School of Accounting and Commercial Law – Te Kura Kaute, Ture Tauhokohoko: Chair in Public Finance: Working Paper Series

Permanent URI for this collectionhttps://ir.wgtn.ac.nz/handle/123456789/21218

The Chair in Public Finance is located in the school of School of Accounting and Commercial Law. The aims of the Chair in Public Finance are to build up expertise in the area of public finance (broadly defined) and to promote research, debate, policy analysis and advice on public finance matters. For further information about the chair please refer to the Chair in Public Finance website.

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Open Access
Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures
(Te Herenga Waka—Victoria University of Wellington, 2012) Creedy, John; Gemmell, Norman
The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.
Open Access
The Tax Gap: A Methodological Review
(Te Herenga Waka—Victoria University of Wellington, 2012) Gemmell, Norman; Hasseldine, John
The global economic crisis has highlighted the continuing problem of tax evasion. For tax agencies to respond, an important antecedent necessitates knowing the extent of the problem. This study is the first to comprehensively review recent research on the tax gap. Our primary contributions are two-fold. First we argue that the tax gap, as conventionally defined, is conceptually flawed because it fails to capture behavioral responses by taxpayers adequately. Our second contribution is to review methods for measuring the tax gap and compare empirical estimates. We suggest that many of the most trenchant criticisms of conventional tax gap measurement (and the ‘hidden economy’ measures that underlie them) leave only microdata-based measures of tax non-compliance as likely to deliver more reliable tax gap estimates. Even here, however, further work is required, on both conceptual and empirical aspects, before tax gaps suitable for policy analysis (e.g. implications for enforcement policy) are likely to be delivered.
Open Access
Inequality Comparisons in a Multi-Period Framework: The Role of Alternative Welfare Metrics
(Te Herenga Waka—Victoria University of Wellington, 2012) Creedy, John; Halvorsen, Elin; Thoresen, Thor
This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi-period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual’s annual average income is used as welfare metric, compared with the use of a single-period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period), using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression towards the (geometric) mean, combined with a large extent of individual unexpected effects.
Open Access
Regression Estimates of the Elasticity of Taxable Income and the Choice of Instrument
(Te Herenga Waka—Victoria University of Wellington, 2012) Carey, Simon; Creedy, John; Gemmell, Norman; Teng, Josh
This paper examines estimation of the elasticity of taxable income using instrumental variable regression methods. It is argued that the ‘standard instrument’ for the net-of-tax rate − the rate that would be applicable post-reform but with unchanged income levels − is unsatisfactory in contexts where there are substantial exogenous changes in taxable income. Two alternative tax rate instruments are proposed, using estimates of the dynamics of taxable income for a panel of taxpayers over a period that involves no tax changes. The parameters derived from this procedure are then used to construct hypothetical (or counterfactual) post-reform incomes that would be expected in the absence of reform. The first method is based on the tax rate each individual would face if income were equal to ‘expected income’, conditional on income in two periods before the tax change. The second alternative uses the form of the conditional distribution of income for each taxpayer to obtain an instrument based on the ‘expected tax rate’. The methods are applied to the tax change in New Zealand in 2001.
Open Access
Measuring Revenue Responses to Tax Rate Changes in Multi-Rate Income Tax Systems: Behavioural and Structural Factors
(Te Herenga Waka—Victoria University of Wellington, 2012) Creedy, John; Gemmell, Norman
This paper shows how income changes in response to changes in marginal income tax rates (MTRs) translate into tax revenue changes for the familiar multi-step income tax function used in many countries. Previous literature has focused on the relatively straightforward case of a proportional income tax or the top MTR only. The paper examines revenue responses at both the individual and aggregate levels, and it is shown that for individual MTRs within a multi-rate regime, simple expressions for tax revenue responsiveness can be derived that nevertheless capture the various behavioural and structural responses to income tax reforms involving changes to multiple rates and thresholds. Illustrations are provided using changes to the New Zealand income tax structure in the 2010 Budget. This reduced all marginal tax rates while leaving income thresholds unchanged.
