 44.6
1915 - 1949 27.1 1983 40.9
1916 - 1950 28.7 1984 35.9
1917 3.0 1951 32.0 1985 37.5
1918 - 1952 29.8 1986 40.4
1919 - 1953 30.1 1987 38.6
1920 4.5 1954 29.5 1988 35.8
1921 - 1955 30.1 1989 33.0
1922 3.7 1956 30.8 1990 29.2
1923 4.6 1957 31.5 1991 29.5
1924 5.1 1958 32.4 1992 29.5
1925 1.9 1959 32.1 1993 29.4
1926 2.2 1960 33.3 1994 29.6
1927 2.8 1961 26.4 1995 29.7
1928 2.6 1962 25.2 1996 29.9
1929 3.1 1963 25.8 1997 28.7
1930 3.3 1964 27.8 1998 28.3
1931 5.5 1965 29.7 1999 27.2
1932 7.2 1966 30.5 2000 26.0
1933 7.4 1967 31.1 2001 27.6
1934 5.8 1968 31.4 2002 28.9
1935 5.5 1969 32.4 2003 29.1
1936 8.0 1970 32.4 2004 29.7
1937 9.6 1971 37.1 2005 30.2
1938 8.7 1972 35.9 2006 30.5
1939 11.3 1973 33.4 2007 30.9
1940 20.5 1974 34.4 2008 31.3
  2009 31.1

* Data from 1981 are sourced from Inland Revenue

Following the early 1980s peak around 47%, a substantial decline in the AMTR occurs, in part associated with the familiar '80s reforms, though beginning prior to the main mid-1980s reform years, and falling to around 30% by 1990. The data also confirm a decline in the AMTR during 1996-2000 in association with revenue-reducing tax reforms (eg, the lowest MTRj fell from 24% in 1994 to 19.5% in 2000, and thresholds were raised). This was followed by a steady rise in the AMTR (from 26% in 2000 to 31% in 2008) following the increase in the top MTRj from 33% to 39% in 2000, and the resulting impact of fiscal drag thereafter as income tax thresholds remained fixed in nominal terms.[16]

Comparing the two series in Figure 5 reveals the impact of our ‘exemptions adjustment' designed to capture the effect of general exemptions reducing net, relative to gross, income. As noted above, for an (unknown) fraction of taxpayers, this would reduce the statutory marginal tax rate that they faced. It can be seen that the adjustment has little effect on estimated AMTRs except for the early 1940s, 1954-58 and 1961-69. For the first two period AMTRs are reduced by about 1-2 percentage points (ppt); during 1961-69 the difference in the series ranged from almost 5 ppt (1962) to 2.4 ppt in 1969. In each of these cases tax structure changes in 1940, 1954 and 1962 involved an increase in the initial income level liable to the 0% marginal tax rate, hence affecting the fraction of taxpayers who may face a lower MTRj. Year-to year changes in the two series are however largely unaffected by the adjustments.

Finally, the AMTR calculations described here exclude the impact of ACC levies, the Benefit system and the Family Tax Credit (FTC) system which, at various times since the 1970s, involved lump sum transfers to lower income families with children that were withdrawn at higher income levels at rates of up to 30c/$, thereby adding to effective MTRjs. The effect of FTCs is discussed further below.

Notes

  • [16]There is very little fiscal drag under similar conditions during 1990-1995 due to the very flat nature of the two-MTRj schedule (at 24% and 33%) and fixed nominal thresholds in those years.
Page top