How much could NZ raise from a higher top tax rate? We crunched the numbers
Because people change their behaviour in response to higher taxes, raising the top income tax rate can affect and even reduce the revenue generated.
New Zealand's top personal income tax rate is currently 39%, but could potentially be raised to 45% or 48% ahead of the upcoming general election. The Green Party and Te Pāti Māori propose different thresholds for the increased rate. While higher rates could generate more revenue, the actual impact depends on how taxpayers react to the change.
These responses can involve altering when or how income is taxed, reducing economic activity, or even changing career choices. Economists use the concept of "elasticity of taxable income" to measure how strongly reported taxable income responds to changes in tax incentives. In a study of 2024 data, a 0.25 elasticity suggests a 1% fall in after-tax income would lead to a 0.25% drop in reported taxable income.
Raising the top rate from 39% to 45% could increase annual revenue by around $560 million, assuming no change in behavior. However, this gain is offset by economic costs, such as reduced productive activity when workers take on less work due to higher taxes. Adding the revenue to other sources in the system could increase the optimal top rate to about 66%.
The overall impact on inequality and social spending also plays a significant role in determining whether raising the top tax rate is beneficial.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
