A Study of Economic Reform: The Case of New Zealand,, edited Brian Silverstone, Alan Bollard, and Ralph Lattimore, (North Holland Books: 1996) pp.101-138.
Note: This item was so big it is in two parts. Income Distribution: Part II
Keywords: Distributional Economics;
There is a widespread belief that a major consequence of the economic reforms of the 1980s and 1990s was increased economic inequality. As will become evident, this overall conclusion is correct, even if the mechanisms which generate the inequality are somewhat more complex than popular views articulate. We can trace these mechanisms in theory using Diagram 1. The rest of the paper assesses their strength and direction.
The central features of the reforms, relevant to this chapter are shown in boxes, as are the other exogenous (for these purposes) influences. (The first reference to each of these items is in italics, which will assist comparison with the summary in section 11.) They reforms are separated into market liberalization, macroeconomic policy, and fiscal policy. Two further elements which is also taken as exogenous are the world economy which is discussed in section 2, and the factor endowment in section 3. (Macroeconomic policy, among others, influences the factor endowment in the medium run, but there is so little useful material it is not possible to trace the relationship.)
The world economy, and the outcomes of the market liberalization, and the macroeconomic policy come together to determine the domestic factor prices, and the factor distribution (section 3). Meanwhile the outcomes of the macroeconomic policies, the factor endowment, and the factor prices themselves, plus social factors (such as the willingness of women, the elderly, and others to work) determine the utilization of the factors, which is also discussed in section 4 (with the factor endowment), in terms of unemployment.
The interaction of the factor prices and the factor endowment generates the personal market distribution described in section 5. Adjustment for taxation and benefits (section 6) gives the personal disposable market income but there is little recorded on it.
Instead, personal disposable incomes are combined into household disposable incomes, which are also influenced by social factors such as demographic change and household composition. (section 7). The chapter also briefly explores the notion of full income, where effects such as government spending, prices, quality of services, and hours worked are taken into account (section 8).
While the connections between the various elements are shown in the diagram, it is not easy to show these in a specific measurable way, and sometimes causality must be inferred. In all relationships orthodox economic processes are assumed.
The focus is on the 1980s and after. But it is necessary to start earlier in order to identify long term trends. For various reasons – including the beginning of key data series and the report of the Royal Commission on Social Security (1972) – as far as possible the data begins in 1971/2.
Section 9 looks at the distributional impact of the 1990 and 1991 reforms using a different approach, for most of the data runs end by the beginning of 1990s. (Snively (1993) provides a review of current research on the income distribution.)
The focus of this chapter is on changes in the economic distribution. Thus not much space is devoted to reporting about groups which are well known to be worse off, unless it is possible to trace their distributional change over time). (Section 6 ends with a brief survey of personal income trends for the Maori in the 1980s. Disposable income trends for Maori and Pacific Island households, and households with dependent children are in section 8.)
The overall conclusion is in Section 11.
2. WORLD INCOME DISTRIBUTION
A small trading economy cannot isolate itself in the long term, or perhaps even the medium term, from the rest of the world. This applies for the economic distributions, for the prices at which goods are traded reflect factor prices, and while world interest rates affect domestic capital transactions. One might also argue that competitive market pressures would also affect the ability of a country to choose its own tax regime – certainly the attitudes and conventional wisdom of the world financial community seems to.
Tracking the story of world income distribution is not easy, although there is data on the key elements of wages and interest rates, and some recent data on international comparisons of the household distribution. To understand what was happening in New Zealand we begin by considering these.
|WAGE AND PRICE CHANGES: 1968-1990
per cent annual change
|G7: (US, JAPAN, GERMANY, FRANCE, UK, ITALY, CANADA)|
|REAL INCOME WAGE||4.7||0.8||0.1||1.3|
|REAL GDP per WORKER||3.2||1.4||1.6||1.9|
|REAL INCOME WAGES||4.9||-0.1||-2.0||0.1|
|REAL GDP per WORKER||2.7||-0.9||0.4||0.6|
Source: OECD (1992)
Wages – Hourly Earnings in Manufacturing (Table 9.1)
Consumer Prices – Consumer Price Indexes (Table 8.11)
Real GDP per Worker – Real GDP per Person
Employed (Table 3.7). Note the New Zealand figure for 1979 to 1990 is missing and was calculated using Table 3.1, and Table R17 of OECD (1993).
