8 Conclusions
This paper has investigated the effects of projected population ageing and changes in labour force participation on projections of income tax (from wage, salary and self-employment income, and capital income) and GST, for males and females separately in New Zealand. It was found that as the baby-boomers move into retirement the burden of taxation will have a compositional shift, from the current male modal age of 48 in 2010/11 to 43 in 2051/52. During the middle of the transition to retirement for the baby-boomers, the male modal age (in the distribution of tax revenue by age) is expected to fall to 40 in 2030/31. The distribution of the proportion of tax paid by females follows a similar pattern.
The projections of income tax revenue were also decomposed into ‘pure ageing' and ‘pure labour force participation' changes: for example, in the former case only the projected age composition of the population was allowed to change, while participation rates remained constant at their 2010/11 values. Ageing was found to reduce aggregate income tax revenue below the base model case. However, changing participation rates, particularly among women, imply higher tax revenue. The projected changes in the age distribution (with fixed labour force participation rates) were found to reduce total tax revenue, below the base model case, by 2.4 per cent by the year 2061. However, the effect of changes in participation rates (with an unchanged age distribution) are projected to increase aggregate revenue above the base model case by 5.7 per cent.
The projected demographic and labour force participation changes are thus small, though not trivial. However, these effects are dwarfed by the much larger changes generated by wage growth. Aggregate revenue was found to be highly sensitive to changes in the overall rate of change in wages and capital income (affecting all cohorts), which is a major determinant of tax revenue growth, along with the assumption regarding indexation of income tax thresholds. While the use of fiscal drag, which arises from not adjusting the thresholds, has been extensively used to increase income tax revenue in the past, it is most unlikely to be sustained for long periods, otherwise a very large proportion of the population would move into the top income tax rate bracket. Hence the effect of periodic threshold adjustments, a more realistic prospect, was examined.
