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New Zealand's Tax Reforms and 'Tax Sheltering' Behaviour

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  • Gemmell, Norman

Abstract

This paper examines two episodes of tax reform in New Zealand to evaluate the extent of tax sheltering in New Zealand. Tax sheltering refers to activities undertaken by taxpayers to earn income in forms that allow this income to be ‘sheltered’ (legally or illegally) from the tax that would normally apply in the absence of such activities. Identifying the nature and extent of tax sheltering behaviour is, however, not straightforward given incentives to hide it and the high resource cost of comprehensive taxpayer auditing. As a result, researchers are often reduced to identifying ‘traces’ (indirect and imprecise indicators) of sheltering activity. This paper examines a variety of variables that can be expected to reveal such traces of sheltering activity related to the ‘legal form’ (corporate, personal, trust, etc.) by which income is earned and taxed. Two substantive reforms to income taxation in New Zealand, in 2000 and 2010, generated two pre- and post-reform tax regimes that allow examination of the issue. The tax regime changes gave rise to different hypothesised effects on ‘legal-form’ tax sheltering that the analysis seeks to exploit. The results provide strong support for those hypotheses. Firstly, tax changes in 2000 created an incentive for individual taxpayers to reduce their personal taxable income (when they paid the top personal rate), and to shift income towards corporate and trust entities. The evidence is consistent with these predictions. Secondly, reforms in 2010, removed the trust route to tax sheltering and reduced incentives and opportunities to earn income via some, but not all, types of corporate ‘arrangement’. Pre- and post-2010 evidence confirms both that the use of trusts declined, and that the most tax-favoured corporate arrangements increased in use after 2010.

Suggested Citation

  • Gemmell, Norman, 2020. "New Zealand's Tax Reforms and 'Tax Sheltering' Behaviour," Working Paper Series 21095, Victoria University of Wellington, Chair in Public Finance.
    • Handle: RePEc:vuw:vuwcpf:21095
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/21095
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    References listed on IDEAS

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    1. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Fiscal Studies, Institute for Fiscal Studies, vol. 33(3), pages 287-303, September.
    2. Robert Buckle, 2010. "Introduction: Tax policy reform New Zealand style," New Zealand Economic Papers, Taylor & Francis Journals, vol. 44(2), pages 129-136.
    3. Joel Slemrod & Caroline Weber, 2012. "Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 25-53, February.
    4. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
    5. Simon Carey & John Creedy & Norman Gemmell & Josh Teng, 2015. "Estimating the Elasticity of Taxable Income in New Zealand," The Economic Record, The Economic Society of Australia, vol. 91(292), pages 54-78, March.
    6. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Fiscal Studies, Institute for Fiscal Studies, vol. 33(3), pages 287-303, September.
    7. Hall, Viv & McDermott, John, 2019. "Changes in New Zealand’s Business Insolvency Rates after the GFC," Working Paper Series 8251, Victoria University of Wellington, School of Economics and Finance.
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