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The Elasticity of Taxable Income in New Zealand

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  • Iris Claus
  • John Creedy
  • Josh Teng

    ()
    (The Treasury)

Abstract

This paper reports estimates of the elasticity of taxable income with respect to the net-of-tax rate for New Zealand taxpayers. The relative stability of the New Zealand personal income tax system, in terms of marginal rates, thresholds and the tax base, provides helpful conditions for deriving these estimates. 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.

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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 12/03.

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Length: 41
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:nzt:nztwps:12/03

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Keywords: Income taxation; Taxable income; Elasticity of taxable income; Excess burden of taxation.;

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References

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  1. John Creedy & Nicolas Hérault & Guyonne Kalb, 2011. "Measuring welfare changes in behavioural microsimulation modelling: Accounting for the random utility component," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 5-34, May.
  2. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  3. Lewis Evans & Arthur Grimes & Bryce Wilkinson, 1996. "Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1856-1902, December.
  4. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  5. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  6. Giertz, Seth, 2004. "Recent Literature on Taxable-Income Elasticities," MPRA Paper 16159, University Library of Munich, Germany.
  7. John Creedy & Nicolas Hérault & Guyonne Kalb, 2007. "Comparing Welfare Change Measures with Income Change Measures in Behavioural Policy Simulations," Melbourne Institute Working Paper Series wp2007n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  8. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
  9. A. B. Atkinson & Andrew Leigh, 2008. "Top Incomes In New Zealand 1921-2005: Understanding The Effects Of Marginal Tax Rates, Migration Threat, And The Macroeconomy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 149-165, 06.
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Cited by:
  1. Simon Carey & John Creedy & Norman Gemmell & Josh Teng, 2013. "Regression Estimates of the Elasticity of Taxable Income and the Choice of Instrument," Treasury Working Paper Series 13/08, New Zealand Treasury.
  2. John Creedy & Norman Gemmell, 2013. "Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors," International Tax and Public Finance, Springer, vol. 20(6), pages 974-991, December.
  3. Creedy, John, 2013. "The Elasticity of Taxable Income, Welfare Changes and Optimal Tax Rates," Working Paper Series 2875, Victoria University of Wellington, Chair in Public Finance.
  4. John Creedy, 2013. "Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures," Treasury Working Paper Series 13/24, New Zealand Treasury.
  5. John Creedy & Norman Gemmell, 2011. "Tax Rates and Revenue Changes: Behavioural and Structural Factors," Treasury Working Paper Series 11/05, New Zealand Treasury.

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