Abstract
This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The elasticity of taxable income was estimated to be substantially higher for the highest income groups. Generally it was higher for men than for women. Changes in the timing of income flows for the higher income recipients were found to be an important response to the announcement of a new higher-rate bracket. The marginal welfare costs of personal income taxation were consistent across years, being relatively small for all but the higher tax brackets. For the top marginal rate bracket of 39 per cent, the welfare cost of raising an extra dollar of tax revenue was estimated to be well in excess of a dollar. Furthermore, for the top bracket the marginal tax rate was often found to exceed the revenue-maximising tax rate.
Highlights
This paper reports new estimates for New Zealand of the elasticity of taxable income with respect to the marginal net-of-tax rate
The numerator is expected to be negative, since those people moving into a higher tax bracket, are likely to respond to the higher tax rate by modifying the increase in their declared taxable income
This paper has provided estimates for New Zealand of the concept of the elasticity of taxable income, with respect to changes in the net-of-tax marginal tax rate
Summary
This paper reports new estimates for New Zealand of the elasticity of taxable income with respect to the marginal net-of-tax rate. This has remained relatively stable since the middle 1990s.
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