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Abstract
Tax systems based on nominal income are non‐neutral to inflation. This paper evaluates the welfare effects of these non‐neutralities in New Zealand. By using a stylised model of the New Zealand tax system, the paper calculates marginal effective tax rates for different values of the inflation rate. Following Feldstein (1997a, 1997b), the paper then estimates the welfare effects of going from 2 percent ‘true’ inflation to price stability. The results are supportive of price stability, but they are not robust to all plausible values of some key parameters.
Notes
Reserve Bank of New Zealand, Economics Department, P O Box 2498, Wellington, New Zealand. Email: [email protected]