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 EMTR_js 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 EMTR_js 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 MTR_js 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

* 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 MTR_j 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 MTR_j 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 MTR_j. 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 MTR_js. The effect of FTCs is discussed further below.