Researchers at Auckland University of Technology and Victoria University of Wellington analyzed how much revenue New Zealand could raise by increasing its top personal income tax rate, currently set at 39% for earnings above NZ$180,000.
The Green Party proposes raising the rate to 45%, while Te Pāti Māori proposes 48%. The study, published in New Zealand Economic Papers, used 2024 Inland Revenue data to model the revenue effects.
The analysis accounts for how taxpayers change behavior in response to higher tax rates, measured using "elasticity of taxable income" (ETI). When the top rate rises from 39% to 45%, taxpayers keep 55 cents per dollar earned instead of 61 cents. Using a previous New Zealand estimate of ETI at 0.25, a 10% reduction in take-home pay would lead to a 2.5% drop in reported taxable income.
Raising the rate from 39% to 45% would mechanically generate NZ$1.1 billion annually if incomes stayed flat. Accounting for reduced reported income, the estimate falls to NZ$560 million. When researchers also factored in reduced household spending and GST receipts, the total public revenue gain dropped to around NZ$300 million.
The researchers calculated that the revenue-maximizing top rate for New Zealand sits around 56%. However, stronger responses from higher earners, suggested by some international evidence, could place that peak closer to the current 39%.
Beyond revenue, higher tax rates impose economic costs. At the current 39% rate, raising an additional dollar of net public revenue generates about NZ$1.20 in economic efficiency losses. At 45%, this cost rises to approximately NZ$2 per dollar raised.
The study notes that whether these trade-offs justify raising the top rate "is ultimately a political judgement."