Average Marginal Income Tax Rates for New Zealand, 1907-2009

McAlis e , Fiona e al. Wo king Pape A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 New Zealand T easu y Wo king Pape , No. 12/04 P o ided in Coope a ion wi h: The T easu y, New Zealand Go e nmen Sugges ed Ci a ion: McAlis e , Fiona e al. (2012) : A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009, New Zealand T easu y Wo king Pape , No. 12/04, ISBN 978-0-478-39672-0, New Zealand Go e nmen , The T easu y, Welling on This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/205623 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 Fiona McAlis e , Debasis Bandyopadhyay, Robe Ba o, Je emy Couchman, No man Gemmell and Go don Liao N EW Z EALAND T REASURY W ORKING P APER 12/04 S EPTEMBER 2012 T easu y:2417707 2 NZ TREASURY WORKING PAPER 12/04 A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 MONTH / YEAR Sep embe 2012 AUTHOR Fiona McAlis e New Zealand T easu y PO Box 3724 Welling on 6015 NEW ZEALAND Email Telephone [email p o ec ed] 64-4- 917 7022 ACKNOWLEDGEMENTS We a e g a e ul o: Sand a Wa son o he Inland Re enue depa men o unde aking he ax a e calcula ions o 1981-2009, using IR uni eco d da a; Uni e si y o Auckland o hei con ibu ion ia he Resea ch G an #3627069; and Kei h Rankin o he Uni e si y o Auckland o aluable discussions on he his o y o he NZ ax sys em. NZ TREASURY New Zealand T easu y PO Box 3724 Welling on 6008 NEW ZEALAND Email Telephone Websi e [email p o ec ed] 64-4-472 2733 www. easu y.go .nz DISCLAIMER The iews, opinions, indings, and conclusions o ecommenda ions exp essed in his Wo king Pape a e s ic ly hose o he au ho (s). They do no necessa ily e lec he iews o he New Zealand T easu y o he New Zealand Go e nmen . The New Zealand T easu y and he New Zealand Go e nmen ake no esponsibili y o any e o s o omissions in, o o he co ec ness o , he in o ma ion con ained in hese wo king pape s. The pape is p esen ed no as policy, bu wi h a iew o in o m and s imula e wide deba e. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 i Abs ac Es ima es o ma ginal ax a es (MTRs) aced by indi idual economic agen s, and o a ious agg ega es o axpaye s, a e impo an o economis s es ing beha iou al esponses o changes in hose ax a es. This pape epo s es ima es o a numbe o pe sonal ma ginal income ax a e measu es o New Zealand since 1907, ocusing mainly on he agg ega e income-weigh ed a e age MTRs p oposed by Ba o and Sahasakul (1983, 1986) and Ba o and Redlick (2011). The pape desc ibes he me hodology used o de i e he a ious MTRs om o iginal da a on incomes and axes om S a is ics New Zealand O icial Yea books (NZOYB), and discusses he esul ing es ima es. JEL CLASSIFICATION H20; H24 KEYWORDS A e age ma ginal ax a es; New Zealand WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 ii Table o Con en s Abs ac ............................................................................................................................... i Execu i e Summa y ........................................................................................................... 1 1In oduc ion .............................................................................................................. 2 2Pe sonal Income Taxa ion ....................................................................................... 3 2.1Sou ces o Go e nmen Re enue .................................................................................. 3 2.2Tax Ra e De ini ions........................................................................................................ 5 2.3The New Zealand Pe sonal Income Tax ........................................................................ 6 3New Zealand Income Dis ibu ion Da a .................................................................. 9 3.1Income Da a .................................................................................................................... 9 3.2Exemp ions Da a ........................................................................................................... 10 3.3Non-File Incomes ......................................................................................................... 11 4Calcula ing AMTRs – Me hodology ...................................................................... 12 4.1Applying he Ba o-Sahasakul App oach ...................................................................... 12 4.2Examples o AMTR calcula ions ................................................................................... 13 5Income-weigh ed AMTRs: 1907-2009 ................................................................... 14 5.1The O e all pa e n o AMTRs ...................................................................................... 14 5.2Rela ionships be ween Exemp ions, Non-Filed Incomes and AMTRs ......................... 18 5.3Decomposing Changes in he AMTRs .......................................................................... 19 5.4Ea ned s. Unea ned Income ....................................................................................... 23 5.5The E ec o Family Tax C edi s, Bene i s and ACC .................................................... 24 5.6Reliabili y o AMTR Es ima es ...................................................................................... 25 6Conclusions ............................................................................................................ 26 Re e ences ....................................................................................................................... 27 Da a Sou ces .................................................................................................................... 28 Appendix 1: The NZ ‘Mul i-Slope’ Income Tax Sys em 1914-1939 ............................. 29 A1.1 The 1914 ax s uc u e .................................................................................................... 29 A1.2 The 1917 ‘wa - ime’ ax s uc u e ................................................................................... 30 Appendix 2:Income Dis ibu ion Da a ........................................................................... 32 Appendix 3: Exemp ions Da a ........................................................................................ 34 Appendix 4: Es ima ing Non- ile s’ Incomes ................................................................ 37 WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 iii Lis o Tables Table 1 – Income ax a es, 1910-1912 .............................................................................................. 7 Table 2 – The AMTR calcula ions, 1980 ........................................................................................... 13 Table 3 – A e age ma ginal ax a es (in pe cen ), 1907-2009 ......................................................... 17 Table 4 – Co ela ion ma ix o AMTR changes ................................................................................ 22 Table 5 – EMTRjs o amily ax c edi s, wel a e bene i s and ACC ................................................. 24 Table A1 – Aba emen o gene al exemp ion, 1917-1935 ................................................................ 35 Table A2 – Exemp ions by size o income o he 1925/26 income yea .......................................... 35 Table A3 – Es ima ed a e age income o non- ile s om 1926 census da a ................................... 37 Table A4 – Es ima ed non- ile income ............................................................................................. 38 Lis o Figu es Figu e 1 – Go e nmen ax e enue by sou ce, 1903 – 2011 ............................................................. 4 Figu e 2 – Top e ec i e ma ginal ax a es o New Zealand, 1907-2009* ........................................ 9 Figu e 3 – Dis ibu ion o o al and ea ned assessable income, 1925 .............................................. 10 Figu e 4 – Income dis ibu ion and ax s uc u e, 1950 ..................................................................... 14 Figu e 5 – AMTRs o New Zealand 1907-2009 ............................................................................... 