Abstract
This paper examines the simulated labour supply responses to the personal tax and transfer policy changes introduced in New Zealand in 2010, and the implications for revenue and income distribution. The main changes examined are the increase in the Goods and Services Tax (GST) rate from 12.5% to 15%, along with reductions in personal income tax rates and increases in the main benefit payments and assistance to families with children, to compensate for the rise in the GST. The simulated labour supply responses were obtained using the Treasury's behavioural microsimulation model, TaxWell-B. The 2009/10 Household Economic Survey was used. The combined effect of all policy changes is to increase average labour supply slightly for all demographic groups, with a weighted average increase of 0.10 hours per person. The average hours increase is the largest for single parents, at 0.33 hours per person. Labour force participation of sole parents is simulated to increase by 0.86 percentage points. In considering separate components, the change in income tax rates is found to have the largest effect on labour supply. This is not surprising, given that it affected a large proportion of the population while the changes to the benefit system and assistance to families with children apply only to certain groups. The reforms are found to be approximately distribution neutral, in terms of the Gini inequality measure of after-tax income per adult equivalent person.
Highlights
In October 2010, several policy changes were implemented to the New Zealand personal tax and social security system, as part of a larger package of tax reforms, including changes to corporation tax, excise taxes and depreciation rules
This paper examines the simulated labour supply responses to the personal tax and transfer policy changes made in New Zealand in 2010, along with the implications for revenue and income distribution
The results presented in this paper were obtained using the Treasury’s behavioural microsimulation model for New Zealand, TaxWell-B
Summary
This paper examines the simulated labour supply responses to the personal tax and transfer policy changes made in New Zealand in 2010, along with the implications for revenue and income distribution. The results presented in this paper were obtained using the Treasury’s behavioural microsimulation model for New Zealand, TaxWell-B This model examines only the supply side of the labour market, so that the simulated labour supply responses make no allowance for the demand side, or possible consequences for wage rates. It is estimated that the policy changes produced a small increase in average hours of work supplied, and a small increase in participation rates. Earlier Treasury estimates were based on the use of average hours and participation elasticities of labour supply, with respect to an increase in the net-of-tax wage rate, for each of a number of demographic groups. An analysis of the inequality of income per adult equivalent person (after allowing for income tax and benefit payments) found that the personal tax changes were approximately distribution neutral in their overall effect
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