Open Access
Average Marginal Income Tax Rates in New Zealand, 1907-2009
(Te Herenga Waka—Victoria University of Wellington, 2012) Bandyopadhyay, Debasis; Barro, Robert; Couchman, Jeremy; Gemmell, Norman; Liao, Gordon; McAlister, Fiona
Estimates of marginal tax rates (MTRs) faced by individual economic agents, and for various aggregates of taxpayers, are important for economists testing behavioural responses to changes in those tax rates. This paper reports estimates of a number of personal marginal income tax rate measures for New Zealand since 1907, focusing mainly on the aggregate income-weighted average MTRs proposed by Barro and Sahasakul (1983, 1986) and Barro and Redlick (2011). The paper describes the methodology used to derive the various MTRs from original data on incomes and taxes from Statistics New Zealand Official Yearbooks (NZOYB), and discusses the resulting estimates.
Open Access
Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics
(Te Herenga Waka—Victoria University of Wellington, 2012) Creedy, John; Hérault, Nicolas
This paper presents two ‘non-welfarist’ approaches and one ‘welfarist’ approach to decompose changes in inequality and social welfare into three components: population, tax policy and labour supply effects. As an illustration, changes in inequality and in values of a social welfare function in Australia between 2001 and 2006 are examined. Inequality is first defined in non-welfarist terms as a function of disposable income: the independent judge places no value on leisure. Then this is modified to allow for evaluations using a weighted geometric mean of disposable income and leisure. This is seen to modify the evaluation of changes in important ways. Furthermore, the results are shown to be quite different from those obtained using a ‘welfarist’ evaluation in terms of money metric utility, where separate behavioural effects cannot be isolated.
Open Access
The Elasticity of Taxable Income in New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2012) Claus, Iris; Creedy, John; Teng, Josh
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. 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.
Open Access
The Composition of Government Expenditure with Alternative Choice Mechanisms
(Te Herenga Waka—Victoria University of Wellington, 2012) Creedy, John; Moslehi, Solmaz
This paper investigates the choice of the composition of government expenditure using both positive and normative approaches. The former involves aggregation over selfish voters (simple majority voting and stochastic voting are examined), while the latter involves the choice by a single disinterested individual (considered to maximise a social welfare function). The approach allows direct comparisons of the choice mechanisms. The structures examined include a transfer payment combined with a pure public good, and a transfer payment with tax-financed education. Explicit solutions are obtained for the choice of expenditure components, and these are shown to depend on the proportional difference between the arithmetic mean and another measure of location of incomes, where the latter depends on the choice mechanism. In each case the expenditure composition depends on an inequality measure defined in terms of the proportional difference between a measure of location of the income distribution and the arithmetic mean, where the location measure depends on the decision mechanism.
Restricted
Government Size, Fiscal Policy and the Level and Growth of Output: A Review of Recent Evidence
(Te Herenga Waka—Victoria University of Wellington, 2012) Gemmell, Norman; Au, Joey
Theoretical developments, improved methodologies and more extensive data have helped generate a dramatic increase in the literature testing for the impact of government size and fiscal policy on economic growth in recent years. We review a range of the more recent evidence and examine (1) the consistency or robustness of the results; (2) how these results differ from the earlier literature and (3) their usefulness as a guide to policy reform in practice. We find that the last decade has produced more robust evidence and more plausible orders of magnitude on the impact of fiscal policy on growth. However, the value of this evidence remains limited as a basis for quantifying macroeconomic responses to fiscal policy reform in practice.
Open Access
Can Automatic Tax Increases Pay for the Public Spending Effects of Population Ageing in New Zealand?