16 Figu e 6 – P opo ions o axed, exemp and non- iled income, 1907 – 1983 .................................. 19 Figu e 7 – AMTRs and ax exemp /non- iled income, 1922-1983 ..................................................... 21 Figu e 8 – C oss-plo o AMTR and non-ze o EMTRj a e age, 1922-1983 ...................................... 21 Figu e 9 – Changes in unweigh ed a e ages o EMTRjs and AMTRs, 1922-1983 .......................... 23 Figu e 10 – AMTRs o ea ned and unea ned income, 1922-1956 .................................................. 24 Figu e A1 – Ma ginal and a e age ax a es in he 1914 ax s uc u e ............................................. 30 Figu e A2 – Ma ginal and a e age ax a es in he 1917 ax s uc u e ............................................. 31 Figu e A3 – Ra io o ile s- o- o al pe sonal incomes, 1907-1958 ..................................................... 39 Figu e A4 – Decomposi ion o o al pe sonal income in o ile s/non- ile s, 1907-1958 ..................... 39 WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 1 A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 Execu i e Summa y Es ima es o ma ginal ax a es (MTRs) aced by indi idual economic agen s, and o a ious agg ega es o axpaye s, a e impo an o economis s es ing beha iou al esponses o changes in hose ax a es. Nume ous esea ch pape s es ing o impac s o axes on labou supply, in es men , p oduc i i y o economic g ow h use a a ie y o ax a es applicable a indi idual o agg ega e le els. Fo mac oeconomic le el s udies o he de e minan s o economic g ow h, Ba o and Sahasakul (1983, 1986) p oposed a me hod o calcula e an ‘agg ega e’ a e age ma ginal ax a e (AMTR) aced by pe sonal income axpaye s. This app oach was applied o US da a by Ba o and Sahasakul (1983, 1986), and mo e ecen ly by Ba o and Redlick (2011), o iden i y impac s o ma ginal ax changes on GDP g ow h. These calcula ed a es la gely a oid he endogenei y p oblems o mo e commonly used agg ega e-le el MTRs based on ax e enue da a. This pape adap s he me hodology p oposed by Ba o, Sahasakul and Redlick o de i e a simila agg ega e ma ginal ax a e measu e o New Zealand. This in ol es cons uc ion o an income-weigh ed a e age o indi idual-le el ma ginal ax a es, ha ing i s accoun ed o a ious ac o s ha allow e ec i e, a he han s a u o y, ma ginal ax a es o be es ima ed. We cons uc he AMTR measu e o 1907-2009. Ou app oach is la gely dic a ed by da a a ailabili y – S a is ics New Zealand income dis ibu ion and ax da a o 1907-1981 and Inland Re enue axpaye uni eco d da a o 1981-2009 (wi h a 3 yea o e lap pe iod, 1981-1983 as a c oss-check). We combine da a on he income ax schedule, aking accoun o income ax a es, h esholds, exemp ions e c, wi h da a on he dis ibu ion o incomes and exemp ions om S a is ics New Zealand’s O icial Yea book, Repo o Incomes and Income Taxes, and New Zealand Censuses. These sou ces enable AMTRs o be calcula ed o mos yea s om 1907-1983, wi h a ying deg ees o accu acy. The esul ing AMTR e idence shows ha he na u e o he ax schedule has changed d ama ically o e he pe iod, and he con ibu ion o income weigh ing om di e en income classes o axpaye s has also played a ole. The AMTR se ies a ied subs an ially o e he whole 1907-2009 pe iod, bu wi h a gene ally inc easing end. Unsu p isingly, he AMTR ose especially du ing he wo Wo ld Wa s, ell modes ly in he immedia e a e ma h o wa bu soon s abilised, o ose again quickly he ea e . A e he immedia e pos -WWII educ ion, he AMTR inc ease om a ound 25% in he mid-1940s o a ound 45% by he ea ly-1980s, wi h a majo in e up ion when AMTRs declined in 1961 and, o a lesse ex en , in he ea ly 1970s. F om he ea ly 1980s a subs an ial decline in he AMTR occu s, in pa associa ed wi h he la e ’80s e o ms, eaching unde 30% by 1990. The da a also con i m he small bu sus ained ise in he AMTR ( om 26% in 2000 o 31% in 2008) ollowing he inc ease in he op a e o pe sonal income ax om 33% o 39% in 2000, and he impac o iscal d ag he ea e as income ax h esholds emained ixed in nominal e ms. An Excel sp eadshee con aining all o he main es ima ed ax a es accompanies his pape . WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 2 1 In oduc ion A ocus on ma ginal ax a es (MTRs) is ubiqui ous among s udies o he nume ous economic ou comes ha can be a ec ed by axa ion. The ‘ou comes’ o in e es a e o en a he indi idual axpaye le el; eg, labou supply choices, pe sonal axable incomes, consump ion-sa ings choices, indi idual wel a e cos s. The agg ega ion o hese mic o- le el beha iou s in esponse o MTRs in o mac o-le el ou comes has become an impo an ocus o esea ch in ecen yea s. I includes a now ex ensi e li e a u e on he e ec s o axa ion (and public expendi u e, de ici s, e c) on agg ega e GDP, na ional sa ings, in es men , and o he mac o-le el ou comes. The ecen global inancial c isis in pa icula has p omp ed mac oeconomis s o econside he e ec i eness o o he wise o iscal s imulus packages on GDP and o he mac o a iables, wi h analysis and e idence on his issue domina ing ecen deba e in he US o e he me i s o ax cu s and s imulus spending. Simila ly, o New Zealand, ecen ax and spending e o ms, including changes o key MTRs ha e implica ions o ne iscal injec ions and u u e iscal de ici s. In addi ion, he li e a u e es ing he impac s o iscal policy on longe - un economic g ow h has inc easingly in es iga ed he impo ance o MTRs aced by di e en agen s and ypes o economic ac i i y, and he impac o exogenous changes in public expendi u es.1 Among he di icul ies con on ing hose mac o-le el s udies a e p oblems measu ing he ‘ ue’ ma ginal ax a es o in e es . Lack o sui able da a has o en mean ha ‘implici ’ a e age ax a es a e used, ob ained using ax e enue da a. As a consequence, he endogenous ela ionships among ‘ ue’ ma ginal ax a es, ax bases and GDP - (which oge he de e mine ax e enues) - become di icul o disen angle. Recen ly Ba o and Redlick (2011) ha e p oposed ways o help o e come hese endogenei y conce ns. Fi s , hey es ima e mul iplie e ec s on US GDP o e a long pe iod (1917-2006) and conside bo h axes and public spending simul aneously. Fo he la e hey use public de ence expendi u es and expec ed de ence expendi u es (“de ence news”) o help o e come spending endogenei y. This equi es a numbe o wa episodes o assis wi h iden i ica ion. Second, on he ax side, ollowing me hods de eloped by Ba o and Sahasakul (1983, 1986), hey a gue ha an economy-wide ‘a e age ma ginal ax a e’ (AMTR) using axpaye income sha es as weigh s p o ides a sui able ma ginal ax a e measu e o cap u e he po en ial agg ega e esponses o GDP o changes in indi idual pe sonal ax incen i es. The p esen pape epo s es ima es o a numbe o MTR measu es o New Zealand, ocusing especially on he Ba o and Sahasakul AMTRs o pe sonal income axes. The es ima es co e a ound a cen u y o New Zealand’s pe sonal income ax egime, om 1907 o he p esen . The pape con ibu es o he li e a u e in h ee main a eas. Fi s , we p o ide a comp ehensi e ime-se ies da abase o a ious ma ginal income ax a e a iables o e mo e han 100 yea s. We calcula e e ec i e ma ginal income ax a es by adjus ing o a ious addi ional axes (social secu i y, wa axes e c) and exemp ions. The inclusion o he impac o social wel a e bene i s was beyond he scope o ou analysis; howe e , we ha e p o ided a poin es ima e o 2008. Second, we ex end he limi ed da abase on incomes (a ailable om Inland Re enue om 1981) o include agg ega e le el income da a by income class om 1907 assembled om S a is ical Yea books and o he p ima y sou ces. Thi d, we p opose a me hodology o cons uc a Ba o-Sahasakul ype measu e o AMTRs using he da a a ailable o New Zealand. This da ase has he po en ial o o m a use ul basis om which o answe a numbe o empi ical ques ions ela ing o he ou pu e ec s o iscal policy in New Zealand. 