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How ageing and other economic factors have impacted New Zealand’s tax system

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Abstract

Population ageing, income growth, and individuals shifting income into companies and trusts has materially changed New Zealand’s tax bases and revenue. We provide indicative analysis of these trends and four main insights: (1) An ageing population may result in an increase in GST revenues as older households spend their saved earnings. This could shift our tax base towards indirect taxes, however the size of this is relatively small. In addition, this result critically relies on assuming no behaviour change from households due to ageing. (2) On the other hand, there have been material behavioural changes. We show that there has been a rise in the ‘labour’ share of our personal tax base that is likely due to rising labour force participation, particularly by older individuals. We also show how, absent this rise in labour income from rising participation, an ageing population would have increased the ‘capital’ share of our personal tax base. (3) Fiscal drag has been significant as income growth moved more income into higher personal tax brackets. From 2011 to 2023, fiscal drag led to personal tax revenues rising by 1.6% of GDP. The distributional impact of fiscal drag is uneven and the full impact on New Zealanders depends on how the revenue is used. However, in the future, if fiscal drag continues, it’s likely to increasingly impact lower income individuals. (4) Taxpayers appear to have responded to gaps between the top personal tax rate and the entity tax rate by shifting more of their income into companies and trusts. This had a material and growing fiscal impact. The risk of sheltering in trusts has largely been removed with the alignment between top personal tax rate and trustee rate in 2024. However, there appears to have been growing sheltering in companies, indicating a potential shift in risk. We also show how this sheltering may explain some of the apparent rise in labour income for individuals as capital income is sheltered in these entities. Whether these trends continue in the future is uncertain. Our analysis shows that behavioural responses by taxpayers as well as future policy choices are key drivers of our tax bases and revenue. We hope the note highlights areas to have continued attention and vigilance.

Suggested Citation

  • Shane Domican & Sijin Zhang, 2025. "How ageing and other economic factors have impacted New Zealand’s tax system," Treasury Analytical Notes Series an25/07, New Zealand Treasury.
    • Handle: RePEc:nzt:nztans:an25/07
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    References listed on IDEAS

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    1. Gemmell, Norman, 2020. "New Zealand's Tax Reforms and 'Tax Sheltering' Behaviour," Working Paper Series 9367, Victoria University of Wellington, Chair in Public Finance.
    2. Gemmell, Norman, 2020. "New Zealand's Tax Reforms and 'Tax Sheltering' Behaviour," Working Paper Series 21095, Victoria University of Wellington, Chair in Public Finance.
    3. Ezra Oberfield & Gene M. Grossman, 2022. "The Elusive Explanation for the Declining Labor Share," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 93-124, August.
    4. Benjamin Ching & Tayla Forward & Oscar Parkyn, 2023. "Estimating the Distribution of Wealth in New Zealand," Treasury Working Paper Series 23/01, New Zealand Treasury.
    5. David Crowe & Jörg Haas & Valentine Millot & Łukasz Rawdanowicz & Sébastien Turban, 2022. "Population ageing and government revenue: Expected trends and policy considerations to boost revenue," OECD Economics Department Working Papers 1737, OECD Publishing.
    6. Germán Gutiérrez & Sophie Piton, 2020. "Revisiting the Global Decline of the (Non-housing) Labor Share," American Economic Review: Insights, American Economic Association, vol. 2(3), pages 321-338, September.
    7. John Creedy & Norman Gemmell, 2014. "Can fiscal drag pay for the public spending effects of population ageing in New Zealand?," New Zealand Economic Papers, Taylor & Francis Journals, vol. 48(2), pages 183-195, August.
    8. Matthieu Gomez, 2025. "Macro Perspectives on Income Inequality," Journal of Economic Perspectives, American Economic Association, vol. 39(2), pages 127-148, Spring.
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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution

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