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
Age-Income Profiles in New Zealand: New Estimates Based on Administrative Data
(Te Herenga Waka—Victoria University of Wellington, 2022) Alinaghi, Nazila; Creedy, John; Gemmell, Norman
This paper uses a new longitudinal dataset, containing information about the incomes of New Zealand individuals, to examine the form of cohort age-income profiles. A model of the variation in mean log-earnings with age, allowing for quadratic age and linear time effect, is estimated separately for males and females, along with a range of other demographic groups. An 'overtaking' property, whereby more recent cohorts have higher real income than older cohorts, at comparable ages, are found in all cases. Cubic profiles of the variation in the variance of log-income with age are also estimated. Examples of the projected changing distribution of income with age are given, for various cohorts aged 20 in 2020.
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 Atkinson Inequality Measure and Inequality Aversion
(Te Herenga Waka—Victoria University of Wellington, 2019) Creedy, John
This paper examines the precise way in which the Atkinson inequality measures varies as inequality aversion increases. The aim is to investigate whether precise conditions can be obtained under which a tax reform might be judged to be inequality reducing for one range of aversion parameters, and inequality increasing for another range. A number of elasticities, with respect to inequality aversion, are derived and shown to have convenient interpretations. Specific conditions cannot be produced because the Atkinson measure can take the same value for a range of alternative distributions. Nevertheless, intersecting profiles of Atkinson measures plotted against inequality aversion can arise without the need for pathological assumptions about changes in the income distribution. The analysis shows the need to consider a range of aversion parameters when examining changes to the tax and transfer system. By considering only one or two values, it could be concluded incorrectly that a tax reform is progressive, when a higher degree of inequality aversion would judge a change to be regressive.
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.
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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.
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Chair in Public Finance Ten Year Review: 2011-2021
(Te Herenga Waka—Victoria University of Wellington, 2022) Gemmell, Norman
This working paper provides a review of the activities and achievements of the Chair in Public Finance over the 10 years from its establishment in 2011 until 2021. The review covers Research, Publications, Research Supervision and Training, Stakeholder Engagement and the Future of the Chair.
Open Access
Comparing Income Distributions Using Atkinson’s Measure of Inequality
(Te Herenga Waka—Victoria University of Wellington, 2021) Creedy, John
This paper is aimed at undergraduate and graduate economics students, and public sector economists, who are interested in inequality measurement. It examines the use of the Atkinson inequality measure to compare income distributions. A major feature of this measure is that distributional value judgements are made explicit, via the use of a particular form of Social Welfare Function. Emphasis is given to the interpretation of changes in inequality and the role of the relative inequality aversion parameter, which reflects an important feature of those value judgements.
Open Access
Complementarity in Models of Public Finance and Endogenous Growth
(Te Herenga Waka—Victoria University of Wellington, 2014) Misch, Florian; Gemmell, Norman; Kneller, Richard
This paper considers the effects of complementarity in private production between private and public inputs on optimal fiscal policy under the objective of growth maximization. Using an endogenous growth model with public finance and CES technology, it derives two central results. First, it shows that with complementarity, growth-maximizing fiscal policy is also affected by preference parameters, the degree of complementarity and the stock-flow properties of public inputs to private production. Second, it shows that optimal public spending composition and taxation are interrelated and also depend on the efficiency of public spending under growth maximization. Both results contrast with standard findings in the literature that are typically based on the assumption of Cobb-Douglas technology, and have important lessons for policy settings.
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.
Open Access
Constructing a Longitudinal Database for the Analysis of Individual Incomes in New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2020) Alinaghi, Nazila; Creedy, John; Gemmell, Norman
This paper describes the construction of a unique longitudinal individual-level dataset that allows the dynamics of individual incomes in New Zealand to be examined. The data are obtained from the New Zealand Integrated Data Infrastructure, and cover approximately 393,874 taxpayers, for whom a range of information including, but not limited to, taxable income, gender, ethnicity, education level and location have been compiled. The availability of suitable data has previously been a constraint on income dynamics research. The present data construction exercise allows a more extensive analysis of individual income inequality and mobility than has previously been possible.
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.
Open Access
Debt Projections and Fiscal Sustainability with Feedback Effects
(Te Herenga Waka—Victoria University of Wellington, 2015) Creedy, John; Scobie, Grant
This paper analyses long-term fiscal sustainability with a model which incorporates a number of feedback effects. When fiscal policy responds to ensure long-term sustainability, these feedback effects can potentially modify the intended outcomes by either enhancing or dampening the results of the policy interventions. The feedbacks include the effect on labour supply in response to changes in tax rates, changes in the country risk premium in response to higher public debt ratios, and endogenous changes in the rate of productivity growth and savings that respond to interest rates. A model of government revenue, expenditure and public debt which incorporates these feedbacks is used to simulate the outcome of a range of fiscal policy responses. In addition the effects of population ageing and productivity growth are explored.
