This article reports estimates of a number of personal marginal income tax rate measures for New Zealand since 1907, focusing primarily on the total income-weighted average MTRs proposed by Barro and Sahasakul and Barro and Redlick (2011). The estimates cover about a century of New Zealand's personal income tax regime, from 1907 to the present day.
Sources of Government Revenue
Subsection 2.1 begins by placing income tax in the context of New Zealand's overall revenue collection regime of which income tax was initially only a small part. Unsurprisingly, the First World War saw a significant increase in the personal income tax share, with some of this prevailing again in the 1920s.
Tax Rate Definitions
Such independence is required to reliably measure the response of income to an exogenous marginal tax rate change. For example, is the investigator interested in the response of income, or of consumption, or of anything else, to changes in marginal tax rates.
The New Zealand Personal Income Tax
Here βτ represents the EMTR impact of the “additional tax” levied on the total income tax. Top statutory tax rate 'Additional' income tax Addition due to 'multi-slope function' Social security charges.
Income Data
We have been able to identify data from the early 1900s to the early 1980s, and over this period the data presented in the NZOYBs has evolved. Instead, we have used AMTRs estimated from more reliable unit registration data by the Inland Revenue for the period, and we examine a three-year overlap as a cross-check of the alternative approaches.
Exemptions Data
Non-Filer Incomes
Within our data set, this includes the Depression of the 1920s and 1930s, when large falls in personal incomes reduced the number of those required to file. Therefore, we estimate the ratio of total personal income, Y, to GNP in the census years (signed 'c'), Yc,/GNPc, and use the interpolated (signed 'i') values of this ratio and the annual GNP values of Yi to estimate countless years. Together with our estimates of the total income of filers, Y(F)i, we can estimate the incomes of non-filers, Y(N), in the non-census years for these years as Y(N)i = Yi - Y(F) i.
The resulting time series for the ratio of filers to total income and the breakdown of total income into filer/non-filer categories are shown in Appendix 4, Figures A3 and A4, respectively. These suggest a plausible but fluctuating decline in the extent of non-filers' incomes, reaching less than 4% of total personal incomes in 1951.
Applying the Barro-Sahasakul Approach
However, another taxpayer with the same $50,000 gross income but $12,000 in exemptions will face a different MTRj - one that applies to net income below $40,000. Therefore, we must subtract the exemptions from gross (assessable) income to derive net (assessable) income in order to identify the relevant MTRj or EMTRj for each taxpayer. However, with gross assessable income data and exemptions at the aggregate level, rather than at the individual level, by gross income group, we do not know how many taxpayers (and the corresponding share of gross income) would face a lower marginal tax rate than would be inferred. from their gross income.
Instead, we (i) assume that the effect of the exceptions is to shift individuals by at most one MTRj band; and (ii) apply the ratio of the total exemptions to the gross assessable income in each range for the MTRj weight for each range, m.
Examples of AMTR calculations
In principle, non-filing income is also added before estimating gross income shares in line 6, although, as noted above, this does not matter after 1958. This adjustment has a particularly large impact at the bottom of the income distribution; for the £200-£300 bracket, the effective tax rate drops from 21%, previously. 15 Data on earned income were collected up to 1956, but earned and unearned income were the same tax rate from 1951 to 1956.
That is, the availability of exemptions moves a large proportion of taxpayers to the 0% tax rate applied to net income up to £200. Using the tax structure and income distribution information discussed in the previous sections, this section discusses the estimated values obtained using the methods described previously – subsection 5.1.
The Overall pattern of AMTRs
Because the relationship between exempt and non-declaration income is important for these calculations, it is discussed in section 5.2. Subsection 5.3 then uses a decomposition of AMTRs to assess the extent to which changes in tax structure and income levels or distribution explain the observed movements in AMTRs over time. After peaking at around 47% in the early 1980s, a substantial decline in AMTR is occurring, partly related to the well-known reforms of the 1980s, although it began before the major reform years of the mid-1980s and 1990 fell to about 30%.
In each of these cases, changes in the tax structure in 1962 brought about an increase in the initial level of income subject to the 0% marginal tax rate, affecting the proportion of taxpayers potentially affected by a lower MTRj to get. However, the year-on-year changes in the two series are largely unaffected by the adjustments.
Relationships between Exemptions, Non-Filed Incomes and AMTRs
As mentioned above, for an (unknown) fraction of taxpayers, this will lower the statutory marginal tax rate they face. Finally, the AMTR calculations described here exclude the impact of GKB levies, the Benefit System and the Family Tax Credit (FTC) system which, at various times since the 1970s, involved lump sum transfers to lower income families with children withdrawn at higher incomes. income levels at rates of up to 30c/$, thereby contributing to effective MTRjs.