The largest element in the factor income distribution, and on some measures the greatest contribution to distributional inequality, is labour earnings, assessed in part by wage rates.
OECD wage statistics are not complete. There is, however, a series for hourly earnings in manufacturing for the Group of Seven (G7) which begins in 1968, which might be used as a proxy for overall wage changes. The change in the index for selected periods is shown in Table 1, together with the consumer price index. The difference between the wage change and price change is the real income wage, the spending power of the worker before income tax. (A wage index divided by a producer price index gives the real product wage index.)
Table 1 shows that real wages rose rapidly in the OECD between 1968 and 1973, including in New Zealand. But after 1973 real wage growth was much slower. In the G7 countries they rose less than 1 percent a year. The New Zealand experience is even more miserly, with the real income wage falling in the post 1979 period.
Unfortunately we do not have productivity figures. We do have real GDP per person employed, which might be treated as a good indicator (especially if the hours worked per employed were constant). Cautiously then, comparing the real wage changes to this crude measure of productivity change, we observe that after 1973 workers in the G7 had real wage increases less than average labour productivity increases by about ½ percent annually over the entire 22 years. The gap was greater in the 1980s. The New Zealand real income wage to real GDP per worker outcome is not too different, although the relative gap was larger in the 1980s.
Thus while the New Zealand economy performed more poorly than the G7, so its real wage path was lower, the broad picture is the same: in most of the rich economies there has been downward pressure on workers real wage income since the mid 1970s. We cannot simply attribute the declining real wage path we observe during the 1980s to internal changes in New Zealand and to the reforms.
2.2. Real Interest Rates
|REAL INTEREST RATES: 1968-1990
per cent p.a.
|G7: (US, JAPAN, W.GERMANY, FRANCE, UK, ITALY, CANADA)|
Source: OECD (1992)
Short Term – typically 3 month rate on Treasury bills (Table 10.8)
Long Term – typically 10 year rate on government stock (Table 10.10)
The deflator is the GDP implicit price index (Table 8.1)
The G7 average is unweighted, and includes estimates of missing cells to maintain comparability.
The story of the real wage path is reinforced by that of real interest rates, for they were higher in the 1980s than in the 1970s. Table 2 records real rates for the G7 countries, and New Zealand. Up to the end of the 1970s, world and New Zealand real interest rates, whether short or long term, were below the volume GDP growth rate. They were low, and even negative. Then the G7 rates rose dramatically, on average by more than 5 percentage points between 1974/1979 and 1980/1990, while the New Zealand domestic rates were over 7 percentage points higher than they had been in the previous decade.
These higher real interest rates impacted throughout the world. There is a single event which might explain the change. In 1979 the American Federal Reserve ceased targeting interest rates, and instead targeted money aggregates, allowing interest rates to fluctuate. Real interest rates rose. Following the large American budget deficit from 1982, the Fed ran a high interest rate strategy to mop up the additional liquidity that the American budget deficit was pumping into the world economy. Downward pressure on real wages followed.
The high real interest rates of the 1980s may offer a prosaic, but more relevant, account of the pressure for privatization of government assets. A government which is borrowing at negative real interest rates can afford the luxury of not very profitable commercial assets. When interest rates increase substantially, the attractiveness of such investments diminishes.
This section has discussed only the factor distribution. International comparisons of the household distribution are discussed in section 10.
3. NEW ZEALAND FACTOR DISTRIBUTION
This section follows Easton (1983) which explored the factor distribution up to the mid 1970s, examining real wages, the factor share between labour and capital, and the return on capital.
3.1. Real (Income) Wages
There is no entirely satisfactory wage index. Figure 2 shows the track of the prevailing weekly wage index (PWWI) and average hourly earnings, in each case relative to the Consumers Price Index.
