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6 Conclusions

This paper has used projections, over the next 50 years, from two separate models, dealing with social expenditures and income tax and GST revenue. The emphasis was on the question of whether projected aggregate tax revenue changes in association with population ageing can be expected to finance projected increases in social welfare expenditures. Important policy settings in the models concern the indexation of benefits and income tax thresholds. If benefits are indexed to wages, the results suggest that the modest projected required increase in the overall average tax rate over the next 50 years can be achieved automatically by adjusting income tax thresholds using an index of prices rather than wages. Based on evidence about the New Zealand tax system over the last 50 years, comparisons of average and marginal tax rates suggested that such an increase may be feasible and affordable. However, in making a policy choice regarding such a limited use of fiscal drag, rather than other fiscal policy adjustments, many considerations are relevant. The paper discussed some of the elements involved, but a more extensive, rigorous comparison of each alternative policy option would be required prior to any specific policy reform recommendations.

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