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The Elasticity of Taxable Income in New Zealand

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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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  • Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Treasury Working Paper Series 12/03, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:12/03
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    File URL: https://treasury.govt.nz/sites/default/files/2012-08/twp12-03.pdf
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    References listed on IDEAS

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    1. 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.
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    3. 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. 14, pages 5-34, May.
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    5. 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.
    6. John Creedy, 1998. "Measuring Welfare Changes and Tax Burdens," Books, Edward Elgar Publishing, number 1579.
    7. Jorge Onrubia?Fernández & José Félix Sanz?Sanz, 2009. "Reported Taxable Income and Marginal Tax Rates: Evidence for Spain Based on the Fiscal Drag," Department of Economics - Working Papers Series 1075, The University of Melbourne.
    8. Seth H. Giertz, 2004. "Recent Literature on Taxable-Income Elasticities: Technical Paper 2004-16," Working Papers 16189, Congressional Budget Office.
    9. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
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    12. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
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    More about this item

    Keywords

    Income taxation; Taxable income; Elasticity of taxable income; Excess burden of taxation.;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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