The now discontinued PWWI was based on the rates reported in the various industrial documents (industrial awards and agreements). Figure 2 shows it grew (relative to consumer prices) up to March 1982. Following the imposition of the wage freeze, the real wage measured this way goes into a sharp decline of 21 percent to 1986 (an average of 4½ percent p.a.). Since then it has declined more gently at about ½ percent p.a. to March 1993. While there is no reason to doubt the veracity of the index in terms of what it purports to represent, it seems unlikely that it describes the actual experience of typical wages.
The decline during the wage freeze gives a clue. The PWWI reports pay-rates in documents, not that which is actually paid. In practice not all workers were covered by the documents, while many who were covered also received supplementary payments which the documents did not recognize.
The average hourly wage rate is based on an industrial survey – basically it is the wage bill divided by the number of hours worked. As an index measure it suffers from a variable composition in the work force. In particular in a period of rising unemployment and stagnant pay rates, the index could show a rise because lower paid workers are more likely to become unemployed. Nevertheless the picture of the real path of average hourly wage rates is perhaps a little more plausible than for the PWWI. Again real wages rose between March 1978 and March 1982. Under the freeze they experienced a decline, but this time of only 11 percent to March 1985, bottoming earlier. Since the nadir they have recovered by a total of 7 percent to March 1993.
However while there are differences in the magnitudes of the two series there is an overall basic agreement as to the shape of the wage path: rising to 1982, falling during the wage freeze, and then relatively flat thereafter.
3.2. Factor Shares
Figure 3 shows the share of labour income in added value (Net National Income, NNY) from the March 1972 year to March 1993. The factor share of labour in NNY was relatively low in the early 1970s (near 70 percent), probably because the terms of trade were high and farming profitable. They collapsed following the end of the commodity boom of the early 1970s, the factor share steadily rose, reaching 77.3 percent in 1990/1. As we might expect from the wage path, the factor share also fell rapidly during the freeze to 69.3 percent in 1984/5. Since then it has recovered a little, but the factor share was broadly flat averaging 73.2 percent between 1985/6 and 1991/2, and fell again after that.
So the dramatic change in the factor distribution began before the reforms. Subsequently there has been some stability in the factor share. In contrast Easton (1983) found there was a tendency for the factor share of labour to rise up to the 1970s.
3.3. Return on Capital
Figure 4 shows the ratio of the operating surplus (excluding self employed labour earnings) to the value of capital stock, which gives a return on capital. It shows some upward movement over the period, excluding the early years when there was a commodity boom, perhaps more strongly in the reform era. (Figure 3)
The big change is the real interest rate. It is negative before 1981/2 and positive afterwards (except for 1985/6). Thus the average rate of return on capital between 1974/75 and 1980/81 was 5.6 percent p.a., while the real rate of interest was minus 3.4 percent p.a. The yield gap, if one may call it that, was 9.0 percentage points. In the latter period from 1981/82 to 1989/90 the average capital return was 6.2 percent p.a.,while the real interest rate was plus 4.3 percent p.a. Despite the higher return on total capital the “yield gap” was only 1.9 percent p.a.
3.4. Factor Returns and the Reforms
It is not possible to attribute significant changes in the factor distribution to the reforms. The shift in the real interest rates occurred in the late 1970s, in events external to New Zealand, and had already impacted on the economy by the early 1980s. The wage and price freeze reduced the labour share which enabled some rise in the return on capital. There would have been market pressures for this rise anyway, and it may well be that the reforms disabled the alternative pressures for a recovery in the real wage.
Nevertheless the lower yield gap dramatically changed financial investment behaviour over the period. Bonds and fixed interest debt became more attractive, and despite a slightly higher return, investment in productive capacity become less attractive. Equity investors looked for higher return activities, of which the property and share market boom of 1986 and 1987 was the most spectacular example, even though it was not underpinned by any genuine change in the underlying rate of return.
The story is more complex than this for it does not cover the effects of taxation, or capital gains. The rate of returns reported here are very much averages. It is a matter of speculation whether the variance of returns was higher in the period of high inflation of the 1970s or the restructuring of the 1980s.