1 Recen con ibu ions include Lee and Go don (2005), and Angelopoulos e al. (2007), Rome o-A ila and S auch (2008), Rome and Rome (2010), Gemmell e al (2011a,b), Bee sma and Guiliudo i (2011), A nold e al (2011), Ramey (2011). WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 3 The pape is o ganised as ollows. Sec ion 2 discusses New Zealand’s pe sonal income ax sys em, pu ing i in his o ical pe spec i e. Sub-sec ion 2.1 begins by pu ing he income ax in he con ex o New Zealand’s o e all e enue- aising egime o which income axa ion was ini ially only a small pa . Since a numbe o ax a e de ini ions a e used h oughou he pape , sub-sec ion 2.2 in oduces hose de ini ions, including he Ba o-Sahasakul AMTR measu e. In iew o he impo an ole o income-weigh ing in he AMTR measu e, sec ion 3 in oduces he a ailable income da a and i s dis ibu ion ac oss income classes o e he pe iod. Sec ion 4 hen desc ibes he me hodology used o cons uc he AMTR se ies o New Zealand, and sec ion 5 p esen s and discusses he AMTR esul s. 2 Pe sonal Income Taxa ion This sec ion i s shows how income axa ion has e ol ed wi hin he New Zealand ax sys em since he beginning o he wen ie h cen u y, in oduces a numbe o ma ginal ax a e de ini ions used la e in he pape , and discusses some key his o ical aspec s o he New Zealand income ax sys em ha a ec calcula ions o he a ious MTR measu es. 2.1 Sou ces o Go e nmen Re enue O e he cou se o New Zealand’s iscal his o y he sou ces o go e nmen e enue ha e changed as he economy has de eloped and he ole o go e nmen inc eased. While axa ion is only one sou ce o go e nmen e enue, i is he mos impo an , hough he p opo ions o expendi u e inanced by axes, cha ges o se ices and bo owing ha e a ied conside ably o e he yea s. The composi ion o ax e enue has changed signi ican ly o e he las cen u y. In he ea ly colonial pe iod i was based hea ily on cus oms and excise du ies; hese accoun ed o mo e han 90 pe cen o ax e enue in 1875-76, wi h he balance being p o ided by s amp du ies. Excise du ies we e cha ged on commodi ies such as alcohol, obacco and suga .2 A ha s age in New Zealand’s his o y cus oms du y ac ed simila ly o a gene al sales ax on commodi ies since a e y high p opo ion o commodi ies was impo ed. In he las yea s o he nine een h cen u y axa ion was ex ended in o wo new a eas: an excise on bee , and axes on land and p ope y. Cus oms and excise du ies emained he p edominan sou ce o e enue, bu om 1891 income was in oduced as a new ax base in he Land and Income Tax Ac . Ne e heless, du ing he ea ly pa o he wen ie h cen u y he go e nmen con inued o ely on cus oms and excise du ies o e enue, and i was no un il he on-se o he Fi s Wo ld Wa (WWI) ha income axes began o con ibu e a subs an ial sha e o o al e enues. These ends can be seen in Figu e 1 which shows he changing composi ion o he ax e enue base om 1903 o 2011.3 Taxes a e spli in o cus oms and excise du ies, pe sonal income ax, company income ax, land ax, es a e and gi du ies, and ‘o he axes’.4 No e ha da a on he e enue sha e o sales and company axes is no a ailable be o e 1950. The Figu e shows ha o e an ex ended pe iod, he sha e o cus oms and 2 See Goldsmi h (2008) o da a on ax e enue sha es du ing he nine een h cen u y om 1840. 3 The igu e uses da a om se e al di e en sou ces. F om 1903 o 1949 da a is aken om New Zealand O icial Yea books. These did no include ca ego ies o company ax o sales ax. F om 1950 o 1979 da a is om he New Zealand Planning Council (1979) and included company and sales ax. F om 1980 o 2011 da a is aken om New Zealand O icial Yea books and he Go e nmen ’s Financial S a emen s. 4 O he axes included: mo o ehicle ees and oad use cha ges, wi hholding axes, gaming du ies and en e ainmen axes. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 10 We assembled NZOYB income da a on indi idual axpaye s ( o example, wage and sala y ea ne s, and sel employed), bu excluding companies. We ocus on he dis ibu ion o income o agg ega e g oss income (be o e exemp ions), agg ega e ea ned and unea ned income, and income ax exemp ions.13 We also used da a on he numbe o ax e u ns iled o es ima e he size o non- iled income (see below). O cou se, a ailable income and ax da a a y in quali y and co e age o e he pe iod o he pe sonal income ax, and we ha e ound no sui able income da a p io o 1907. Appendix 2 discusses he na u e and quali y o he income da a o e a ious sub-pe iods du ing 1907-1983, highligh ing he main me hods and assump ions adop ed. Figu e 3 p o ides an example o how he income dis ibu ion da a a e o ganised, in his case o 1925. I shows o al assessable income, no numbe s o axpaye s, on he e ical axis, wi h income classes on he ho izon al, whe e he class wid hs a e no s anda dised. The dis ibu ion o g oss assessable income is shown wi h sepa a e his og ams o o al, and ea ned, income. Whe e ax b acke s do no coincide wi h he ele an income classes, agg ega e income wi hin he income class is di ided on a p o a a basis o allow each segmen o be axed a he app op ia e a e. No e ha he spike in income in b acke 1,000-1,999 is due o he la ge size o his and subsequen b acke s. In 1925, ea ned income below a ce ain h eshold was axed a a lowe a e compa ed o unea ned income (applicable h ough he i s hal o he 20 h cen u y). In addi ion, ce ain income was exemp om ax depending on a axpaye ’s ci cums ances. Da a on ax exemp ions, dis ibu ed by size o income, i s appea ed in he NZOYB in his pe iod and a e desc ibed u he in Appendix 3. Figu e 3 – Dis ibu ion o o al and ea ned assessable income, 1925 3.2 Exemp ions Da a Un il he 1970s exemp ion o some income om pe sonal income ax was a ea u e o he New Zealand ax sys em. A po ion o income was exemp om ax o a speci ied se o ci cums ances, including: low income ( he ‘gene al exemp ion’), and exemp ions o child/dependen , wi e/spouse, housekeepe and insu ance ( ela ed o li e insu ance and supe annua ion und con ibu ions). This had he e ec o educing indi iduals’ ax 13 The NZOYB also has da a on axable income (ie, g oss income less exemp ions), income ax assessed, and simila measu es o income and ax o companies. The NZOYB ceased publishing inal income da a om 1973, hough p o isional es ima es o income we e included. Ins ead, o he 1970s and ea ly 1980s we sou ce income and exemp ion da a om he sepa a e SNZ Repo on Incomes and Income Tax. 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 Unde 300 300—399 400—499 500—599 600—699 700—799 800—899 900—999 1,000—1,999 2,000—2,999 3,000—3,999 4,000—4,999 5,000—5,999 6,000—6,999 7,000—7,999 8,000—8,999 9,000—9,999 10,000—19,999 20,000ando e Agg ega eG ossAssessableIncome(£) Incomeb acke s(£) To alG oss AssessableIncome WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 11 liabili ies, o gi en g oss income, depending on hei indi idual ci cums ances, he eby a ec ing hei a e age ax a es. I di ec ly a ec ed hei e ec i e ma ginal ax a es o he ex en ha exemp ions we e income-dependen (eg, we e wi hd awn in associa ion wi h inc easing income). I would also ha e a ec ed he ele an s a u o y ax a e whe e exemp ions shi ed a axpaye be ween MTR bands. In Appendix 3 we desc ibe he exemp ions da a u he and sec ion 4 below discusses how we use da a on he dis ibu ion o exemp ions by income le els in he AMTR calcula ions. 3.3 Non-File Incomes A majo omission om NZOYB income da a is he income o indi iduals who we e no equi ed o ile ax e u ns, p io o he in oduc ion o PAYE in 1958. Non- ile s we e gene ally hose wi h incomes below he low-income ‘gene al exemp ion’ h eshold since hose wi h incomes abo e his le el we e legally equi ed o ile a e u n. Appendix 4 desc ibes he me hods we use o es ima e he income o non- ile s. While omission o hese non- ile s wi h a ze o EMTR would no be a p oblem o calcula ions o a ax-sha e weigh ed es ima e o he agg ega e AMTR, i is po en ially impo an o an income- weigh ed a e age. Igno ing non- ile s would isk o e -es ima ing he AMTR. In b ie , ou me hod o es ima ing non- ile s’ income in ol es using census da a o 1926, 1936, 1945 and 1951 and labou ma ke da a o de i e es ima es o o al pe sonal incomes which can be compa ed wi h ou NZOYB da a on ile s’ o al pe sonal incomes. One op ion would be o in e pola e be ween census yea s using he a io o ile - o-all pe sonal incomes. This a io e eals an inc easing end, ising om 0.347 ( o 1926) o 0.707 (1936), 0.919 (1945) and 0.963 (1951). Howe e , e idence om Ba o and Sahasakul (1983) sugges s ha , while his a io ends o end up o e ime in associa ion wi h ising income le els, i can be especially low du ing sho - un ecessiona y pe iods. Wi hin ou da ase , his includes he 1920s-30s dep ession when la ge alls in pe sonal incomes educed he numbe s o hose equi ed o ile. Da a on GNP a e a ailable h oughou ou pe iod o in e es , and his could be expec ed o cap u e ecessiona y impac s. We he e o e es ima e he a io o o al pe sonal income, Y, o GNP in Census yea s (subsc ip ed ‘c’), Yc,/GNPc, and use in e pola ed (subsc ip ed ‘i’) alues o his a io, and annual GNP alues, o es ima e alues o Yi o non-Census yea s. Toge he wi h ou es ima es o o al income o ile s, Y(F)i, o hose yea s we can es ima e non- ile s incomes, Y(N), in non-Census yea s as Y(N)i = Yi - Y(F)i. The esul ing ime-se ies o he a io o ile s- o- o al income, and he decomposi ion o o al income in o ile /non- ile ca ego ies, a e shown in Appendix 4, Figu es A3 and A4 espec i ely. These sugges a plausible bu luc ua ing all in he ex en o non- ile s’ incomes, eaching less han 4% o o al pe sonal incomes by 1951. