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The Built-in Flexibility of Income and Consumption Taxes in New Zealand

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Author Info
John Creedy ()
Norman Gemmell () (The Treasury)

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Abstract

This paper provides estimates of individual and aggregate revenue elasticities of income and consumption taxes in New Zealand, based on the 2001 tax structure and expenditure patterns. Using analytical expressions for revenue elasticities at the individual and aggregate levels, together with a simulated income distribution, values for New Zealand were obtained. Results using equi-proportional income changes suggest that the aggregate income and consumption tax revenue elasticities are both fairly constant as mean income increases, at around 1.3 and 0.95 respectively. This latter estimate assumes that increases in disposable income are accompanied by approximately proportional increases in total expenditure. If there is a tendency for the savings proportion to increase as disposable income increases, a somewhat lower total consumption tax revenue elasticity, of around 0.9, is obtained for 2001 income levels. However, non-equiproportional income changes are more realistic. Allowing for regression towards the geometric mean income reduces these elasticities, giving an elasticity for income and consumption taxes combined that is only slightly above unity. Examination of the tax-share weighted expenditure elasticities for various goods also revealed that, despite the adoption of a broad based GST at a uniform rate in New Zealand, the persistence of various excises has an important effect on the overall consumption tax revenue elasticity, especially for individuals at relatively low income levels.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-05/twp03-05.pdf
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Publisher Info
Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 03/05.

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Length: 22 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:nzt:nztwps:03/05

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Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
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Web page: http://www.treasury.govt.nz
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Related research
Keywords: Tax Revenue; Elasticity; Budget Shares;

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Find related papers by JEL classification:
H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

References listed on IDEAS
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  1. Paul Johnson & Peter Lambert, 1989. "Measuring the responsiveness of income tax revenue to income growth: a review and some UK values," Fiscal Studies, Institute for Fiscal Studies, vol. 10(4), pages 1-18, November.
  2. John Creedy & Norman Gemmell, 2003. "The Revenue Responsiveness of Income and Consumption Taxes in the UK," Manchester School, University of Manchester, vol. 71(6), pages 641-658, December. [Downloadable!] (restricted)
    Other versions:
  3. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD, Economics Department. [Downloadable!]
  4. John Creedy & Norman Gemmell, 2001. "The Revenue Elasticity of Taxes in the UK," Melbourne Institute Working Paper Series wp2001n11, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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