Source: The Treasury
The Treasury published three papers today on its research into the effective tax rate of all New Zealanders across the income and wealth distributions.
This note uses scenario analysis to demonstrate the value in estimating more comprehensive effective average tax rates (EATRs). Scenario analysis cannot reveal the full distribution of our more comprehensive EATRs, so the author presents a prototype extension to the TAWA microsimulation model that can measure them across the income and wealth distributions. In total, the author developed nine increasingly comprehensive EATR measures. Starting with personal income taxes, the author then adds further taxes, transfers, and income types. This iterative approach allows us to isolate the effect of adding each income or tax type on the overall EATR.
This note includes novel methods to estimate the distribution of capital gains and imputed rents. These methods will remain experimental. They rely upon Household Economic Survey (HES) net worth data and are therefore unlikely to provide an accurate picture of EATRs at the top of the income or wealth distributions. In this regard, Inland Revenue’s High Wealth Individual Research Project provides separate, complementary EATR estimates for New Zealand’s wealthiest families.
The authors modelled more comprehensive EATRs that measure the combined effect of multiple taxes and transfers against a broad definition of economic income.
The modelling is based on Household Economic Survey (HES) wealth, income and expenditure data from 2018 and 2019. HES provides a rich source of distributional data for New Zealand, but it is limited in its ability to accurately measure the top of the wealth, expenditure and income distributions. The authors find that the degree of progressivity is heavily reliant upon which taxes and income types are included:
- 1) For a narrow definition (EATR1) they find the expected progressive trend across the taxable income distribution. However, when ordered by net worth the trend appears less progressive, which reflects the imperfect correlation between wealth and taxable income (ie, some people with high wealth may have lower taxable incomes.)
- 2) Including transfers as a ‘negative tax’ (EATR2) makes the EATR trend appear more progressive. The authors find the bottom third of the income distribution have negative EATRs. By contrast, transfers appear more evenly spread across the wealth distribution because transfer payment eligibility does not tend to be contingent on wealth. The treatment of transfers as a ‘negative tax’ also creates a divergence between the mean and median, which demonstrates a high degree of EATR variability for any given level of income or wealth.
- 3) PIE taxes, the ACC levy, and local body rates have a relatively minor effect on both the income and wealth distribution of EATRs.
- 4) Incorporating accrued annual capital gains into the definition of income lowers EATRs and reduces progressivity.
- 5) Incorporating imputed rents (the value of rent a homeowner would need to pay to rent their own house) shifts most EATRs towards zero but does not significantly alter progressivity.
- 6) GST is slightly regressive when examined across the expenditure distribution. GST appears more regressive against the income distribution, which is due to the higher rates of saving and lower rates of borrowing at the top of the income distribution and vice versa.
- 7) The most comprehensive EATR (EATR9) appears broadly progressive by income distribution, except for the top 5% where the median EATR declines when using 1-year capital gain rates. When ranked by wealth the median EATR9 is progressive in the first half of the distribution, but regressive in the second half. Again, the mean EATR diverges from the median when ranked by wealth and shows a more progressive trend. Any regressivity is exaggerated by the absence of company and trustee taxes in our model. However, the Inland Revenue Project includes company and trustee taxes in their measures, allowing comparisons to be made between the EATRs for ‘middle’ New Zealanders and the high-wealth population.
- 8) The most comprehensive definition of income indicates greater pre-tax income inequality in New Zealand (Gini coefficient between 46 and 48) than a measure that is based solely on personal taxable income (Gini coefficient around 44).
This paper develops a taxable income capitalisation method for estimating the distribution of wealth in New Zealand, termed “the New Zealand capitalisation method”. The method combines Inland Revenue taxable income administration data with Stats NZ’s Household Balance Sheet to give new estimates of the distribution of New Zealand individuals’ wealth. The paper presents results for 2010, 2015, and 2018, and compares these distributions with those recorded by the Household Economic Survey (HES) 2018. The method allows wealth estimates of smaller groups than can be reliably obtained through the HES, including estimates of the wealth held by the top 0.1% of the wealth distribution. The results suggest more wealth at the top of the distribution than estimated by the HES, which is consistent with similar work internationally. The New Zealand capitalisation method also suggests that wealth shares at the top of the distribution fell between 2010 and 2018, while at the same time the greatest increase in average wealth went to the top of the distribution.
