New Zealand is considering raising its top income tax rate ahead of next week’s general election, with the Green Party and Te Pāti Māori proposing increases to 45% and 48% respectively. The current rate of 39% applies to earnings over NZ$180,000, which is relatively low by international standards. However, simply raising the rate isn’t straightforward because taxpayers may change their behavior, reducing the expected revenue.
Our recent study, published in New Zealand Economic Papers, used Inland Revenue data for 2024 to estimate the revenue effects of changing the top tax rate. Raising it from 39% to 45% would mechanically raise around $1.1 billion annually if taxable incomes remained unchanged. But accounting for behavioral responses, the estimated additional revenue drops to around $560 million, and further adjustments reduce it to about $300 million due to lower household spending and GST receipts.
The revenue-maximizing rate for New Zealand is estimated at around 56%, but stronger responses by higher-income taxpayers could lower this peak. The type of response also matters: if half the reduction in personal taxable income is shifted into family trusts taxed at 39%, the revenue-maximizing rate could increase to 66%.
Higher taxes impose economic costs, as workers may decline additional work if the take-home pay is insufficient. At the current 39% top rate, raising an additional dollar of net public revenue generates around $1.20 in economic efficiency losses. At a 45% top rate, this cost rises to approximately $2 per dollar raised. The overall effect on inequality depends on how the additional revenue is spent, with potential benefits for healthcare, education, or other public services.