The Welfare Cost of Taxation in New Zealand Following Major Tax Reforms

The welfare cost of taxation of labour income is the economic loss to employees over and above the taxation revenue acquired by the government. This article estimates total welfare cost in 1986 and 1988 in New Zealand, and also estimates marginal welfare cost and related measures of marginal excess burden for a hypothetical marginal tax reform prior to and following the major discrete reforms of 1986. Estimated welfare costs are generally higher in the post-reform period despite a significant reduction in the progressivity of the statutory personal income tax schedule, the effect of the uniform goods and services tax introduced at that time serving to raise the weighted average effective marginal tax rate. As with recent estimates for the U.S., estimated welfare costs for New Zealand are sensitive to labour supply elasticity parameters, and are higher than for the U.S. Part of this difference, however, is shown to depend on our use of disaggregated income data.