Tax and Transfer Progressivity in New Zealand: Part 2 Results

This note is the second in a two-part series that seeks to improve our understanding of effective average tax rates (EATRs) in New Zealand. EATRs measure the net effect of taxes and transfers as a proportion of a taxpayer’s income. Measuring EATRs can provide insight into some important questions with implications for the fairness and efficiency of the tax and transfer system: Who pays tax and who receives transfer payments? How much do they pay or receive? Where might taxes and transfers distort decisions to save and invest? This series focuses on the first two questions and what EATRs can tell us about progressivity (defined as having higher tax rates and lower transfer rates for higher levels of income or wealth). Measuring EATRs can also help us to identify tax distortions caused by the inconsistent tax treatment of different types of income. Such distortions can create allocative inefficiencies and reduce productivity. This work stems from a recommendation by the Tax Working Group Secretariat (2018, recommendation 69) that ‘strongly encouraged’ the Government to release more statistical and aggregated information about the tax system. A lack of data on the distribution of capital gains prevented the Tax Working Group from being able to provide precise impact analysis of extending the taxation of capital gains. Closing this knowledge gap is particularly important because capital gains can be a significant source of economic income.