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Working paper

Can Automatic Tax Increases Pay for the Public Spending Effects of Population Ageing in New Zealand? (WP 13/22)

Issue date: 
Wednesday, 18 December 2013
Status: 
Current
View point: 
Document Date: 
Publication category: 
JEL classification: 
E62 - Fiscal Policy
H69 - National Budget, Deficit, and Debt: Other
ISBN: 
978-0-478-40375-6

Formats and related files

This paper examines the extent to which projected aggregate tax revenue changes, in association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures.

Abstract

This paper examines the extent to which projected aggregate tax revenue changes, in association with population ageing over the next 50 years, can be expected to finance expected increases in social welfare expenditures. It uses projections from two separate models, dealing with social expenditures and income tax and GST revenue. The results suggest that the modest increase required 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.

This Working Paper is available in Adobe PDF and HTML. Using PDF Files

Acknowledgements

We are grateful to Chris Ball, Bob Buckle, Richard Disney and Anita King for comments on an earlier version of this paper.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Last updated: 
Thursday, 19 December 2013