4. THE DISTRIBUTION OF NEW ZEALAND FACTOR ENDOWMENT
There is little information on the distribution of either non-human wealth or human capital in New Zealand, although it is possible to say something about the utilization of the latter in terms of unemployment.
There is very little on the recent personal distribution of wealth in New Zealand. The New Zealand Planning Council published some erroneous figures for 1984/5 (NZPC 1988:74-75). (See the more cautious NZPC (1990), based on Payne (1990).) The estimates use the estate duty method, which treats the estates of the dead as a stratified random sample of all estates, bur depends on accurate reporting of the value of the estates. From the early 1970s the effects of estate duty requirements meant that the first spouse of a couple under-reported their wealth, because a joint owned home was automatically transferred to the surviving spouse (Easton 1983, Payne 1990).
In 1956 and 1966 the private wealth to GDP ratio was 3.1 in 1956 and 1966, using valid applications to calculate private wealth. The ratio for 1985 using the Council’s estimate based on an invalid application of the method was 2.1. This suggests the Council figure missed the true total of private wealth by about 50 percent. Since the estimates were derived on quite different assumptions it was most unfortunate that the Council went on to compare the 1956 and 1966 distributions, with the 1985 one.
4.2. Human Capital
|SHARES OF MARKET INCOME BY GENDER
Percentage of Total Income
|Total Income including Social Security Benefits|
Source: Population Census.
Notes: * 1945 share assumes gender numbers were the same, adjusting for service personnel still overseas, who did not appear in census enumeration. ** estimated
With one important exception, there is little information useful to assess changes in the distribution of human capital. Undoubtedly there has been a change in the gender balance of the factor endowments expressed in the market. This is captured in Table 3 which shows the income from market human capital and wealth by gender. The shift of women into the (paid) labour force has, of course, been one of the features of the post-war era. Their share of financial wealth has also probably increased. They also benefit more from social security. Since women have lower incomes than men, an improvement in their share reduces inequality. When people predict that the income distribution is getting more unequal, they forget this critical social change.
We can say more about the utilization of human capital – unemployment. This not only affects the market (and total) income of those involved, but is damaging to the unemployed’s health and welfare. (Shirley et al 1990:135-148) As reported in other chapters the unemployment rate increased over the period of the reforms. Table 4 shows the available Population Census figures back to 1896. (Interpretation should allow for definitional and social change over time.)
There appears to have been a sharp rise in unemployment in the 1980s, to levels for males comparable to those of the late stage of the depths of the inter-war depression. The female ones are even higher, but this reflects social change as more women choose a career in the labour force.
|CENSUS UNEMPLOYMENT RATES
Percentage of Labour Force
Source: NZOYB (1990:359-61) with corrections; 1986, 1991 added.
: * Total Labour Force; ** Full Time Only
From one perspective, a higher unemployment rate might be interpreted as an increase in the inequality of the allocation of paid work in the economy. Systematically relating the allocation of employment by income is more complicated. The only useful consistent series are from the population census, but they are not available before 1986. (A further complication is that there is good reason to believe that disguised unemployment, that is people who would like a job but are too discouraged to seek one and are thus classified as not-in-the-labour force, is affected by socioeconomic variables, which locate people in the income distribution. Moreover the unemployment refers to the preceding week whereas the income refers to the preceding year.)
We can calculate a gini coefficient for the employed on the distribution of personal income of those in the labour force, by asking how equally is employment distributed by income (or how unequally is unemployment distributed by income). In the 1986 census the gini coefficient for employment was 0.696, and in 1991 it was 0.606. The lower values indicates there was less inequality, and unemployment was more equally shared through the income distribution in 1991 than 1986. An increase in labour market churning – repeated movements in and out of the work force – especially as it penetrates into higher paid workers, would give the sort of gini coefficient we observe here. (Easton 1995a)
Further evidence for this “democratization” of unemployment comes from the registered unemployment figures. Over the period from October 1988 to June 1993, 754,312 enroled on the New Zealand Employment Service register. (Department of Labour 1994) To give some idea of this magnitude, the average size of the labour force was about 1,612,000 people, so the enroled unemployed represent about 47 percent of that total, or around 10 percent of the labour force each year, over an almost five period in which the average rate of unemployment at any point in time was 8.7 percent. This overestimates the likelihood of being unemployed because of inflows (from school leaving, returning to work, and immigration), and underestimates it insofar as not all unemployed registered. Whatever is the true figure it would appear that a high proportion of the labour force experienced unemployment in the five year period.
