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The Distributional Impact of Population Ageing

3 Methodology

The present paper uses the NZ Treasury's non-behavioural tax-benefit microsimulation model, Taxwell and the 2009/10 Household Economic Survey (HES).[5] The survey contains sufficient information about incomes, expenditures and household characteristics to compute welfare benefits, along with direct and indirect taxes. It also contains detailed demographic information on individuals which can be used to impute the expected education and health expenditure.

Each individual in the survey is assigned a weight which makes it possible to aggregate from the sample to population values. The approach is to calculate, for each year of interest, a new set of weights. The new weights ensure that aggregate values of a wide range of variables sum to calibration totals, which correspond to the Treasury's Long-Term Fiscal Model (LTFM). The calibration variables include the projected demographic structure of the population, aggregate labour market participation rates, by age and gender, and others. Details of the calibration weighting procedure are given in Appendix B.

3.1  Modelling the income distribution

It is possible to compute summary measures of inequality and poverty using a range of types of income unit and income measure. Beginning with an observed distribution of income from wages, self-employment and investments - usually referred to as market income - it is possible to obtain the net effect of income-support payments, housing subsidies and income taxes to estimate the distribution of disposable income.[6] The estimated cash value of in-kind benefits such as health and education is attributed to households using various allocation rules.[7] The incidence of indirect taxes is then estimated and the net effect of these secondary forms of state assistance and taxes is added to disposable income and the resulting distribution of a measure of the economic resources available to households is derived; this measure is referred to as final income. A more comprehensive idea of the redistributive extent of government activity, beyond that affected by a progressive income tax and transfer system, can therefore be gained. Figure 4 describes the sequence of allocations made.

To undertake such fiscal incidence studies, detailed micro-level data on household or family income and expenditure are obtained from surveys and the rules of the tax and welfare system are applied to estimate the tax liability and eligibility for and entitlement to welfare receipts. Estimates of the amounts of the indirect taxes paid are similarly derived. Demographic characteristics of households or families are used to impute the cash-value of health and education entitlements. Views on the redistributive effects of government policy can therefore be informed by analysing disparities between income groups and calculating aggregate inequality and poverty measures.[8]

Figure 4 - Analytical Framework
Figure 4 - Analytical Framework.

This analysis implements the framework described in Figure 4 for the year 2009/10 and then imposes the expected demographic profile of New Zealand for 2020, 2030, 2040, 2050 and 2060 to model changes in the income distribution.

Notes

  • [5]For this analysis, a particular year such as 2010 refers to the 12 month period from 1 April in the previous year to 31 March of the year mentioned. The HES is from July to June, but Taxwell is adjusted to ‘tax years’.
  • [6]These benefit amounts are based on eligibility and may not reflect actual receipt if take-up is less than 100 per cent.
  • [7]The model defines families as economic family units (EFUs). Each family contains an adult principal earner, for couples a spouse of the principal earner, and dependent children. Adult children are deemed not to be dependent on their parents and are therefore not part of their parents' family, even if they live in the same household. A household is the largest unit in this model and consists of an economically independent group of families.
  • [8]See Crawford and Johnston (2004) and Aziz et al. (2012) for an evaluation of the distributional impact of tax and government spending between the years 1988 and 2010.
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