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 12 4 Calcula ing AMTRs – Me hodology 4.1 Applying he Ba o-Sahasakul App oach As no ed in he in oduc ion, he AMTR o in e es he e is he Ba o and Sahasakul (1983) income-weigh ed a e age o indi idual e ec i e ma ginal pe sonal income ax a es. Tha is, we wan o es ima e he agg ega e:    Yj YEMTRj   0  (6) whe e Yj is he pe sonal income o axpaye j, and Y is agg ega e pe sonal income ac oss all j axpaye s. The EMTRjs a e ob ained om he ax schedule o sui ably adjus ed ‘e ec i e’ a es whe e hose di e om s a u o y a es. The ele an ax a es and h esholds a e hen ma ched wi h in o ma ion on (Yj/Y) om ou income dis ibu ion da a, inclusi e o he income sha e o non- iling axpaye s. To a oid con usion, in he emainde o he pape we e e o ma ginal ax a es (MTR, EMTR) le ied a he indi idual le el using he subsc ip j; hence: MTRj, EMTRj. Applying equa ion (6) o ou da a equi es a numbe o simpli ying assump ions. Fi s ly, om 1981-2009 he use o axpaye uni eco d da a ensu es ha he ele an MTRj o EMTRj o income ax is iden i ied o each axpaye . Howe e , like he p e-1981 da a, his da ase does no include he impac on EMTRjs o aba emen o social wel a e paymen s. Fo da a p io o 1981, we seek o ma ch da a om NZOYB and o he sou ces on he dis ibu ion o g oss assessable income wi h he ele an ax schedule. Since ax b acke s a e ypically desc ibed wi h espec o ne -o -exemp ions assessable income, i is impo an o sub ac hose exemp ions o iden i y ne income and he eby he app op ia e EMTRj o apply a each g oss income le el. Fo many axpaye s, he deduc ion o exemp ions om hei g oss income will no al e hei MTRj o EMTRj (eg, deduc ion o $5000 om g oss income o $50,000 will no a ec he MTRj whe e his MTRj applies o e a ne income band o $40,000-50,000. Howe e , ano he axpaye wi h he same $50,000 o g oss income bu $12,000 exemp ions would ace a di e en MTRj - ha applicable o ne income below $40,000. We he e o e need o deduc exemp ions om g oss (assessable) income o de i e ne (assessable) income in o de o iden i y he ele an MTRj o EMTRj o each axpaye . Howe e , wi h agg ega e-le el, a he han indi idual-le el, g oss assessable income and exemp ions da a by g oss income band, we do no know how many axpaye s (and associa ed ac ion o g oss income) would ace a lowe ma ginal ax a e han would be in e ed om hei g oss income. T ea ing ou agg ega e-le el da a as i hey ep esen ed an indi idual wi hin each income band would mean ha ei he all o no income would shi MTRj bands as a esul o adjus ing o exemp ions. Ins ead we (i) assume ha he impac o exemp ions is o mo e indi iduals by no mo e han one MTRj band; and (ii) use he a io o o al exemp ions o g oss assessable income in each band o weigh he MTRjs o each band, m. This yields an EMTRj es ima e e lec ing he exemp ions adjus men : EMTRj,m = (em/ym) MTRj,m-1 + (1 - em/ym) MTRj,m (7) Whe e (em/ym) is he exemp ions/income a io in band m, and MTRj,m (MTRj,m-1) is he MTRj in band m (m-1), (m > 0) and MTRj,0 = 0, cap u es he gene al pe sonal exemp ion. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 13 To examine he sensi i i y o ou AMTR calcula ions o his assump ion, we also epo AMTRs whe e no shi s in MTR b acke s, based on exemp ions da a, has been assumed. 4.2 Examples o AMTR calcula ions Table 2 shows an example o he AMTR calcula ions – o he 1980 income yea – when he e we e ela i ely ew (six) income ax b acke s and MTRjs. Since he income ax schedule de ines axable income as income ne o exemp ions (deduc ions), he income b acke s in ow 1 a e de ined wi h espec o ne income. The MTRj o each income b acke is shown in ow 2. Row 3 p o ides an es ima e o he EMTRj aced by indi iduals in each ax b acke , adjus ed o he impac o exemp ions.14 This adjus men weigh s he MTRjs in each b acke by he a ios o exemp income ( ow 5) o g oss income ( ow 4). Fo example, app oxima ely 7% o income in he <4,500 b acke in 1980 was exemp om ax; we he e o e assume ha his ac ion o income aces he MTRj o he b acke immedia ely below; in his case, 0%. In iew o he small amoun o exemp ions (a e aging 6% o g oss income), he esul ing impac s on he 1979/80 EMTRs in ow 3 a e small. Table 2 – The AMTR calcula ions, 1980 1 Taxable income b acke ($) <4,500 4,500- 10,000 10,000- 11,000 11,000- 16,000 16,000- 22,000 >22,000 To al 2 S a u o y MTR 14.5% 36.5% 41.5% 48.0% 55.0% 60.0% 3 EMTR 13.5% 35.2% 41.2% 47.6% 54.6% 59.8% 4 G oss assess- able income 1,225,46 5 4,565,69 5 991,17 0 3,550,58 0 1,583,88 0 1,304,22 0 13,221,01 0 5 Exemp ions 85,775 275,315 66,130 235,960 90,860 45,870 799,910 6 income sha e (%) 9% 35% 7% 27% 12% 10% 100% Income-weigh ed AMTR = 41.70% The ele an g oss income sha es a e calcula ed in ow 6. In p inciple, non- ile income is also added be o e es ima ing he g oss income sha es in ow 6 hough, as no ed abo e, his is no ele an a e 1958. Applying he ow 6 weigh s o he EMTRjs in ow 3 yields he AMTR (=41.70%) o 1980. I can be seen ha his is domina ed by he la ge sha es (nea ly 65%) o income in he $4.5-10k and $11-16k income b acke s acing EMTRjs o 35.2% and 47.6% espec i ely. The case in Table 2 illus a es a ela i ely s aigh o wa d yea . Mos yea s, howe e , in ol e mul iple ma ginal ax a es ac oss income le els and a a ie y o addi ional complica ions including: i ea ned and unea ned income dis inc ions (1921-50) wi h each acing di e en MTRjs15 ii es ima ion o EMTRjs whe e s a u o y a es do no measu e e ec i e a es; eg, sepa a e non- ile incomes and aba emen o h esholds iii The mul i-slope ax unc ion whe e EMTRjs ise wi h e e y pound o income (1914-39); in ha case we calcula e AMTRs based on EMTRjs a he mid-poin s in income classes ac oss he income dis ibu ion i income classes om income dis ibu ion da a ha app oxima e he income bands in he ax s uc u e, equi ing some e-g ouping o da a on incomes, exemp ions e c simul aneous applica ion o se e al di e en axes a a ious a es o a gi en income including social secu i y axes, and special ‘wa axes’ 14 No e ha his is no an EMTR as con en ionally de ined since no indi idual aces his a e. Ra he i e lec s he weigh ed a e age o a es aced by axpaye s in ha , and he adjacen , income b acke s. 15 Da a on ea ned incomes was collec ed un il 1956 bu ea ned and unea ned income aced he same ax a e om 1951-1956. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 14 Figu e 4 – Income dis ibu ion and ax s uc u e, 1950 Figu e 4 illus a es he mo e complex 1950 income dis ibu ion and ax s uc u e. This o e lays income dis ibu ion da a wi h he indi idual EMTRjs. The a es ise in mul iple s eps om 4% a an income o £200 o 76% a incomes o e £4000. This yields he AMTR o 29% shown. Exemp ions da a a e used o adjus he EMTRjs o app oxima e he e ec o people mo ing o lowe income b acke s. This adjus men has a pa icula ly la ge impac a he bo om o he income dis ibu ion; o he £200-300 b acke he e ec i e ax a e d ops om 21%, be o e allowing o exemp ions, o 4%. Tha is, he a ailabili y o exemp ions shi s a la ge ac ion o axpaye s in o he 0% ax a e applied o ne incomes up o £200. 