The welfare cost of taxation in New Zealand following major tax reforms

Abstract

The welfare cost of taxation on labour income is the economic loss to employees over and above the tax revenue acquired. This article estimates total and marginal welfare cost for New Zealand, along with marginal excess burden, for a hypothetical marginal tax reform prior to and following the major discrete reforms of 1986. Estimated welfare costs are, surprisingly, higher in the post‐reform period despite a significant reduction in the progressivity of the personal income tax schedule. Tax bracket creep resulting from inflation appears largely responsible for raising the weighted average effective marginal tax rate during the period. As with recent estimates for the US, estimated welfare costs for New Zealand are sensitive to labour supply elasticities, and are higher than for the US. This is due in part to our use of disaggregated income data.

Notes

Department of Economics and Marketing, Lincoln University, and Department of Economics, University of Canterbury