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A microsimulation analysis of marginal welfare-improving income tax reforms for New Zealand

Author

Listed:
  • John Creedy

    (Victoria University of Wellington)

  • Norman Gemmell

    (Victoria University of Wellington)

  • Nicolas Hérault

    (University of Melbourne)

  • Penny Mok

    (Ministry of Business, Innovation and Employment (MBIE))

Abstract

This paper examines the direction of welfare-improving income tax reforms in the context of New Zealand, which recently reduced its top marginal income tax rate to one of the lowest in the OECD. A behavioural microsimulation model is used, in which social welfare functions are defined in terms of either money metric utility or net income. The model allows for labour supply responses to tax changes, in which a high degree of population heterogeneity is represented along with the details of the highly complex income tax and transfer system. The implications of the results for specific combinations of tax rate or threshold changes that are both revenue neutral and welfare improving are explored in detail, recognising the role of distributional value judgements. Results suggest, under a wide range of parameter values and assumptions, that raising the highest income tax rate and/or threshold would be part of a welfare-improving reform package.

Suggested Citation

  • John Creedy & Norman Gemmell & Nicolas Hérault & Penny Mok, 2020. "A microsimulation analysis of marginal welfare-improving income tax reforms for New Zealand," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 409-434, April.
    • Handle: RePEc:kap:itaxpf:v:27:y:2020:i:2:d:10.1007_s10797-019-09558-5
    DOI: 10.1007/s10797-019-09558-5
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    Cited by:

    1. Nazila Alinaghi & John Creedy & Norman Gemmell, 2021. "Designing Personal Income Tax and Transfer Reforms: Alternative Modelling Approaches," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(4), pages 445-461, December.
    2. Gemmell, Norman, 2021. "Economic Lessons for Tax Policy Advisers," Working Paper Series 21109, Victoria University of Wellington, Chair in Public Finance.
    3. Gemmell, Norman, 2021. "Economic Lessons for Tax Policy Advisers," Working Paper Series 9463, Victoria University of Wellington, Chair in Public Finance.
    4. Alain Babatounde & Bart Capeau & Romain Houssa, 2023. "Welfare effects of indirect tax policies in West Africa," DeFiPP Working Papers 2301, University of Namur, Development Finance and Public Policies.

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    More about this item

    Keywords

    Optimal taxation; Tax reform; Behavioural microsimulation; Social welfare function; Money metric utility;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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