5 Income-weigh ed AMTRs: 1907-2009 Using he ax s uc u e and income dis ibu ion in o ma ion discussed in p e ious sec ions, his sec ion discusses he es ima ed alues ob ained using he me hods desc ibed ea lie – sub-sec ion 5.1. Since he ela ionship be ween exemp and non- ile incomes is impo an o hese calcula ions, his is discussed in sub-sec ion 5.2. Sub-sec ion 5.3 hen uses a decomposi ion o he AMTRs o assess how a changes in ax s uc u e and income le els o i s dis ibu ion accoun o obse ed mo emen s in AMTRs o e ime. 5.1 The O e all pa e n o AMTRs The changes in bo h he ax schedule and income dis ibu ion o e he pe iod om 1907 o 2009 ha e esul ed in an AMTR se ies which a ies subs an ially o e he pe iod. Figu e 5 shows wo AMTR se ies. The main se ies (in black) uses exemp ions da a o adjus he EMTRjs up o 1983, and epo s IRD-based calcula ions om 1981. This se ies is also gi en in Table 3. A second se ies igno ing exemp ions da a ( ha is, indi idual EMTRjs a e no adjus ed using exemp ions da a) is shown in do ed ed. Bo h se ies anges om 0.4% in 1907, he i s yea o which income dis ibu ion da a a e a ailable, o a maximum o a ound 47% in 1982. I can be seen ha in gene al he wo se ies ollow each o he closely sugges ing ha exemp ions adjus men s play a limi ed ole. The main pe iod du ing which exemp ions adjus men s ha e a la ge impac is 1954 0 10000 20000 30000 40000 50000 60000 70000 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 <200 300‐400 500‐600 700‐800 900‐1,000 1,100‐1,200 1,300‐1,400 1,500‐1,600 1,700‐1,800 1,900‐2,000 2,100‐2,200 2,300‐2,400 2,500‐2,600 2,700‐2,800 2,900‐3,000 3,100‐3,200 3,300‐3,400 3,500‐3,600 3,700‐3,800 3,900‐4,000 (£000) Ma ginal ax a e IncomeB acke s(£) E ec i eMa ginalTaxRa e(LHS) A e ageMa ginalTaxRa e(LHS) WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 15 o 1969. As discussed below, his was a pe iod ha wi nessed a subs an ial inc ease in he ini ial ax- ee allowance and o he exemp ions. Based on he main se ies, he AMTR inc eases du ing WWI and i s a e ma h, eaching 5.4% in 1924. I hen d ops back o 2-3% in he second hal o he decade. The ea e du ing he in e -wa pe iod, he AMTR ises especially du ing he yea s o he G ea Dep ession om 1929, eaching a maximum o 7.4% in 1933. The mos signi ican inc ease in he AMTR o e he cen u y, howe e , occu s a he beginning o WWII whe e he a e jumps om 11% in 1939 o 21% in 1940. The AMTR con inues o ise he ea e o each a local maximum o 30% in 1945. Though he AMTR d ops in he immedia e a e ma h o he wa , he lowe AMTRs o e he emainde o he decade a e sho -li ed wi h an inc ease o 32% by 1951. Changes o he ax sys em om 1939 o 1953 we e la gely enac ed h ough he use o addi ional wa - ela ed income axes, anging om an addi ional 2.5% o 33% added o indi iduals’ inal income ax bills. These had he adminis a i e ad an age o aising ex a e enue wi hou needing o adjus he basic income ax schedule; see Vosslambe (2009). A e WWII he AMTR ollows a ai ly s eady upwa d end ill 1982, in e up ed by wo subs an ial declines: in 1961 and in 1971-3. Bo h declines la gely e lec ax s uc u e, mainly a e, changes bu whe eas he 1971-3 a e educ ions mainly in ol ed declines in op a es (see Figu e 2), he 1961 case p ima ily e lec ed cu s in lowe ax a es and inc eased exemp ions. Bo h educ ions in AMTRs we e soon e e sed, wi h exemp ions subsequen ly cu ailed in he mid-1960s, and he emo al o he gene al pe sonal exemp ion plus inc eased MTRjs in 1975 as he ea ly 1970s oil c isis hi . Sec ion 5.3 discusses he decomposi ion o AMTR changes in mo e de ail. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 16 Figu e 5 – AMTRs o New Zealand 1907-2009 0% 10% 20% 30% 40% 50% AMTR AMTR(noexemp ionsadjus men ) AMTR(InlandRe enuese ies) 1959:PAYE in oduced 1914:'mul i‐slope' ax sys emin oduced 1940:Re u n omul i‐s ep axsys em 1939‐1953: Addi ional'wa  axes'imposed 1981‐2009: IRDcalcula ions WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 17 Table 3 – A e age ma ginal ax a es (in pe cen ), 1907-2009 Yea AMTR (%) Yea AMTR (%) Yea AMTR (%) 1907 0.4 1941 21.7 1975 39.3 1908 - 1942 27.3 1976 39.9 1909 - 1943 27.8 1977 38.5 1910 0.4 1944 27.7 1978 43.3 1911 - 1945 30.2 1979 42.1 1912 0.5 1946 25.4 1980 41.7 1913 - 1947 24.4 * 1981 42.6 1914 0.5 1948 26.3 1982 44.6 1915 - 1949 27.1 1983 40.9 1916 - 1950 28.7 1984 35.9 1917 3.0 1951 32.0 1985 37.5 1918 - 1952 29.8 1986 40.4 1919 - 1953 30.1 1987 38.6 1920 4.5 1954 29.5 1988 35.8 1921 - 1955 30.1 1989 33.0 1922 3.7 1956 30.8 1990 29.2 1923 4.6 1957 31.5 1991 29.5 1924 5.1 1958 32.4 1992 29.5 1925 1.9 1959 32.1 1993 29.4 1926 2.2 1960 33.3 1994 29.6 1927 2.8 1961 26.4 1995 29.7 1928 2.6 1962 25.2 1996 29.9 1929 3.1 1963 25.8 1997 28.7 1930 3.3 1964 27.8 1998 28.3 1931 5.5 1965 29.7 1999 27.2 1932 7.2 1966 30.5 2000 26.0 1933 7.4 1967 31.1 2001 27.6 1934 5.8 1968 31.4 2002 28.9 1935 5.5 1969 32.4 2003 29.1 1936 8.0 1970 32.4 2004 29.7 1937 9.6 1971 37.1 2005 30.2 1938 8.7 1972 35.9 2006 30.5 1939 11.3 1973 33.4 2007 30.9 1940 20.5 1974 34.4 2008 31.3 2009 31.1 * Da a om 1981 a e sou ced om Inland Re enue Following he ea ly 1980s peak a ound 47%, a subs an ial decline in he AMTR occu s, in pa associa ed wi h he amilia ’80s e o ms, hough beginning p io o he main mid- 1980s e o m yea s, and alling o a ound 30% by 1990. The da a also con i m a decline in he AMTR du ing 1996-2000 in associa ion wi h e enue- educing ax e o ms (eg, he lowes MTRj ell om 24% in 1994 o 19.5% in 2000, and h esholds we e aised). This was ollowed by a s eady ise in he AMTR ( om 26% in 2000 o 31% in 2008) ollowing WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 18 he inc ease in he op MTRj om 33% o 39% in 2000, and he esul ing impac o iscal d ag he ea e as income ax h esholds emained ixed in nominal e ms.16 Compa ing he wo se ies in Figu e 5 e eals he impac o ou ‘exemp ions adjus men ’ designed o cap u e he e ec o gene al exemp ions educing ne , ela i e o g oss, income. As no ed abo e, o an (unknown) ac ion o axpaye s, his would educe he s a u o y ma ginal ax a e ha hey aced. I can be seen ha he adjus men has li le e ec on es ima ed AMTRs excep o he ea ly 1940s, 1954-58 and 1961-69. Fo he i s wo pe iod AMTRs a e educed by abou 1-2 pe cen age poin s (pp ); du ing 1961-69 he di e ence in he se ies anged om almos 5 pp (1962) o 2.4 pp in 1969. In each o hese cases ax s uc u e changes in 1940, 1954 and 1962 in ol ed an inc ease in he ini ial income le el liable o he 0% ma ginal ax a e, hence a ec ing he ac ion o axpaye s who may ace a lowe MTRj. Yea - o yea changes in he wo se ies a e howe e la gely una ec ed by he adjus men s. Finally, he AMTR calcula ions desc ibed he e exclude he impac o ACC le ies, he Bene i sys em and he Family Tax C edi (FTC) sys em which, a a ious imes since he 1970s, in ol ed lump sum ans e s o lowe income amilies wi h child en ha we e wi hd awn a highe income le els a a es o up o 30c/$, he eby adding o e ec i e MTRjs. The e ec o FTCs is discussed u he below. 5.2 Rela ionships be ween Exemp ions, Non-Filed Incomes and AMTRs The calcula ed AMTRs inco po a e es ima es o he amoun o income exemp om ax, including income which was no equi ed o be iled wi h he ax depa men , and i s impac on he e ec i e ma ginal ax a e aced by indi iduals. Non- ile income is e ec i ely ea ed as being ‘ axed’ a a ze o ax a e in ou calcula ions, and his has a signi ican impac in lowe ing he AMTRs. Fo exemp income we ha e sough o cap u e he impac o exemp ions in mo ing people o lowe ma ginal ax b acke s as discussed abo e. This had a smalle , bu ne e heless no iceable impac , especially whe e i mo es some axpaye s in o a ax- ee income b acke . Figu e 6 shows how he p opo ions o exemp and non- ile income changes o e he 1907 o 1982 pe iod. (This is no eadily calcula ed o he pos -1982 IRD da ase ). Du ing he ea ly pa o he 20 h cen u y, we es ima e ha a la ge p opo ion o income was no iled. In 1907, app oxima ely 89% o income was no iled because i ell unde he £300 iling limi . This p opo ion educed s eadily h oughou he i s hal o he cen u y, and by 1958 when he PAYE sys em was in oduced i was close o ze o. As desc ibed abo e, he e we e a numbe o ax exemp ions a ailable. The p opo ion o income which was exemp om ax is shown in ed in Figu e 6. By 1980 income exemp om ax ep esen ed only a ound 5% o g oss assessable income. 