(Te Herenga Waka—Victoria University of Wellington, 2013) Creedy, John; Gemmell, Norman
This paper examines the extent to which projected aggregate tax revenue changes, association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures. Projections from two separate models, dealing with social expenditures and income tax and GST revenue, are used. The results suggest that the modest projected required increase in the overall average tax rate over the next 50 years can be achieved automatically by adjusting income tax thresholds using an index of prices rather than wages. Based on evidence about the New Zealand tax system over the last 50 years, comparisons of average and marginal tax rates suggest that such an increase may be feasible and affordable. The paper discusses the range of considerations involved in deciding if this automatic increase in the aggregate average tax rate, via real fiscal drag of personal income taxes, is desirable compared with alternative fiscal policy changes.
Open Access
Alternative Distributions for Inequality and Poverty Comparisons
(Te Herenga Waka—Victoria University of Wellington, 2013) Creedy, John
This paper provides an introductory review of the alternative possible income distributions which can be used when making cross-sectional evaluations of the effects of taxes and transfers using a household economic survey. This paper attempts to clarify the various alternatives, both for users of data and those wishing to interpret results. Special attention is given to the choice of income unit. The need to avoid spurious comparisons is stressed. The use of adult equivalence scales and the application of an explicit sharing rule are considered. Comparisons over time, where both the tax structure and the populations differ, are also considered. Numerical examples are used to highlight the alternative approaches and distributions.
Open Access
An Analysis of Benefit Flows in New Zealand using a Social Accounting Framework
(Te Herenga Waka—Victoria University of Wellington, 2013) Aziz, Omar; Carroll, Nick; Creedy, John
This paper presents a social accounting model to examine the entrants, exits and transitions of individuals among a wide range of benefit categories in New Zealand. Transition rates and flows are estimated separately for periods before the global financial crisis (GFC) and periods following the crisis. The data were obtained from the Benefit Dynamics Dataset maintained by the Ministry of Social Development. The model is used to examine, using simulations, the implications for the time profile of changes in the stock of benefit recipients under a range of counterfactual situations. It is suggested that the model can provide a useful tool for policy analysis.
Open Access
The Elasticity of Taxable Income, Welfare Changes and Optimal Tax Rates
(Te Herenga Waka—Victoria University of Wellington, 2013) Creedy, John
This paper provides a technical introduction to the use of the elasticity of taxable income in welfare comparisons and optimal tax discussions. It draws together, using a consistent framework and notation, a number of established results concerning marginal welfare changes and optimal taxes, in addition to presenting some new results, particularly in terms of non-marginal tax changes.
Open Access
The Growth Effects of Tax Rates in the OECD
(Te Herenga Waka—Victoria University of Wellington, 2013) Gemmell, Norman; Kneller, Richard; Sanz, Ismael
The literature testing for aggregate impacts of taxes on long-run growth rates in the OECD has generally used tax rate measures constructed from macroeconomic aggregates such as tax revenues. These have a number of advantages but two major disadvantages: they are typically average, rather than marginal, rates, and are constructed from endogenous tax revenues. Theory predicts a number of responses to both average and marginal tax rates, but empirical analogues of the latter tend to be at the micro level. In addition though most OECD economies are best regarded as small open economies, previous macroeconomic tests of OECD tax-growth relationships have implicitly been based on closed-economy models, focusing on domestic tax rates. This paper explores the relevance of these two aspects – "macro average‟ versus "micro marginal‟ tax rates, and open economy dimensions – for test of tax-growth effects in OECD countries. We use annual panel data on a number of average and marginal tax rate measures and find: (i) statistically small and/or non-robust effects of macro-based average tax rates on capital income and consumption but more evidence for average labor income tax effects; (ii) statistically robust GDP growth effects of modest size from changes in marginal income tax rates at both the personal and corporate levels; (iii) international tax competition, in which both domestic and foreign corporate tax rates play a role, is consistent with the data; (iv) tax effects on GDP growth appear to operate largely via impacts on factor productivity rather than factor accumulation.
