How ageing and other economic factors have impacted New Zealand’s tax system

Shane Domican and Sijin Zhang ()
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Sijin Zhang: The Treasury

Treasury Analytical Notes Series from New Zealand Treasury

Abstract: Population ageing, income growth, and individuals shifting income into companies and trusts has materially changed New Zealand’s tax bases and revenue. We provide indicative analysis of these trends and four main insights: (1) An ageing population may result in an increase in GST revenues as older households spend their saved earnings. This could shift our tax base towards indirect taxes, however the size of this is relatively small. In addition, this result critically relies on assuming no behaviour change from households due to ageing. (2) On the other hand, there have been material behavioural changes. We show that there has been a rise in the ‘labour’ share of our personal tax base that is likely due to rising labour force participation, particularly by older individuals. We also show how, absent this rise in labour income from rising participation, an ageing population would have increased the ‘capital’ share of our personal tax base. (3) Fiscal drag has been significant as income growth moved more income into higher personal tax brackets. From 2011 to 2023, fiscal drag led to personal tax revenues rising by 1.6% of GDP. The distributional impact of fiscal drag is uneven and the full impact on New Zealanders depends on how the revenue is used. However, in the future, if fiscal drag continues, it’s likely to increasingly impact lower income individuals. (4) Taxpayers appear to have responded to gaps between the top personal tax rate and the entity tax rate by shifting more of their income into companies and trusts. This had a material and growing fiscal impact. The risk of sheltering in trusts has largely been removed with the alignment between top personal tax rate and trustee rate in 2024. However, there appears to have been growing sheltering in companies, indicating a potential shift in risk. We also show how this sheltering may explain some of the apparent rise in labour income for individuals as capital income is sheltered in these entities. Whether these trends continue in the future is uncertain. Our analysis shows that behavioural responses by taxpayers as well as future policy choices are key drivers of our tax bases and revenue. We hope the note highlights areas to have continued attention and vigilance.

JEL-codes: D31 D33 H20 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2025-10-16
New Economics Papers: this item is included in nep-age, nep-pbe and nep-pub
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