16 The e is e y li le iscal d ag unde simila condi ions du ing 1990-1995 due o he e y la na u e o he wo-MTRj schedule (a 24% and 33%) and ixed nominal h esholds in hose yea s. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 19 Figu e 6 – P opo ions o axed, exemp and non- iled income, 1907 – 1983 5.3 Decomposing Changes in he AMTRs The a ia ions in he AMTR o e he pe iod can be decomposed in o changes o he ax sys em, changes in a e age income le els, and changes o he income dis ibu ion. The impac o each o hese a ies ac oss he pe iod. This sec ion a emp s o iden i y he mos signi ican impac s in di e en ime pe iods. The AMTRs changed only sligh ly du ing he pe iod 1907 – 1916, due o mino changes in bo h ax a es and income dis ibu ion. In 1914 he mul i-slope scale was in oduced. I did no ha e a la ge impac on he AMTR, howe e , as he ax a es emained low and he e we e many una ec ed non- ile s. In 1917 e ec i e ma ginal ax a es we e inc eased subs an ially (by a ound 3 imes a he lowe end o he income dis ibu ion and up o 8 imes a he uppe end). The inc ease included he addi ion o a ‘special wa ax’. In addi ion, aba emen o he gene al exemp ion was in oduced. As a esul he AMTR inc eased om 0.5% in 1914 o 3.0% in 1917. I inc eased u he o 4.5% in 1920, solely as a esul o inc easing incomes which mo ed people in o highe ax b acke s ( he ax sys em did no change). F om 1922 o 1924 ax a es we e educed sligh ly, bu he AMTRs con inued o ise due o inc easing incomes shi ing he dis ibu ion owa ds highe income ax b acke s. I was no un il 1925, howe e , ha pos -WWI ax a es ell mo e signi ican ly, wi h he op ma ginal ax a e d opping om 29% in 1924 o 22.5% in 1925. The ea e he AMTR gene ally ose slowly o e he emaining ’20s and ’30s, excep o a ela i ely la ge ise (compa ed o p e iously) be ween 1930 and 1932. This la gely e lec ed ax schedule changes in 1931.17 In he same yea , o al income d opped by 5% and he income 17 Fo example, he s a u o y MTRjs we e app oxima ely doubled ac oss he income dis ibu ion and he ax- ee h eshold was educed; a 30% addi ional ax was added o he inal ax bill; social secu i y ax was in oduced a 1.25%; and a supplemen a y 33.33% ax was applied o unea ned income. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % non- ile income % exemp income % axable income WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 26 6 Conclusions Following he me hods p oposed by Ba o and Sahasakul (1983, 1986) o calcula e an ‘agg ega e’ ma ginal income ax a e (AMTR), which hey applied o US da a, his pape has adap ed he me hodology o de i e a simila agg ega e ax a e measu e o New Zealand. This in ol ed cons uc ion o an income-weigh ed a e age o indi idual- le el ma ginal ax a es, ha ing i s accoun ed o a ious ac o s ha allow e ec i e, a he han s a u o y, ma ginal ax a es o be es ima ed. These calcula ed a es la gely a oid he endogenei y p oblems o mo e commonly used agg ega e-le el MTRs based on ax e enue da a. We ha e cons uc ed he AMTR measu e o 1907-2009. Ou app oach o cons uc ing an income-weigh ed AMTRs was la gely dic a ed by da a a ailabili y – S a is ics New Zealand income dis ibu ion and ax da a o 1907-1981 and Inland Re enue axpaye uni eco d da a o 1981-2009 (wi h a 3 yea o e lap pe iod, 1981-1983 as a c oss-check). We combined da a on he income ax schedule, aking accoun o income ax a es, h esholds, exemp ions e c, wi h da a on he dis ibu ion o incomes and exemp ions om S a is ics New Zealand’s O icial Yea book, Repo o Incomes and Income Taxes¸ and New Zealand Censuses. These sou ces enabled AMTRs o be calcula ed o mos yea s om 1907-1983, wi h a ying deg ees o accu acy. The esul ing AMTR e idence shows ha he na u e o he ax schedule has changed d ama ically o e he pe iod, and he con ibu ion o income weigh ing om di e en income classes o axpaye s has also played a ole. The AMTR se ies e eals ha a es a ied subs an ially o e he whole 1907-2009 pe iod, bu wi h a gene ally inc easing end. Unsu p isingly, he AMTR ose especially du ing he wo Wo ld Wa s, ell modes ly in he immedia e a e ma h o wa bu soon s abilised, o ose again quickly he ea e . A e he immedia e pos -WWII educ ion, he AMTR gene ally ises om a ound 25% in he mid-1940s o a ound 45% by he ea ly-1980s, wi h a majo in e up ion when AMTRs declined in 1961 and, o a lesse ex en , in he ea ly 1970s. F om he ea ly 1980s a subs an ial decline in he AMTR occu s, in pa associa ed wi h he la e ’80s e o ms, eaching unde 30% by 1990. The da a also con i m he small bu sus ained ise in he AMTR ( om 26% in 2000 o 31% in 2008) ollowing he inc ease in he op a e o pe sonal income ax om 33% o 39% in 2000, and he impac o iscal d ag he ea e as income ax h esholds emained ixed in nominal e ms. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 27 Re e ences Angelopoulos, K., Economides, G and Kammas, P. (2007) Tax-spending policies and economic g ow h: heo e ical p edic ions and e idence om he OECD. Eu opean Jou nal o Poli ical Economy, 23, 885-902. A nold, J., B ys, B., Heady, C., Johansson, Å., Schwellnus, C. and Va ia, L. (2011) Tax policy o economic eco e y and g ow h. Economic Jou nal, 121, Feb ua y, 2011, F59– F80. Ba o, R.J. and Sahasakul, C. (1983) Measu ing he a e age ma ginal income ax a e om he indi idual income ax. Jou nal o Business, 56, 419-452. Ba o, R.J. and Sahasakul C. (1986). “A e age Ma ginal Tax Ra es om Social Secu i y and he Indi idual Income Tax,” Jou nal o Business, 59, 555-566. Ba o, R.J. and Redlick, C.J (2011) Mac oeconomic e ec s om go e nmen pu chases and axes, Qua e ly Jou nal o Economics, 126, Feb ua y, 51-102. Bee sma, R. and Giuliodo i, M. (2011) The e ec s o go e nmen pu chases shocks: e iew and es ima es o he EU, Economic Jou nal, 121, Feb ua y, 2011, F4–F32. Eas on, B.H. (1983) Income Dis ibu ion in New Zealand, NZIER Resea ch Pape No 28, Welling on. Gemmell, N., Knelle , R. and Sanz, I. (2011a) The iming and pe sis ence o iscal policy impac s on g ow h: e idence om OECD coun ies. Economic Jou nal, 121, Feb ua y, 2011, F33–F58. Gemmell, N., Knelle , R. and Sanz, I. (2011b) The g ow h e ec s o co po a e and pe sonal ax a es in he OECD. Bond Uni e si y Globaliza ion and De elopmen Cen e, Wo king Pape No 49 (May). Goldsmi h, P. (2008) We Won, You Los . Ea Tha ! A Poli ical His o y o Tax in New Zealand Since 1840. Auckland: Da id Ling Publishing Limi ed. Lee, Y. and Go don, R.H. (2005) Tax s uc u e and economic g ow h, Jou nal o Public Economics, 89, 1027-1043. Leibschu z, D.S. (1999) Taxes and Po e y in New Zealand The Impac o he Tax and Bene i Sys em on Low-Income New Zealande s. Ian Ax o d Fellowships O ice, 1999. A ailable a www. ulb igh .o g.nz/ oices/ax o d/docs/liebschu zd.pd . (Accessed on 15-06- 2011). Myles, G.D. (2009a) Economic G ow h and he Role o Taxa ion – Theo y. OECD Economics Depa men Wo king Pape s, No. 713, OECD Publishing. Myles, G.D. (2009b) Economic G ow h and he Role o Taxa ion – Agg ega e Da a. OECD Economics Depa men Wo king Pape s, No. 714, OECD Publishing. Ramey, V.A. (2009) De ense News Shocks, 1939-2008: Es ima es Based on News Sou ces.” unpublished, Uni e si y o Cali o nia San Diego, Oc obe . Ramey, V.A. (2011) Iden i ying Go e nmen Spending Shocks: I ’s All in he Timing. Qua e ly Jou nal o Economics, 126, Feb ua y, 1-50. Rankin, K. (1995) Unemploymen in New Zealand a he peak o he G ea Dep ession. Uni e si y o Auckland Wo king Pape s in Economics, No. 144, Auckland: Uni e si y o Auckland. