That is a good point. It does show up in the data – there are spikes at each income tax bracket and at areas with high EMTR’s. Patrick Nolan from NZIER has done a lot of work on this sort of stuff – he’d have more of an idea about how this functions in the New Zealand context.

I’m not sure there are any calculators around working out EMTR’s – however IRD has done some work on them.

http://www.ird.govt.nz/aboutir/reports/briefing/briefing-2005/bim-part2/bim-part2a.html

A good graph is here:

http://www.ird.govt.nz/resources/file/eb63c649ad71c2b/bim-figure7-large-doc.jpg

Although it looks like the EMTR’s here are actually only MTR’s + WFF – they don’t seem to include the removal of other benefits, which would increase the EMTR’s early in the scale.

This is on the old tax scales though – the tax cuts will shift these EMTR’s up the nominal income scale (although in real terms they should be equivalent to the situation in say 2002/03 (wild guess) if WFF has been fully integrated by then).

Thanks Kimble 🙂

“I still think the movement towards the reservation wage would occur with some sort of a universal benefit scheme”

Agreed. But to figure out how, we have to realise that the “reservation wage” is actually a function of benefit payments.

If benefit payments are higher, the reservation wage will be higher – as the price of leisure is greater (given diminishing marginal utility of income) and the EMTR’s are higher. As a result, higher low income welfare will lead to higher low income income 🙂

Of course I expect you to say that if we go back to the efficiency-equity trade-off this creates problems, as lower taxes would encourage higher labour supply while higher benefits reduce the labour supply (this could be partially over-come by making the welfare payments partially dependent on work, or at least work search). I agree, I would say the same thing 😉

However, if the tax cuts don’t achieve equity outcomes – because all the surplus is extracted by firms, then we only have the option of achieving equity considerations through benefits.

Asking Dr Cullen to make the tax system more progressive won’t help those who need/deserve it, and will screw up savings and labour supply incentives further up the income chain – in a couple of hours we’ll see how he did this 🙂

The ’employer’ has greater knowledge of an employees tax than their welfare receipts. But they still, over time, will come to learn their employees welfare status, and this would be more true if welfare payments become more common.

I reckon that the movement towards the reservation wage because of a tax cut would be relatively quick, but I still think the movement towards the reservation wage would occur with some sort of a universal benefit scheme. It will just take a little longer. Short run vs Long run again.