Effective Tax Rates on Capital in New Zealand - Changes 1972-1998 (WP 99/12)

Abstract#

Effective tax rates (rather than statutory tax rates) on capital assets can give us an idea of the level of distortion imposed on investment by the tax system. This paper describes a study of effective tax rates on different types of capital assets in New Zealand using the King-Fullerton methodology. While the usual caveats of the application of King-Fullerton methodology apply, a clear story emerges from the data. The model demonstrates the severely negative impact of inflation, especially under the old tax regime and at the high rates of inflation seen in the late 1970s and 80s. By comparison, the current tax system is shown to be rather consistent across different types of capital assets and means of financing. The low inflation of the past few years has contributed to the improvement, but this study shows that the new tax regime performs better even under equalised circumstances (e.g. zero inflation) for the whole period under consideration.