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 28 Rome , C.D. and Rome , D.H. (2010) The mac oeconomic e ec s o ax changes: es ima es based on a new measu e o iscal shocks, Ame ican Economic Re iew, 100, 763-801. Rome o-A ila, D. and S auch, R. (2008) Public inances and long- e m g ow h in Eu ope: e idence om a panel da a analysis, Eu opean Jou nal o Poli ical Economy, 24, 172-191. Vosslambe , R. (2009) How Much? Taxa ion on New Zealande s’ Employmen Income 1893-1984, New Zealand Jou nal o Taxa ion Law and Policy, 15, 299-321. Da a Sou ces Census and S a is ics Depa men , Popula ion Census – 1926, 1931, 1936, 1945, 1951. New Zealand Taxa ion Re iew Commi ee (1967) Taxa ion in New Zealand: Repo o he Taxa ion Re iew Commi ee, (“Ross Repo ”), Oc obe 1967. B ooke s Tax Se ice, S aples and Tax Ra es Guide, a ailable a : h p://www.b ooke s online.co.nz/da abases/modus/ axs c/ cs g/GEN-SCOPE!174? id=6990887&si= 1610670095 (las accessed 12/06/11). S a is ics New Zealand ( o me ly Depa men o S a is ics), New Zealand O icial Yea books, ( a ious yea s, 1892-1983). S a is ics New Zealand, Long- e m Da a Se ies, a ailable a : h p://www.s a s.go .nz/ b owse_ o _s a s/economic_indica o s/Na ionalAccoun s/long- e m-da a-se ies/labou - ma ke .aspx S a is ics New Zealand, Repo o Incomes and Income Tax ( a ious yea s, 1972-1984). WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 29 Appendix 1: The NZ ‘Mul i-Slope’ Income Tax Sys em 1914-1939 This Appendix desc ibes he so-called ‘mul i-slope’ ma ginal ax a e schedule. This is in con as o he mo e usual ‘mul i-s ep’ ax schedule in which ma ginal ax a es ise in s eps a speci ied income h esholds and a e cons an be ween h esholds, and whe e each MTR applies o addi ional income abo e each h eshold. The mul i-slope ax schedule o 1914- 39, on he o he hand, ypically applied o incomes in excess o an ini ial h eshold income le el bu he ma ginal ax a e speci ied in he schedule inc eased wi h e e y addi ional pound ha an indi idual ea ned and each highe a e applied o all income (abo e an ini ial ax-exemp le el o income whe e applicable), no jus he inc emen . Below we desc ibe his sys em using wo yea s o illus a e: 1914 and 1917. The 1917 case in ol ed wo addi ional ea u es: an addi ional ‘special wa ax’ (1917- 1920) and an ini ial income exemp ion aba ed beyond a speci ied highe le el o income. A1.1 The 1914 ax s uc u e Le y be axable income be o e he exemp ion, A. An exemp ion o 300 pounds applies o all axpaye s. Le * be he ma ginal ax a e speci ied in he ax schedule as le ied on assessable income, so ha he o al ax paid is: T = *(Y - a) whe e a = 300 (A1) The ma ginal ax a e, om (A1), is:  = dT/dy = * + (y - a)(d*/dy) (A2) Fo 300 ≤ y ≤ 400:  = * = 0.025 (6 pence pe pound; he e a e 240 pennies in a pound) Fo incomes abo e 400, he alue o * inc eases by 3/400 hs o a penny o each pound inc ease in income. Hence: Fo 400 < y ≤ 1400: * = 0.025 + (3/400)(1/240)(y-400)  * = 0.0125 + 0.00003125y (A3) No e ha * = 0.025 a y=400 and * = 0.05625 a y=1400. Using (2) and (3) i can be shown ha :  = 0.003125 + 0.0000625y (A4) gi ing  = 0.028125 a y=400 and  = 0.090625 a y=1400. Values o  o 400 < y < 1400 a e on a s aigh line be ween hese wo poin s; see Figu e 1. Fo 1400 < y ≤ 2400, he lowe a e o inc ease in * (1/(400*240)) yields: * = 0.04168 + 0.000010417y (A5) such ha *= 0.05625 a y=1400 and *= 0.0667 a y=2400. Fo his income ange, using (2) and (5) i can be shown ha :  = 0.038552 + 0.000020834y (A6) Equa ion (6) yields:  = 0.06772 a y=1400 and  = 0.08855 a y=2400. Values o  o y be ween 1400 and 2400 a e on a s aigh line be ween hese wo poin s. Beyond 2400, he ma ginal ax a e is speci ied as a cons an 14 pennies pe pound, o 5.83%. This e eals ha he EMTR can be highe , and some imes conside ably highe , han * du ing he 1914-39 pe iod due o he impac o he mul i-slope aspec o he schedule. The WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 30 maximum a e does no gene ally apply a he highes income le els, whe e he ‘slope aspec ’ is absen . The slope is u he ampli ied when he e is aba emen o he ax- ee h eshold, a1, as occu ed du ing 1917-35. Figu e A1 also e eals ha he EMTR a ied be ween abou 2.5% and 9% in 1914 o hose who we e liable o pay ax and ile ax e u ns. Mos income ea ne s did no ea n su icien income o exceed he ax- ee h eshold in his pe iod – by ou es ima es (see below) only a ound 10% o employees we e ax ile s and no all o hose we e assessed as ax-liable ( o example, i hei assessable income ell below £300). Hence, when weigh ed by axpaye incomes (see sec ion 5), he a e age ‘e ec i e’ ma ginal ax a e ac oss ax ile s was a ound 5% in 1914, bu o all income ea ne s combined i was only a ound 0.5%. Figu e A1 – Ma ginal and a e age ax a es in he 1914 ax s uc u e A1.2 The 1917 ‘wa - ime’ ax s uc u e The ax s uc u e desc ibed abo e also applied in 1917, wi h an exemp ion o £300 a ailable o all axpaye s wi h incomes below £600. The ea e he exemp ion was wi hd awn a a a e o £1 each addi ional £1 ea ned; ie, he exemp ion is ze o o incomes abo e 900. (Fo o he yea s he e we e di e en wi hd awal egimes, some imes in ol ing mo e han one wi hd awal o aba emen a e). The ma ginal ax a e, om (1), now needs o e lec ha d(y – a)  dy, hence:  = dT/dy = *(d(y – a)/dy) + (y - a)(d*/dy) (A7) Allowing o he aba emen ange o incomes (600 o 900), his gi es:  = * + (y – a)(d*/dy) y ≤ 600 whe e d(y – a)/dy = 1  = 2* + (y – a)(d*/dy) 600 < y ≤ 900 whe e d(y – a)/dy = 2 (A8)  = * + y(d*/dy) y > 900 whe e a = 0; d(y – a)/dy = 1 Fo 300 ≤ y ≤ 400, he ax schedule speci ied a ax a e o 6 pence pe pound (0.025) plus a ‘wa ax’ a e o 9 pence (0.0375). The combined ma ginal ax a e is gi en by:  = * = 0.0625 (6+9 pence pe pound) Fo 400 ≤ y ≤ 600, he 6 pence pe pound ax a e is inc eased by 1/200 h o a penny pe pound and he special wa ax a e is inc eased a 3/400 hs o a penny pe pound. This gi es: * = 0.041667 + 0.000052083y (A9) 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1 MTR ATR * * WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 31 yielding: * = 0.0625 a y = 400, and * = 0.0729 a y = 600. Using (A2) and (A9) i can be shown ha  = 0.02604 + 0.00010417Y, and hence  = 0.0677 a y = 400, and  = 0.0885 a y = 600. Fo 600 ≤ y ≤ 900, he aba emen o he £300 exemp ion begins; he e o e using (A8) and he p e ious de ini ion o * yields:  = 0.03646 + 0.00020833Y (A10) In his case: * = 0.0729 and  = 0.1615 a y = 600, while * = 0.0885 and  = 0.2237 a y = 900. Fo 900 ≤ y ≤ 6,400, * is gi en by he las line o (A8) such ha , wi h no exemp ions,  = 0.1354 a y = 900 and  = 0.7083 a y = 6,400. The ea e , o incomes in excess o 6400 he e is no longe any inc ease in * as incomes inc ease, Tha is, d*/dy = 0 and his elemen o he MTR calcula ion in d ops ou . The ma ginal ax a e is now simply  = * = 0.375, implying a la ge d op in he MTR a y = 6,400 ( om 70.8% o 37.5%) which emains cons an a highe income le els; see Figu es A1a and A1b. Figu e A2 – Ma ginal and a e age ax a es in he 1917 ax s uc u e A2(a) Indi idual incomes up o £1200 A2(b) Indi idual incomes up o £7000 0 0.05 0.1 0.15 0.2 0.25 0.3 1 101 201 301 401 501 601 701 801 901 1001 1101 1201 MTR ATR 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0 1000 2000 3000 4000 5000 6000 7000 MTR1917 ATR1917 WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 32 Appendix 2: Income Dis ibu ion Da a The income dis ibu ion da a used in his pape ha e been sou ced om ha d copies o a ious edi ions o he NZ O icial Yea books and ela ed S a is ics New Zealand publica ions. A ailable income and ax da a a y in quali y and co e age o e he pe iod o he pe sonal income ax. The e is no income da a p io o 1907; he ea e we desc ibe he a ailable da a acco ding o di e en sub-pe iods. 1907-1924 (Sou ce: NZ O icial Yea books) Da a in his pe iod a e only a ailable o he 1907, 1910, 1912, 1915, 1917, 1920, and 1922-24 income yea s. The da a ep esen assessable income ga he ed om ax assessmen s iled wi h Inland Re enue. The 1915 and 1923 NZOYBs p o ide a decomposi ion o o al income ( o 1907, 1910, 1912, 1915, 1917, 1920) by sala ied pe sons, pe sons and i ms, egis e ed companies, non- esiden ade s and p o essional men. We ha e combined income dis ibu ion da a o hose g oups excluding egis e ed companies o measu e pe sonal income. As no ed in he NZOYBs o he ea ly 1920s: “No comple e s a is ics o annual income a e a ailable o New Zealand, no has any o icial in es iga ion o he o al income o he Domain been a emp ed” (NZOYB, 1925, p.699). Ne e heless, income da a based on ax e u ns iled wi h Inland Re enue we e published in he NZOYB. These e u n da a, pa icula ly in he ea ly 20 h cen u y, unde s a e o al income because, o many income ea ne s, low income exemp ions mean ha many axpaye s we e excluded om iling ax e u ns. We ha e add essed his issue by a emp ing o es ima e non- ile income using long- e m labou ma ke da a, census da a on income and agg ega e na ional income s a is ics; see below and Appendix 4 o de ails. 1925 – 1931 (NZ O icial Yea books) F om 1925 he NZOYB decomposes income in o ou axpaye classes (and 10 di e en sou ces o income): Class I. Pe sons and i ms (ie, indi iduals); Class II. Companies; Class III. Agen s o deben u e holde s; and Class IV. Non- esiden ade s. Impo an ly, da a on he dis ibu ion o Class I g oss assessable income, by income class size, is a ailable, including simila dis ibu ions o ea ned income and exemp ions. Ea ned income below a gi en h eshold (£2000 in 1929), was axed a a lowe a e compa ed o unea ned income h ough he i s hal o he 20 h cen u y. In addi ion, ce ain income was exemp om ax depending on a axpaye ’s ci cums ances. Da a on ax exemp ions dis ibu ed by size o income, i s appea ed in he NZOYB in his pe iod; hey a e desc ibed u he in Appendix 3. 