3.2 Modelling the incidence of tax and spending by age group

Since part of the aim of this analysis is to investigate how the age-distribution of tax and spending changes as a consequence of population ageing, it implements the framework indicated by Figure 4 using individuals as the unit of analysis. To do this, rules to model the age-incidence of tax and spending and the sharing of resources within families and households need to be implemented.[9] Appendix C describes the attribution principles used for this analysis in further detail.

Market income is attributed to the particular earner of that income in the family as are estimates of tax liabilities on the income.[10] Working-age welfare entitlements and any tax owed on those entitlements are generated from Treasury's micro-simulation model, Taxwell. These are attributed equally to the principal earner and, if applicable, spouse in each family. The eligibility and entitlement rules for Working for Families (WfF) tax credits are determined in Taxwell at a family level. Any WfF entitlement for eligible families is attributed to the adult with the least market income, who is assumed to be the main caregiver for dependents. Government spending on the Income Related Rental Subsidy (IRRS) is imputed, based on data obtained from the Department of Building and Housing and is available at a household level. This is divided equally among all families in a household and then divided among the adults in each family. The Accommodation Supplement (AS) is also attributed in a similar way for eligible families.

This information enables the calculation of each earning individual's disposable income, which is then assumed to be shared within the family. That is, individuals in a family earn market income, pay taxes, and/or receive transfers and then pool their disposable income. This is then allocated to the members of the family using an assumed sharing rule. In contrast to an equal sharing rule, the present analysis assumes a family's disposable income is divided among its individuals using a set of sharing factors, assumed to be the same for each family. In the absence of empirical information about average sharing proportions in New Zealand, the consumption weights in the OECD modified equivalence scale were used as a ‘benchmark'. The principal earner of a family is assigned a weight of 1, a partner of the principal, 0.5, and every dependent, 0.3. For example, in a family consisting of two adults and two children, the principal earner would obtain a fraction, (1/2.1) of total disposable income, while the partner would obtain a fraction, (0.5/2.1), and each child would have (0.3/2.1) of the total. However, the effects of varying these weights were examined and are noted below.

Expenditure on in-kind benefits –health and education – is attributed directly to individuals. Health expenditure is attributed using demographic per capita expenditure profiles provided by the Ministry of Health. Education expenditure is based on total government spending on particular types of education. For example, primary and secondary education is decomposed into government spending on each schooling year or age. Those people in the HES who are in that type of education and who match the additional characteristics, such as age, are allocated the government expenditure appropriate for their education.[11]

Finally, the incidence of indirect taxes is modelled. Indirect taxes included in this study are GST and fuel, alcohol and tobacco excises and customs duties. Information on indirect taxes is obtained from expenditure data which are available in the HES at a household level. Therefore these are first attributed from the household to the family and then further attributed to people within the family depending on their assumed consumption needs and age.[12] GST and fuel excises are attributed in the same manner as family disposable income. However, alcohol and tobacco excises are divided equally among only those who are 18 years of age or over.

The age-based incidence analysis depicts the distribution of tax, spending and income at various dates between 2010 and 2060. As explained above, it does not attempt to project each individual's life-course nor does it model behavioural or structural changes. It applies calibrated sample weights to investigate how the relative distribution of tax, spending and income will change across age groups as the demographic profile of New Zealand evolves.The analysis imposes the projected demographic and labour force participation profile of New Zealand for the years 2020, 2030, 2040, 2050 and 2060 on data from 2009/10. As incomes of individuals are not projected into the future, no assumptions about wage growth or productivity changes are required.[13] Current consumption patterns are assumed to hold throughout the projection period.

The tax and welfare settings are for the system in the year 2009/10. Relativities between benefits and NZS are held constant at their 2009/10 levels.[14] This is the most recent comprehensive cross-sectional dataset available on New Zealand households' income and expenditure.

Some results are reported below using total household income per adult equivalent person as the income measure. For convenience the equivalence scales used are the same as the modified OECD scales mentioned above (although sensitivity analyses were also carried out).