A Treasury analysis has revealed that 6 percent of New Zealanders and 30 percent of single parents face effective tax rates of more than 50 percent. Some could even have effective marginal tax rates of more than 100 percent.
Effective marginal tax rates (EMTRs) measure how much of each extra dollar a person earns is lost due to higher tax rates or deductions from government supports, such as the accommodation supplement.
For example, someone with an effective marginal tax rate of 50 percent only keeps 50 cents of every dollar earned.
The paper’s authors say high EMTRs are “an unavoidable feature of any targeted welfare system that aims to support those most in need while managing government costs.
“The key policy question is then not whether to have high EMTRs, but rather which groups should face them and at what income levels they should occur.”
The research found that high rates (50 percent or more) affected six percent of New Zealanders, but that 13 percent of two-parent families and 30 percent of single-parent families were also at that level.
This was due to policies that sharply reduced benefits (as well as government support such as Working for Families and the accommodation supplement) as incomes rose.
For instance, anyone receiving a benefit has their payment reduced by 70 cents for every dollar they earn over $160 a week. Since that’s calculated based on gross income, tax absorbs most of the rest.
So, for example, a single parent currently earning a median wage of $33.00 and working part-time (between eight and 20 hours a week) would get to keep only 10 cents of every additional dollar earned because of tax and the reduced benefits and Working for Families credits they could receive.
“When working between 20 to 24 hours, they keep none of the additional dollars earned due to reductions in the minimum family tax credit, income tax, and the ACC levy,” the analysis said. They actually lose nearly 2 cents by earning an extra dollar. The small number of families that have EMTRs higher than 100 percent all have children.
Parents who worked would also face additional costs such as childcare and transport.
“We often assume that working more hours leads to a corresponding increase in take-home pay,” the authors concluded. “However, this is not always the case. Sometimes, extra work might push someone into a higher tax bracket or mean they receive fewer government benefits. Their additional take-home pay might be less than expected.”
The paper outlined one solution.
“The only way to completely eliminate high [EMTRs] while maintaining adequate income support would be through universal payments,” the analysis says.
| Proportion who have... | ||||
| Family type | EMTRs <25% | EMTRs between 25% & 50% | EMTRs >50% | EMTRs at their marginal tax rate + ACC levy |
| All | 41% | 53% | 6% | 85% |
| Single person | 57% | 42% | 1% | 89% |
| Couple without children | 40% | 58% | 2% | 93% |
| Sole parent | 44% | 25% | 30% | 51% |
| Couple parents | 20% | 67% | 13% | 70% |