1932 – 1933 (Sou ce: Es ima ed) Da a a e no a ailable o e hese wo yea s and i was no ed ha ‘ easons o economy’ p e en ed he da a om being collec ed. We ha e illed in he missing o al and ea ned income dis ibu ions by applying linea in e pola ion o he income sha e o each income b acke om he yea s ei he side o he missing obse a ions. 1934 – 1941 (Sou ce: NZ O icial Yea books) The da a discussed abo e o 1925-1931 a e a ailable h oughou mos o his pe iod. Changes o ax laws in he ea ly 1930s mean indi iduals wi h incomes abo e £200 ( o me ly £300) we e equi ed o ile ax e u ns. As a esul i is expec ed ha he NZOYB WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 33 da a would cap u e a la ge numbe o indi iduals who o me ly we e no cap u ed. Howe e , a la ge inc ease in assessable income o low income axpaye s, ha migh ha e been expec ed, did no e en ua e; i may be ha he dep ession pushed many below he £200 income le el. F om 1935 he eco ded income o low income axpaye s did s a o ise signi ican ly.21 1942 – 1945 (Sou ce: Es ima ed) Da a a e no a ailable - he NZOYB was no compiled because o labou sho ages in WWII. We ha e again applied linea in e pola ion o income sha es o es ima e he missing yea s. 1946 – 1960 (Sou ce: NZ O icial Yea books) Indi idual axpaye da a a e a ailable h ough his pe iod. F om 1949 he compila ion o s a is ics was changed om a popula ion o income assessmen s o a 10% sample, bu a ull enume a ion o assessmen s o incomes abo e £2,500. Ce ain ypes o non- assessable (and hence non- axable) income, such as wa pensions and social secu i y bene i s, we e no cap u ed in he NZOYB income da a. All indi iduals whose income exceeded £200 we e equi ed o ile a ax e u n. Ou es ima es o non- ile income sugges s ha by he ea ly 1950s only a small p opo ion o o al axable income was no being cap u ed by income iled wi h Inland Re enue; he in oduc ion o Pay-As-You-Ea n (PAYE) sou ce-based axa ion in 1958 ende ed he ile /non- ile dis inc ion edundan o ou pu poses.22 1961 – 1984 (Sou ce: NZ O icial Yea books o 1971; Repo o Incomes and Income Tax, 1972-84) P e iously discussed income da a a e a ailable h oughou his pe iod (excep da a o 1962 we e ne e published - we ha e again applied linea in e pola ion). Also, in 1967 New Zealand implemen ed a decimal (Dolla ) cu ency sys em (se a $2 = £1), bu income da a p esen ed in decimal o m a e a ailable in he NZOYB om 1962.23 21 F om 1938, indi idual and company ax da a a e p esen ed in sepa a e subsec ions wi hin he NZOYB. As a esul , any indi ec cap u e o company income in p e ious da a ( o ins ance h ough exemp ions) is elimina ed, hough his is no expec ed o be signi ican . 22 The PAYE sys em, in oduced on 1 Ap il 1958, led o a dis up ion in he collec ion o 1958 income yea da a. Taxpaye s solely ea ning sala y and wage income did no ha e o u nish a ax e u n o income unde £1,040. As a esul , income da a o he 1958 income yea may unde ep esen low income ea ne s. 23 The Repo on Income and Income Tax was no p oduced o he 1975 and 1977 yea s. Fo hose yea s we ha e used p o isional income ax da a (sala y and wage, sel -employed pe sons and in es men income) a ailable om he NZOYBs. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 34 Appendix 3: Exemp ions Da a Exemp ions o ce ain income om ax we e an impo an ea u e o he New Zealand pe sonal income ax sys em up un il he 1970s. A po ion o income was exemp om ax o a speci ied se o ci cums ances. These included:24  Gene al pe sonal exemp ion: The i s New Zealand income ax exemp ed he i s £300 o income. The le el o he gene al exemp ion subsequen ly a ied be ween £200 and £468.  Dependen wi e/husband exemp ion: In oduced in 1933, he dependen spouse exemp ion anged om £50 in 1933-45 o a maximum o £200 in 1960. The exemp ion was aba ed agains bo h spouses’ incomes, and was in place un il a leas 1967.  Child/dependen exemp ion: Allowances o dependen child en we e i s in oduced in o he Land and Income Assessmen Amendmen Ac 1913. An exemp ion o £25 o each child unde 16 applied, subjec o a household income limi o £425. The a e was inc eased o £50 pe child and he age limi inc eased o 18 om 1922.  Housekeepe exemp ion: F om 1933 an exemp ion applied o widows and widowe s (la e di o cees and unma ied people) wi h dependen child en. The exemp ion anged om a maximum o £50 o a maximum o £200.  Li e insu ance exemp ion: An exemp ion was gi en on li e insu ance p emiums in he Land and Income Assessmen Ac 1891. P emiums we e ax deduc able up o £50. Con ibu ions o Na ional P o iden Fund, supe annua ion and insu ance unds we e also ax deduc able. The gene al exemp ion was he mos signi ican exemp ion. Ini ially, he exemp ion applied o all axpaye s, bu om 1917 un il 1935 i aba ed such ha i only applied o incomes below a ce ain le el. F om 1936 i applied o all income ea ne s again. O he exemp ions we e also dependen on income and we e aba ed as income inc eased. Howe e , we ha e only been able o accoun o he impac ha aba emen o he gene al exemp ion had on EMTRjs. Table A1 below se s ou he aba emen egimes which applied om 1917 o 1935. F om he ea ly-mid 1920s, NZOYBs p o ide da a on he o al alue o exemp ions claimed by size o assessable income, by exemp ion ca ego y, cap u ed ia income ax e u ns iled wi h Inland Re enue. In he 1920s, exemp ion da a we e p esen ed as an agg ega e ac oss all classes o axpaye , bu in gene al exemp ions only applied o he incomes o Class I axpaye s (indi iduals). An excep ion was an exemp ion o 5% on he capi al alue o unimp o ed alue o land om which income was de i ed, and which also applied o ce ain egis e ed companies. 24 A a ious imes du ing he sample pe iod, o he o ms o income, we e en i ely exemp om ax such as wa pensions o social wel a e bene i s. Because hose o ms o income we e non-assessable hey a e no cap u ed in ou ax- e u n based da a, and a e he e o e no included in ou exemp ion adjus men s o he AMTR calcula ions. WP 12/04 | A e age Ma ginal Income Tax Ra es o New Zealand, 1907-2009 35 Table A1 – Aba emen o gene al exemp ion, 1917-1935 Pe iod Aba emen egime 1917 – 26 y ≤ £600: £300 exemp ion £600 < y < £900: exemp ion wi hd awn a £1 pe £1 o e £600 y ≥ £900: no exemp ion 1927 – 30 y ≤ £450: £300 exemp ion £450 < y < £750: exemp ion wi hd awn a £1 pe £2 o e £450 £750 < y < £900: £150 exemp ion, educed by £1 pe £1 o e £750 y ≥ £900: no exemp ion 1931 – 32 y ≤ £260: £260 exemp ion £261 < y < £560: exemp ion wi hd awn a £1 pe £3 o e £260 £560 < y < £800: exemp ion o £160, educed by £1 pe £1 10s. o e £560 Y ≥ £800: no exemp ion 1933 - 35 As abo e wi h £50 deduc ed om he exemp ion asce ained Table A2 shows he common o m o agg ega e exemp ion da a p esen ed in he NZOYB o he 1925/26 income yea . I shows ha he gene al exemp ion made up he majo i y o exemp ions and was p edominan ly ecei ed by low income ea ne s (since he exemp ion was aba ed wi h income). Wi h he excep ion o land alue exemp ions, o he exemp ions also appea o be claimed mainly be hose wi h incomes below £1000. Table A2 – Exemp ions by size o income o he 1925/26 income yea