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Staff and teams are writing in their individual capacity and the views in this paper are not necessarily a “Treasury” view. Please read our disclaimer. This work makes use of Stats NZ’s Integrated Data Infrastructure (IDI), please also read the IDI disclaimer.
Supplementary material supporting this report can be accessed at the following GitHub address: https://github.com/Treasury-Analytics-and-Insights/analytical-note-24-09-fiscal-incidence-and-inequality-by-age
Executive summary#
In this analytical note we report results of a calculation of the final incomes of individuals in New Zealand in tax year 2018/19. An individual’s final income, like their disposable income, adds any income support payments they receive to their market income (from their wage or salary and investments), while accounting for the direct taxes they pay. However, final incomes go beyond this by incorporating both the value of government spending on social services that individuals receive and the indirect taxes they pay on their consumption. The final income concept thus offers a more comprehensive picture of an individual’s income and living standards than is provided by analyses of their market or disposable income alone.
We apply a sharing rule to account for the distribution of disposable incomes and indirect taxes such as goods and services tax (GST) within families and households. Combining these shared incomes and taxes with estimates of in-kind spending on education and health services that individuals receive yields their final incomes.
We present results for the average market, disposable, and final incomes of individuals in five-year age groups and quantify the inequality of the distribution of each of these income types in each group by their Gini coefficients. Our analysis also covers the various tax and spending components that contribute to final incomes, and the net fiscal impacts of these components, across the age range. We further consider the distributions of the three income concepts over age groups in four distinct family types. These estimates provide a characterisation of the effects of fiscal policies on the incomes of individuals across the course of their lives.
We find the following key results:
- Income support payments, taxes, and in-kind social services spending result in a profile of final income across an individual’s lifetime that is much flatter than that of their market income. The contributions of indirect taxes and in-kind spending have the largest effects on the final incomes of the youngest and oldest individuals in the population, due primarily to spending on education services, and on health services and New Zealand Superannuation payments, respectively.
- The average net fiscal impact on individuals is positive for children and youth, and for individuals at or past the age of eligibility for New Zealand Superannuation. Throughout the primary working years, this average impact is negative, as individuals pay more in taxes than they receive in income support payments and social services.
- Final income inequality among older individuals is substantially reduced by income support payments, taxes, and in-kind health spending. The inequality of market incomes increases markedly with age in the senior years, but this trend is reversed when disposable and final incomes are considered. In the prime working age range, disposable income inequality gradually increases with age, and final income inequality follows this trend at a slightly lower level.