The Treasury

Global Navigation

Personal tools

6 Conclusions

Following the methods proposed by Barro and Sahasakul (1983, 1986) to calculate an ‘aggregate' marginal income tax rate (AMTR), which they applied to US data, this paper has adapted the methodology to derive a similar aggregate tax rate measure for New Zealand. This involved construction of an income-weighted average of individual-level marginal tax rates, having first accounted for various factors that allow effective, rather than statutory, marginal tax rates to be estimated. These calculated rates largely avoid the endogeneity problems of more commonly used aggregate-level MTRs based on tax revenue data.

We have constructed the AMTR measure for 1907-2009. Our approach to constructing an income-weighted AMTRs was largely dictated by data availability - Statistics New Zealand income distribution and tax data for 1907-1981 and Inland Revenue taxpayer unit record data for 1981-2009 (with a 3 year overlap period, 1981-1983 as a cross-check). We combined data on the income tax schedule, taking account of income tax rates, thresholds, exemptions etc, with data on the distribution of incomes and exemptions from Statistics New Zealand's Official Yearbook, Report of Incomes and Income Taxes¸ and New Zealand Censuses. These sources enabled AMTRs to be calculated for most years from 1907-1983, with varying degrees of accuracy.

The resulting AMTR evidence shows that the nature of the tax schedule has changed dramatically over the period, and the contribution of income weighting from different income classes of taxpayers has also played a role. The AMTR series reveals that rates varied substantially over the whole 1907-2009 period, but with a generally increasing trend. Unsurprisingly, the AMTR rose especially during the two World Wars, fell modestly in the immediate aftermath of war but soon stabilised, or rose again quickly thereafter. After the immediate post-WWII reduction, the AMTR generally rises from around 25% in the mid-1940s to around 45% by the early-1980s, with a major interruption when AMTRs declined in 1961 and, to a lesser extent, in the early 1970s. From the early 1980s a substantial decline in the AMTR occurs, in part associated with the later '80s reforms, reaching under 30% by 1990. The data also confirm the small but sustained rise in the AMTR (from 26% in 2000 to 31% in 2008) following the increase in the top rate of personal income tax from 33% to 39% in 2000, and the impact of fiscal drag thereafter as income tax thresholds remained fixed in nominal terms.

Page top