New app. shows cost of earning an extra dollar
Press Release: Australian National University
Steve Thomas
15 May 2014
A new web app. released today, on Budget Day—the New Zealand Tax and Welfare Calculator (NZTWC)—helps New Zealand
households better understand how the tax and welfare system impacts them. The app. can be accessed through: http://www.stevethomas.org.nz/nztaxandwelfarecalculator.
The app. allows users to see what share of income they pay in tax (average tax rate), and the additional tax burden on
earning an extra dollar from the income tax system and the withdrawal of tax credits (effective marginal tax rate).
“It is important for households to understand what these costs are because they affect decisions such as, whether to
enter the labour force, whether to work longer hours, to take up a higher paying job, or to undertake further study,”
says Steve Thomas, a New Zealand PhD Scholar at The Australian National University’s Crawford School of Public Policy,
who designed the app. with two fellow ANU students.
With the taxable income of the primary and secondary earner in a household, the NZTWC currently calculates how much
income tax a household pays and how much it is entitled to receive in Family Tax Credits, In-Work Tax Credits and the
Parental Tax Credit (which are part of Working for Families). The Labour Party’s proposed ‘Best Start’ baby bonus, which
would replace the Parental Tax Credit, can also be included.
“With this information, the NZTWC determines the overall sacrifice each earner makes in taxation—according to his or her
average tax rate—and the cost of earning an extra dollar for each earner—according to his or her effective marginal tax
rate,” says Thomas.
For example, for the average New Zealand household earning around $85,000:
• The effective marginal tax rate on the primary earner is 34.7% for a sole income household with no children—paying
$18,970 a year in income tax.
• For a two-income household, the effective marginal tax rate is 31.7% for the primary earner and 19.2% per cent for the
secondary earner, assuming income is apportioned two-thirds, one-third. The household pays about $14,000 in income tax.
• For the same household with three children (a new born, a 2 year old and a 5 year old) the NZTWC shows that the
effective tax rates increase to 52.9% for the primary earner and 40.5% for the secondary earner. This household pays
about $14,000 in income tax per year, and is entitled to about $5,506 in tax credits.
• Including Labour’s proposed ‘Best Start’ entitles the same household to tax credits of about $7,500 per year.
• However, for the same household when the new born turns 1, tax credits would fall to about $4,470. The cost to the
primary earner of earning an extra dollar would increase to 61.7%, while the cost to the secondary earner would increase
to 49.2%.
Depending on their circumstances, some households will notice that their effective marginal tax rate may be high across
the middle of the taxable income range.
“While this version of the NZTWC includes the tax credits listed above, our plan is to add further interpretive
information, as well as more tax credits and welfare payments that households or individuals receive under the current
system. If tax changes, or changes to tax credits, are announced in today’s Budget—as Prime Minister John Key signalled
yesterday—we will look to include them.
We also plan to add policies that are announced by political parties in the run up to this September’s general
election,” says Steve Thomas.
“Our hope is that the NZTWC will be a helpful tool to those wanting to assess how much better or worse off they would be
under different parties’ policies. It could also be a helpful decision-making tool for those who want to think about how
changing circumstances might affect their income,” says Thomas.
“Finally, we hope that the NZTWC can help those designing alternative welfare policies to see
the impact of their proposals, and assess the trade-offs that are made between providing income assistance and not
unduly harming households’ livelihoods and work incentives.”
Disclaimer:
The NZTWC is provided for information and illustrative purposes. The NZTWC is not intended to be financial advice, nor
should it be used in this way.
All reasonable care has been taken in preparing and designing the NZTWC; however, we provide no warranties and make no
representation that the information provided by the NZTWC is appropriate for users’ particular circumstances or
indicates that they should follow a particular course of action.
ENDS