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The tax system in New Zealand is generally highly regarded in the international tax community, and indeed is often described as a model tax structure, especially in the broadness of the base of its Goods and Services Tax. Nevertheless, numerous elements of the tax system are ripe for reform. Indeed, the recent report of the Victoria University of Wellington Tax Working Group (TWG) (2010, pp. 5-6) concludes that “the current tax system is not working effectively and that reform is necessary if New Zealand is to have a fair tax system that minimizes the cost of raising taxes, reduces barriers to productivity and growth and positions it well for future challenges.” In particular, the TWG report stresses that, “The current system is incoherent, unfair, lacks integrity, unduly discourages work participation and biases investment decisions.” As part of the ongoing debate regarding the tax structure in New Zealand, several approaches to reform have been proposed, especially in the area of capital income taxation, which the TWG report identifies as a particular area of concern. This report, prepared at the request of—and with considerable assistance from—the New Zealand Treasury, provides computer simulations of the potential macroeconomic effects of numerous such reform proposals. The simulations use a dynamic, large-scale, overlapping generations, computable general equilibrium (CGE) model that we have developed—the Tax Policy Advisers (TPA) model—which was extended in several ways to more accurately model the effects of tax reform in the New Zealand context.
The report proceeds as follows. The following section provides a brief overview of the ongoing tax reform debate in New Zealand, drawing on the 2010 report of the TWG and Benge and Holland (2010) as well as Zodrow (2010b) and then, given this context, describes the specific tax changes and reform proposals that are analyzed in the report. Section III describes the TPA model, including the various features of the model that are especially important to accurately capture the effects of reform in New Zealand; this section includes a discussion of the parameter values used in constructing the initial equilibrium of the model, which is a stylized representation of the New Zealand economy in 2007. The model simulation results are presented and discussed in Section IV, and Section V concludes.
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