Those who enrol more than once, are counted but once in the above total. In fact over 45 percent were enroled at least twice, and 2.1 percent more than 5 times. This suggests that at least 21 percent of the labour force experienced repeated unemployment in the 4¾ year period, and 1 percent experienced it on five or more occasions. The average number of enrolments was 1.78 times for non-Maori, and 2.18 times for the Maori. The average cumulative duration on the register was 59.2 weeks, the Maori averaged 68.8 weeks. The register does not pick up all the churning, but the available data is indicative that it was substantial in recent years, especially among the Maori.
In summary there has been a rise in unemployment during the reforms. There is some evidence that unemployment was more equally shared in the late 1980s, that is it was affecting increasingly higher income strata.
5. PERSONAL MARKET DISTRIBUTION
While in principle given a the factor endowment, and the return and utilization of each asset in the endowment, the resulting personal income distribution can be constructed, in practice this has proved impracticable. Instead the studied personal income distribution is the actual market outcome, typically using income tax reported income, income reported in the household survey, or that reported in the census.
5.1. Data from Tax Returns
Easton (1983: 183-6) provides an analysis of personal income as reported for tax purposes from 1954/55 to 1976/7. It showed a tendency for the distribution to narrow, probably because of the increasing number of female earners, for the male distribution is reasonably constant (after 1961/2). Figure 5 provides data for the period 1978/9 to 1987/8, calculated according to the same principles, that is including adults without income. The data is by genders as well as for all adults.
Income reported for tax purposes is subject to a variety of decisions taken for administrative purposes, which affect the comparability of the data over time. For instance from 1987 social security beneficiaries paid tax on grossed up benefits. As a result I am unwilling to place to great a weight on these series.
There appears one new lesson from the data. At face value the gini coefficients which measure inequality seems to be relatively flat over the first part of the period. This appears to the result of a rising coefficient for men, and a falling one for women, together with rising average female incomes relative to men. Thus the all adult average is disguising some very complex phenomenon. Nevertheless here we have further evidence of a phenomenon noticed in the earlier Easton (1983). for much of the post war era, a dominating feature of the overall income distribution was the increasing earnings of women active in the market place. Unfortunately there is not the data to evaluate whether this phenomenon remained important after the mid 1980s.
More generally, the data suggests that the post-war trend decreasing personal income inequality, that Easton (1983) observed through to the mid 1970s, did not continue through the 1980s.
5.2. Data from the Household Survey
|SHARE OF MARKET INCOME
Market Income Quintiles of Adults (%)
Household Expenditure and Income Survey, reported in NZPC (1990).
The Household Expenditure and Income Survey covers about 3000 households and therefore is subject to somewhat greater sampling error than the other data sources, although it is likely that the actual income reportage is more accurate than the Census Data. The New Zealand Planning Council provided estimates for three years in the 1980s, for the share of market income by quintile. They are shown in Table 5. It has not been possible to update the data.
The picture is of increasing inequality of personal market incomes over the period from 1981/2 to 1987/8. We might speculate that the main cause is rising unemployment, which reduces the market income of the lower quintiles, plus factor price shifts. There is also a pattern of growing losses in the lowest quintile which may reflect a structural trend, as a result of increasing self employment.
5.3. Data from the Census
Table 6 is derived from the various population censuses and shows the distribution of income by deciles for the adult (over 15 years old) population. It tells us, for instance, that in 1991 the top ten per cent of adults reported receiving 30.3 per cent of the total reported income. In simple terms, their income averaged three times the average adult income. Over the same period the bottom thirty per cent reported receiving 7.3 percent.
INCOME REPORTED BY ADULT DECILES
Percentage of Total Income
|Total Income including Social Security Benefits|
Source: Population Census – see Easton (1983:188)
Notes: * non-Maori only, and excluding service personnel overseas.
