Tax take from wealthy fell when top tax rate went up Treasury

Friday 3rd August 2012

Treasury research has found the proportion of all tax paid by the highest earners fell after the 2001 tax changes that took the top personal income tax rate to 39 percent from 33 percent.

Far from its intended purpose of increasing the contribution by wealthy people to the cost of running the government, the 2001 tax increase spurred the highest income earners to find ways of avoiding tax, the "Elasticity of Taxable Income in New Zealand" paper found.

Published on the Treasury website, the research paper tracks the proportion of income tax paid by different income bands between 1994 and 2008, and finds the top 10 percent of income earners had begun to pay an increasing share of total income tax in the years immediately preceding the tax rate increase and peaked at 38.9 percent at the time the tax rate increase was announced.

"However, following introduction of the 39 percent rate, it fell to 33.9 percent in 2001," the report says. "Between 2001 and 2009, the share of taxable income obtained by the top decile fluctuated between 33.7 percent in 2008 and 34.6 percent in 2005."

Treasury warned the results should be treated with caution, but that it showed "the elasticity of taxable income is substantially higher for the highest income groups", meaning the higher the income bracket, the more capacity that group of earners has to manipulate declared income.

"For lower deciles of the income distribution, the elasticity was found to be negligible," the report found.

Men had greater opportunity than women.

"This may be largely because the taxable incomes of men are systematically above those of women," the researchers say. "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 Inland Revenue Department last year won a landmark case against two Christchurch orthopaedic surgeons who declared dramatically lower incomes after the 2001 income tax changes than in previous years.

BusinessDesk.co.nz

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