Thursday, 25 May 2017

New EMTRs!

We have the new Effective Marginal Tax Schedules. Really these things should be published along with the budget documents.

The excellent Patrick Nolan will be presenting some work at the NZEA conference explaining New Zealand's EMTRs. They're kinda high in some income ranges.

I asked Patrick whether he might update one of the main scenarios (they all vary depending on number and ages of kids) to account for the newly announced income tax thresholds and WFF abatement rates. And he kindly provided! Thanks Patrick!

This scenario tracks the EMTR by weekly hours of work for a single-income family with an earner on $20/hour and with one child under the age of 16. I'll quote from the scenario description - note that the description is from the pre-budget version so make your own adjustments.

Again, the $14,000 threshold increases to $22,000; the $48,000 threshold increases to $52,000, the family tax credit increases by $9 per week and abates at a higher rate starting from a lower level of income. The accommodation supplement is not here included.

UPDATE: Updated 16.30 with a correction to the image from Patrick.

And here's Patrick (again: this is pre-changes):
Income taxes and ACC levies are levied from the first dollar of income. The starting tax rate is 10.5% and ACC levy is 1.4%, thus giving an initial EMTR of 11.9%.
Once gross earnings increase to $80 per week the main benefit starts abating. The net benefit abates at a rate of 70% against increases in gross non-benefit incomes. Income-tested benefits are not exempt income under section CW33 1(a) of the Income Tax Act 2007. Thus, as both the level of the benefit and total gross taxable income are above the threshold for the 17.5% tax rate ($14,000 per annum), the gross benefit abatement is 84.8% (given by 0.7 / (1 - 0.175)). The increase in gross income from a dollar earnings is thus 15.2 cents (given by 1 - 0.848), giving an increase in net incomes of 10.1 cents (given by 0.152 * (1 - 0.175) - 0.014), meaning an EMTR of 88.9% (given by 1 - 0.101).
The EMTR remains at this level until the gross benefit falls below $14,000, at which point the tax rate used to gross up the main benefit falls to 10.5%. Consequently the gross benefit abatement is 78.2% (given by 0.7 / (1 - 0.105)). The increase in gross income from a dollar earnings is thus 21.8 cents (given by 1 - 0.782), giving an increase in net incomes of 16.6 cents (given by 0.218 * (1 - 0.175) - 0.014), meaning an EMTR of 83.4% (given by 1 - 0.166).
 The EMTR and remains at this level until the person works 20 hours a week and thus qualifies for in-work assistance. The Minimum Family Tax Credit provides a guaranteed net family income, and so net income above the level of the guaranteed net income ($23,764) abates at 100% until the credit is fully exhausted. With the ACC levy this leads to an EMTR of 101.4%.
 Once the family has a net income before Working for Families of $23,764 the Minimum Family Tax Credit is fully abated, and the EMTR falls to 18.9%, reflecting the 17.5% income tax rate and 1.4% ACC levy.
Once gross income reaches $36,350 the rest of the Working for Families programmes start abating at a rate of 22.5%. The order of abatement is the Family Tax Credit and then the Working Tax Credit. (Note the Independent Earner Tax Credit and Parental Tax Credit are not included in this model.) This gives an EMTR of 41.4% (made up of 22.5% Working for Families Abatement, 17.5% income tax, and 1.4% ACC levy).
At $70,000 gross income the income tax rate increases to 33%, so the EMTR increases to 56.9%, and once the Working for Families entitlement is fully abated the EMTR falls to 34.4%, which is a combination of the top personal tax rate and the ACC levy. The EMTR remains at this rate until $122,063, at which point the ACC levy is no longer charged, and the EMTR is 33%.

Thanks again!

Previously: Bringing sexy back - EMTR style

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