Decomposing Changes in the AMTRs
This reveals that the increase in AMTR largely occurred in connection with an increase in. It can be seen that both changes in the share of taxpayers in total income, t'1dw'1, and changes in 'average' non-zero MTRjs, w'1dt'1, is positively correlated with annual changes in AMTR. The positive cross-correlation between, w'1dt'1 and t'1dw'1 reveals that this has a greater effect on AMTR than the change in income weight, t'1dw'1.
By itself, the change in income weighting (between taxed and untaxed income) within the AMTR calculation had relatively little effect. The data underlying these correlations can be seen in Figure 9, which plots the annual change in AMTR (right axis) and the unweighted average non-zero EMTRjs (left axis).
Earned vs. Unearned Income
This reveals that EMTRj remain relatively unchanged for many years (generally because statutory rates are unchanged), while AMTR changes - due to changes in income levels/distribution, changes in thresholds, exemptions, etc. it was no longer relevant for tax purposes, but Statistics New Zealand continued to collect data separately. For this period, the difference between the two AMTRs—on the order of 5 to 6%—reflects solely the different distribution of earned and unearned income.
The Effect of Family Tax Credits, Benefits and ACC
EMTRjs, and the total AMTR, of the combined FTC, Benefit and ACC (Accident Compensation Corporation) systems. Calculating the income-weighted AMTR for income tax, FTC, ACC and Benefits combined yields an AMTR of 34.7% compared to 31.3%. That is, at the aggregate level, the impact of the FTC, welfare benefits and ACC on the AMTR is about 3 percentage points.
The table shows EMTRjs for FTC and benefits of and 70% and above, with taxpayers facing 0% accounting for the lion's share of total income, but with about 8% of taxpayers by share of income facing 20% EMTRjs ( except for their income tax MTRj). The last row of Table 5 shows the contributions to the AMTR, with the FTC adding the largest element to the overall AMTR (1.7%) with a combined 3.4 percentage points added to the AMTR for income taxes.
Reliability of AMTR Estimates
Our approach to producing income-weighted AMTRs was largely dictated by the availability of data – New Zealand Statistics on Income Distribution and Taxation data for 1907–1981 and tax unit tax unit record data with a 3-year overlap period as a cross-check). We have combined income tax schedule data, taking into account income tax rates, thresholds, exemptions, etc., with data on income distribution and exemptions from Statistics New Zealand's official yearbook, the Income and Income Tax Report¸ and Census New Zealand. Since the early 1980s, the AMTR has declined significantly, partly related to the later reforms of the 1980s, reaching below 30% by 1990.
1999) Taxes and poverty in New Zealand The impact of the tax and benefit system on low income New Zealanders. New Zealand Tax Review Committee (1967) Taxation in New Zealand: Report of the Tax Review Committee, ("Ross Report"), October 1967.
The NZ ‘Multi-Slope’ Income Tax System 1914-1939
The slope is compounded when the tax-free threshold, a1, is lowered, as happened in the period 1917-1935. Most income earners did not earn enough income during this period to cross the tax-free threshold – according to our estimates (see below), only about 10% of employees were taxable and not all were assessed as taxable (for example, if their taxable income was below £ 300 drops). The tax structure described above also applied in 1917, with an exemption of £300 for all taxpayers whose income was less than £600.
Thereafter, the exemption was withdrawn at a rate of £1 for every additional £1 earned; i.e. the exemption is zero for incomes above 900. Then, for incomes above 6400, there is no longer any increase in τ* as incomes rise, that is, d τ*/dy = 0 and this element of the MTR calculation in drops out .
Income Distribution Data
Certain types of non-taxable (and therefore non-taxable) income, such as war pensions and Social Security benefits, were not included in the NZOYB income data. This appendix briefly outlines how we quantify the size of the income of non-submitters that are not sufficiently captured in the NZOYB data. The number of individual NZOYB taxpayers was subtracted from the total number of employees to get an estimate of the total number of non-filers.
A distribution of the population by income, from NZ censuses, was used to estimate the average annual income level of non-filers – who are predominantly low income earners. The estimated average revenue above is multiplied by the estimated number of non-filers, giving the total revenue generated by non-filers.
Exemptions Data
Estimating Non-filers’ Incomes
Additionally, for the purpose of estimating the average income of non-filers, earners above the low-income exemption are also excluded from our calculation. The weighted average income of non-declarants was estimated by multiplying the midpoint of each income group (assumed to include non-declarants) by the corresponding weight that each selected group contributed to the total sample population. While income increased over time overall, fewer taxpayers fell into the non-filing bracket leading to a lower amount of non-filing income.
To estimate the number of non-submitters in years between censuses, we follow the approach of Barro and Sahasakul (1983), who suggest that the ratio of non-submittors' income to total income fluctuated during different economic conditions, such as the depression in the thirties. However, between 1945 and 1951, this produces an estimated negative amount of non-petitioner income in some intervening years.