The definition of income is critical. Until 1981 the census income question was in terms of the individual’s market income. Since then the question asked about total income, with benefit income is added to market income. (Income tax is not deducted.) Miraculously both questions were asked in 1981. The overlap gives some possibility of comparison over the whole of the post-war era.
Excepting the 1945 to 1951 period, where as the table footnote observes data definitions make comparisons difficult, the general post-war picture is one of mildly reducing inequality, with variability about the trend. The top decile share falling from 38.5 per cent in 1951 to 34.9 per cent in 1981, followed on the wider income definition, from 31.3 per cent in 1981 to 30.3 per cent in 1991. Conversely the share of the bottom half of adults rises from 4.0 per cent in 1951 to 7.7 per cent in 1981, and then from 15.5 per cent in 1981 to 18.8 per cent in 1991 (although some of this increase may be due to the grossing up of social security benefits to include taxes in 1986).
It is possible that the comparisons are still subject to a measurement artefact because of the grossing up of social security benefits from 1987. The apparent improvement for low income deciles in 1991 may be due to this. One must be cautious. The data suggests there may well have been in the 1980s a slight increase in inequality in market incomes, probably as a result of rising unemployment. This was offset in part by social security benefits (of which unemployment may have been crucial) giving a slight decrease in inequality of total incomes, through to the 1990/91 year (see below).
5.4. The Personal Market Income and the Reforms
We have examined three data series over the 1980s, each of which is subject to error and interpretation. On the basis of the available data, and allowing that there is more in the period up to 1988, we could perhaps tell the following story.
It is difficult to argue that there was a major change in the personal (market) income distribution in the period from the reforms, but there was probably a shift towards greater inequality in the personal income distribution, a conclusion supported by data presented in section 7. This can be attributed to three effects. First, in the early 1980s there were factor price shifts which followed world trends. Second, there was rising unemployment. Third, and partly offsetting the first two, there was the rising earnings of women, who are positioned lower in the income distribution.
None of these effects may be directly attributed to the market reforms themselves. This might seem surprising. However, suppose that the reforms affected the utilization of the factor endowment across all groups, as much those with high as well as low incomes. The total impact might be collective impoverishment, but no overall change to the personal income distribution. Because we see the hardship of the reforms on, say, workers who were laid off, we might underestimate the distributional effects of higher salaried workers who became self employed consultants, which may have involved a similar income drop. In the end, the reforms may have been “democratic”, with all classes suffering equally.
As a final point, frustratingly, we have not been able to trace the impact of the speculative financial and property boom of 1986 and 1987, and the bust thereafter, in the available data sets. This is partly because they are not precise enough to capture short term shifts. Many people assess the impact on their finances from the height of the boom to the bottom of the bust, whereas the data is better assessing the longer term of three or four years. Moreover much of the wealth increases (and decreases) were fictitious, and would not have been reported in the income data bases used here. This is not to argue that the boom and bust did not affect the distribution. Undoubtedly some people’s economic status fell as a result, but others’ improved. There was an individual churning, but we are unable to identify any long term impacts. It is especially disappointing we have no wealth series, for the main effect of the boom may have been to redistribute the ownership and valuation of assets and debt.
6. BENEFITS AND TAXES
Market incomes get modified by income taxes and benefits into disposable income. This section looks at some broad trends in their impact.
|(NET) WEEKLY BENEFIT LEVELS: SEPTEMBER 1993
|Royal Commission’s BDL||$270.72||100|
Index: 1972 Royal Commission on Social Security’s Benefit Datum Line = 100.
Traditionally, the social security benefit entitlement has been on the basis of need, so the level was the same for all beneficiaries in similar domestic circumstances (RCSS 1972:65). Exceptions include accident compensation from its inception in 1974, and national superannuation which replaced the age benefit in 1976. However in the 1990 benefit reform, the traditional parity between domestic purposes, invalids, sickness, and unemployment benefits was broken. The recent relativities for a married couple are shown in Table 7. The rate they would have been if the pre-1991 regime had been retained is shown as the Royal Commission Benefit Datum Line (BDL) (further explained in section 9).
