Formats and related files
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.
Key insights #
This Analytical Note examines how New Zealand’s tax and transfer system affects financial incentives to work, using Effective Marginal Tax Rates (EMTRs) as the main measure. EMTRs show how much of each additional dollar earned is lost through taxes and benefit reductions. We use the Treasury’s TAWA microsimulation model to look at the EMTRs of New Zealand families, comparing our empirical results with example families to understand situations where people face high EMTRs.
High EMTRs are an unavoidable feature of any targeted welfare system that aims to support those most in need while managing government costs. The key policy question is then not whether to have high EMTRs, but rather which groups should face them and at what income levels they should occur (Binder & Rosen, 1985).
Key findings include:
- Most New Zealanders (94%) face EMTRs below 50%, with only 6% experiencing EMTRs over 50%. However, the distribution of EMTRs varies significantly across different family types.
- Families without children generally experience lower EMTRs and therefore higher work incentives, as they are less likely to receive government support payments that reduce with increases to income. Around 90% of these families have EMTRs at their marginal tax rate.
- In contrast, many families with children face much higher EMTRs and lower work incentives, particularly single-parent families. These high EMTRs come from a combination of factors including income tax and reductions in benefit, Working for Families[1] tax credits, and Accommodation Supplement. 13% of couple-parent families and 30% of single-parent families have EMTRs greater than 50%.
- A small number of families have EMTRs higher than 100%, and these are all families with children.
| Family Type | Proportion who have… | |||
|---|---|---|---|---|
| EMTRs < 25% | EMTRs between 25% and 50% |
EMTRs > 50% | EMTRs at their marginal tax rate + ACC levy |
|
| All | 41% | 53% | 6% | 85% |
| Single person | 57% | 42% | 1% | 89% |
| Couple without children | 40% | 58% | 2% | 93% |
| Sole Parent | 44% | 25% | 30% | 51% |
| Couple Parent | 20% | 67% | 13% | 70% |
This analysis highlights the complex interplay between various elements of the tax and transfer system in New Zealand. It demonstrates that most people keep a reasonable amount of their additional earnings when they work more hours, but parents—especially single parents—often face significant financial penalties for working more. These findings provide valuable insights into the structure of New Zealand's welfare system and its potential impacts on labour market participation across different demographic groups.
Note
- [1] Working for Families includes the Family Tax Credit, In-Work Tax Credit, Minimum Family Tax Credit, and Best Start Tax Credit.