Open Access
The Distribution of Income and Fiscal Incidence by Age and Gender: Some Evidence from New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2013) Aziz, Omar; Gemmell, Norman; Laws, Athene
This paper examines the age and gender dimensions of income distribution and fiscal incidence in New Zealand using Household Expenditure Survey (HES) data for 2010 and a non-behavioural micro-simulation model. Since many fiscal policies are likely to have quite different incidences across age groups and genders, and with population ageing changing the age and gender composition of the voting population in many countries, age/gender dimensions of fiscal incidence become increasingly relevant. While this single ‘age distribution snapshot’ cannot fully capture lifecycle incidences, it avoids the complex and uncertain assumptions implicit in the latter and is an important component of lifetime redistribution calculations. We explore alternative methods of intra-family allocation of resources including ‘unequal share’ assumptions based on recent research into how families allocate their spending. Our evidence, which in general is not highly sensitive to sharing assumptions, suggests a strong ‘life cycle’ aspect to fiscal incidence whereby net tax liabilities are low, and generally negative, at younger and older ages but positive during much of the ‘working age’ period. Women, on average, are found to have a systematically and persistently lower net fiscal liability than men, most pronounced at older ages when greater female longevity exercises a strong influence. Nevertheless, considerable heterogeneity of fiscal incidence for both men and women is observed with the distributions of various fiscal incidence measures showing substantial overlap.
Restricted
Taxpayers' Behavioural Responses and Measures of Tax Compliance 'Gaps': A Critique
(Te Herenga Waka—Victoria University of Wellington, 2013) Gemmell, Norman; Hasseldine, John
The work of Feldstein (1995, 1999) has stimulated substantial conceptual and empirical advances in economists’ approaches to analysing taxpayers’ behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non-compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non-compliance via (legal) avoidance and/or (illegal) evasion. In this paper we argue that the tax gap as conventionally defined is conceptually flawed because it fails to capture behavioural responses by taxpayers. We show that, in the presence of such behavioural responses, tax gap measures both for indirect taxes (such as the ‘VAT-gap’) and direct (income) taxes exaggerate the degree of noncompliance. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax base reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.
Open Access
Population Ageing and the Growth of Income and Consumption Tax Revenue
(Te Herenga Waka—Victoria University of Wellington, 2013) Ball, Christopher; Creedy, John
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.
Open Access
Corporate Taxation and Productivity Catch-Up: Evidence from European firms
(Te Herenga Waka—Victoria University of Wellington, 2013) Gemmell, Norman; Kneller, Richard; McGowan, Danny; Sanz, Ismael; Sanz-Sanz, José F.
Firms that lie far behind the technological frontier have the most to gain from imitating the technology or management practices of others. That some firms converge relatively slowly to the productivity frontier suggests the existence of factors that cause them to underinvest in their productivity. In this paper we explore how far higher rates of corporate taxation affect firm productivity convergence by reducing the after tax returns to productivity enhancing investments for small firms. Using data for 11 European countries we find evidence for such an effect; productivity growth in small firms is slower the higher are corporate tax rates. Our results are robust to the use of instrumental variable and panel data techniques with quantitatively similar effects found from a natural experiment following the German tax reforms in 2001.
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Estimating Firm-Level Effective Tax Rates and the User Cost of Capital in New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2013) Fabling, Richard; Gemmell, Norman; Kneller, Richard; Sanderson, Lynda
Effective marginal tax rates can be very different from the statutory rate and vary across firms, reflecting such factors as the extent and nature of taxable deductions (losses, depreciation), asset and ownership structures, and debt/equity financing. We estimate firm-specific EMTRs and related user cost of capital (UCC) measures allowing for shareholder-level taxation using data for 2000-2010 from the Longitudinal Business Database. Examining distributions of various UCC measures we find substantial firm-level heterogeneity; systematic changes as a result of tax reforms between 2004 and 2011; and systematic differences between foreignowned and domestically-owned firms. Choices among alternative UCC measures make a difference to interpretations.