Population ageing and the growth of income and consumption tax revenue

Abstract

This paper investigates the implications of population ageing and changes in labour force participation rates for projections of revenue obtained from personal income taxation and a consumption tax (in the form of a broad-based goods and services tax). A projection model is presented, involving changing age–income profiles over time for males and females. The model is estimated and applied to New Zealand over the period 2011–2062.

Keywords:

• income taxation
• total tax revenue
• age–income profiles

JEL Codes:

• J11
• H24
• H27

Acknowledgements

We are grateful to Matt Benge, Bob Buckle, Iris Claus, Peter Mawson and Paul Rodway for comments on an earlier draft of this paper. Access to data used in this report was provided by Statistics New Zealand under conditions designed to give effect to the security and confidentiality provisions of the Statistics Act 1975. The graphs presented in this report are the work of the authors and not Statistics New Zealand. The views, opinions, findings and conclusions of this article are strictly those of the authors and do not necessarily reflect the views of the New Zealand Treasury.

Notes

1. The approach contrasts with the more aggregative revenue projections in the Treasury’s Long-Term Fiscal Model; see Bell and Rodway (2014).

2. The basic structure of age–income profiles is relatively stable over time, although the aggregate relationship may change if there are substantial changes in the occupational composition of the labour force and if the profiles for specific occupations differ in their shapes.

3. The approach probably slightly overstates GST revenue, to the extent that not all expenditure attracts GST even with a very broad coverage (small firms below a threshold do not pay GST, some expenditure is on second-hand goods, and so on).

4. There is in fact insufficient data on which to base reliable propensities depending jointly on age and income.

5. The model neglects the possibility that the composition of investment income varies with total income, and effective tax rates can differ depending on the capital income source.

6. On the lognormal distribution see Aitchison and Brown (1957).

7. It would be relatively simple to add quadratic time effects, if desired; see Creedy (1992).

8. On the implications of alternative dynamic processes for the variance–experience profile, see Creedy (1985, pp. 38–39).

9. This effective wage concept was used to decide how to treat outliers, removing anyone with a reported wage of less than $2 per hour or more than $350 per hour.

10. As above, weighted aggregates were used and cross-sectional data for different years were adjusted to 2010/2011 values.

11. The negative constant term for the regression of female capital incomes means that for some of the lower age groups, the projected values could be negative; these were set to zero.

12. As explained in the previous section, no distinction is made here regarding different hours of work. An allowance was made when constructing the income data on which the profiles were estimated, rather than introducing separate treatments for workers in different hours categories.

13. However, in the application reported here the 75-and-over age group was in fact aggregated into a single group.

14. In general, , where and are the mean and variance of logarithms of .

15. On this formulation of the multi-step function and further applications, see Creedy and Gemmell (2006, pp. 25–26).

16. On this kind of expression in a range of tax-transfer systems, see Creedy (1996, pp. 42–44).

17. Creedy (1996, pp. 42–44).

18. http://www.stats.govt.nz/tools_and_services/tools/TableBuilder/population-projections-tables.aspx. The population projections aggregate the 90+ age group. For labour force projections, see http://www.stats.govt.nz/browse_for_stats/income-and-work/employment_and_unemployment/NationalLabourForceProjections_HOTP06-61update.aspx.

19. http://www.treasury.govt.nz/government/longterm/fiscalmodel.