Friday, 16 May 2014

Bringing sexy back: EMTR-style

Posted by Eric Crampton
In the leadup to yesterday's budget, I'd tweeted that, were there any talk on tax rates, I'd be far more keen on seeing action on effective marginal tax rate schedules rather than on headline rates. I just don't believe that the 33% rate has any substantial pernicious effect on labour supply decisions when compared to the near 100% EMTRs* hitting some parts of the lower income ranges where abatement rates over multiple benefits combine for awfulness.

Keith Ng was sceptical:
This morning, Sam Warburton rose to the challenge.


For the original graph, hit NZIER's paper on Working for Families.



@Economissive is consequently today's #FF.


* Update: Effective Marginal Tax Rates tell you what portion of your next dollar is kept by the government. It combines your headline marginal tax rate at your income level, your ACC contribution, and any reduction in income-contingent benefits. Income-linked benefits like Working For Families reduce with family income rather than just with personal income. Suppose you're a single-earner family on $40,000. The non-earning spouse wishes to re-enter the workforce. While the marginal tax rate will be low on part-time earnings, the effective marginal tax rate can be high because it scales with family income rather than with personal income. So the schedule above shows that, for some income ranges and in some family circumstances, you can effectively receive zero dollars out of a raise or from working more hours: the government claws it all back out of your WFF or other benefits.
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1 comment:

  1. Tim MakariosFri May 16, 11:55:00 am GMT+12

    I recall that when I was on a student allowance, I concluded that I had an EMTR of something like 107%. The allowance was abated just quickly enough that income tax would take all the rest of the next dollar earned; the extra 7% (or whatever it was) was the ACC levy.

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