Figure 6 shows the sickness benefit since 1972 measured in constant 1992/3 prices. The recommendations of the 1972 Royal Commission on Social Security, eagerly and generously seized upon by the politicians of the day, led to the social security benefit increasing in real terms from around $236 a week for a married couple in 1971/2 to around $281 in 1974/5. This level was maintained through to 1990/1 with a perhaps a slight upward drift, although there was a weakening of the level in the late 1980s as the government began to address the budget deficit. In April 1991 the sickness, and most other benefits were cut by varying amounts (Bolger et al 1990:57) to levels comparable or lower than those rejected by the 1972 Royal Commission, the invalid benefit excepted.
If the real level of the benefits hardly rose in the 1980s, the total real net spending on benefits increased. Partly this was the result of demographic pressures: the rise of the numbers of the elderly and solo parent families. But the rise in unemployment – which also affected numbers of sickness and domestic purposes benefits, and the elderly who involuntary retired – also contributed to upward pressure on government spending.
6.2 Tax rates
This chapter will not report on the “Real Disposable Incomes Index” (RDII) despite its wide use – or, rather, misuse. The index assumes that all parts of the labour earnings distribution experience the same increase, so there are no changes in the pre-tax earnings dispersion. And it ignores unemployment, despite this impacting on different parts of the earnings distribution to different degrees, with low income earners more likely to experience unemployment.
We can use the underlying tax index series on which the RDII is based. The index measures the burden of taxation on various points in the employee distribution. The effects of the introduction of GST and the abolition of sales tax, was included, assuming that all disposable income was consumed.
Figure 7 shows the tax rate for three points in the wage and salary distribution, which change over time according to the method used in the RDII. In 1981 the wage rates reflected the average of the top, middle, and bottom quintile, although they are unlikely to do so today. Not surprisingly, given the fiscal pressures, the effective tax rate has risen for all three earnings levels. However it has risen much more for the bottom quintile than the top one, with the middle quintile experience between the two. In particular the bottom quintile’s effective tax rate rose from 18.0 percent in 1981 to 28.1 percent in 1993, or 10 percentage points, while the top quintile rose from 39.1 percent in 1981 to 40.8 percent in 1993 or by just 1.7 percentage points. (The middle quintile rose from 26.6 percentage points to 35.4 percent in 1993, 8.8 percentage points.) This is not unexpected given the flattening of the income tax scale.
What is unexpected is that the sharpest narrowing in the tax rates occurred in October 1982, before the reforms although the cuts in the top income tax rate in October 1986 and 1988 are also evident in the graph. The reason we cannot see any dramatic impact from the latter two reforms is that the largest beneficiaries from the later tax cuts were only those at the very top. In 1984/85, the point at which tax payers started paying 45 percent on their incomes was $25,000, equivalent to $40,500 in 1990/1 if indexed by changes in hourly earnings. The point at which the 66 percent rate cut in was $38,000 in 1984/5 (equivalent to around $62,000 in 1991/2). I estimate from the 1991 census that only 4½ percent of all wage and salary earners had incomes exceeding that figure. Thus the big gainers were not even a quarter of the top quintile, while some at the bottom end of the top quintile may be paying more relatively more tax. The upper quintile figure is thus an average, which obscures how well the very rich have done. This is a persistent problem in distributional analysis in New Zealand. The top quintile or even the top decile is too broad, to trace the experience of the very rich. On the other hand we have little systematic information on the top, say, 1 percent of the distribution.
For the record, the top one percent of those over 15 reported incomes for tax purposes in excess of $81,000 in 1989/90. Their share of total reported (assessable income) was 8.5 percent. (Incomes, Department of Statistics New Zealand 1991:Table 6.3). The upper percentile of the income distribution had incomes above the following levels in the different data bases as follows (assuming a pareto coefficient for the upper tail of 3):
1990/1 using Assessable Income for Taxation Purposes: $81,000;
1990/1 using Population Census reported income: $81,000;
1990/1 using Household Expenditure and Income Survey: $83,000.