The Distributional Effects of Consumption Taxes in New Zealand

Abstract

This paper investigates the distributional effects of the GST in New Zealand, and the case for the introduction of reduced rates to address distributional concerns. The analysis is based on a consumption tax micro-simulation model constructed using expenditure micro-data from the Household Economic Survey for 2012/13. The distributional effects of excise taxes on tobacco, alcohol and petrol are also considered. The paper finds that the lifetime distributional impact of the GST is either proportional or at worst slightly regressive. Excise taxes are also found to be roughly proportional or slightly regressive, though they are of far smaller magnitude than GST burdens. Simulation results show that the introduction of a European-style multi-rate GST system would have a progressive impact on overall GST burdens, but that such a reform would benefit richer households significantly more than poorer households in dollar terms. Given it is the overall progressivity of the tax system that matters, New Zealand’s current approach of providing targeted support to poorer households via the Working for Families tax credit package can be seen as a far more cost effective way of supporting poorer households than the introduction of reduced GST rates for specific expenditure items.