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
Designing Direct Tax Reforms: Alternative Approaches
(Te Herenga Waka—Victoria University of Wellington, 2020) Alinaghi, Nazila; Creedy, John; Gemmell, Norman
How high should the top personal income tax rate be? Is there an `optimal' structure of tax rates and thresholds? Despite numerous value judgements being required to answer such questions, this paper suggests that 'rational policy analysis' principles can nevertheless be applied to support policy advice on these and other direct tax design questions. It is argued that the economic models thought suitable as the basis for tax analysis vary according to the precise ways in which the policy question is formulated; the underlying behavioural responses to taxation expected across the taxpaying population; the precise definitions of key variables such as income inequality; and the specification of policy objectives such as redistribution, revenue-raising or tax efficiency.
Open Access
Determinants of the Spanish housing market over three decades and three booms: Long run supply and demand elasticities
(Te Herenga Waka—Victoria University of Wellington, 2014) Arrazola, María; de Hevia, José; Romero, Desiderio; Sanz-Sanz, José Félix
This paper offers a quantitative analysis of housing supply and demand in Spain. To this end, it formulates a model in line with the traditional models of the literature. Using Spanish data for the period 1975 to 2009, reduced form and structural models are estimated. The results obtained show that faced with situations of disequilibrium prices adjust more rapidly than stock. Similarly, they demonstrate that demand shows low sensitivity to variations in prices and real interest rates. By contrast, it is highly sensitive to demographic changes and the evolution of the labor market. The evidence confirms that permanent income has greater weight than prices as a determinant of demand. Moreover, supply is very sensitive to variations in prices and interest rates.
Open Access
Did tax-transfer policy change New Zealand disposable income inequality between 1988 and 2013?
(Te Herenga Waka—Victoria University of Wellington, 2018) Nolan, Matt
This paper investigates the role tax and transfer policies changes played in the increase in disposable income inequality over the 1988-2013 period. Utilising the Household Economic Survey (HES) and a behavioural microsimulation model (Treasury’s TAXWELL-B) the relative contributions of tax policy and changes in various sociodemographic characteristics (age, highest educational attainment, and employment status) to the change in inequality are estimated. Tax and transfer policy changes are found to have had a major role in the increase in income inequality, accounting for around a third of the observed increase. Furthermore, non-policy related changes in the employment distribution also increased income inequality. However, increases in tertiary educational attainment and the proportion of workers in their prime earning years were both factors that were reducing income inequality over this same period. With these factors pushing in separate directions, this research also indicates that there are significant unobserved determinants of the rise in income inequality that cannot be attributed to the static role of tax-transfer policy, age, education, or employment status distributions.
Open Access
Differential Income Growth of Individuals in New Zealand: Evidence from Administrative Data
(Te Herenga Waka—Victoria University of Wellington, 2022) Alinaghi, Nazila; Creedy, John; Gemmell, Norman
This paper uses administrative, longitudinal data on the New Zealand taxpayer population to examine the nature and extent of income mobility by individuals. It uses recently developed illustrative devices for mobility measures based on individuals' relative income growth over time, for periods of 1 to 15 years, during 2002 to 2017. Results highlight consistently higher (lower) relative income growth for those with initially lower (higher) incomes, reflecting strong 'regression to the mean' processes.
Open Access
The 'Disciplinary Effect' of the Performance-based Research Fund Process in New Zealand
(Te Herenga Waka—Victoria University of Wellington, 2019) Buckle, Robert A; Creedy, John
This paper examines how the research quality of academic disciplines within New Zealand universities has evolved since the first Performance-based Research Fund (PBRF) assessment in 2003. The analysis uses a database consisting of an anonymous ‘quality category’ (QC) for each person assessed in the 2003 and 2012 PBRF assessment rounds. Individual researchers are assigned to academic discipline groups and the paper measures the distribution of researchers across disciplines and the discipline composition of universities. There has been little change in the distribution and their concentration within and across universities. However, exceptions are increases in the shares of medicine and agriculture, and a reduction in the share of education. Research Average Quality Scores are derived for discipline groups. All groups substantially increased their scores. Transition matrices show that there are significant differences in the dynamics of the various disciplines during the PBRF process. The paper shows that changes in the discipline composition of universities explains little of the proportional improvement of research quality among New Zealand universities.
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.