Why higher tax rates don't always raise more revenue
When tax rates rise, people work less and rearrange income. So revenue gains fall short of predictions.
New Zealand debates raising the top income tax rate from 39%. The proposal assumes higher rates mean higher revenue.
Economic research shows people change their behavior when tax rates change. A study of New Zealand tax data examined raising the rate to 45%.
If incomes stayed the same, it would raise about $1.1 billion yearly. But people report less income and spend less when rates rise.
So actual revenue would be just $300 million. Economists measure this shift: how much reported income falls when tax rates rise.
Revenue rises only up to a peak rate around 56%. Beyond that point, raising rates reduces revenue.
Above that point, rate increases actually reduce total government take. Economic costs also matter: raising the rate imposes efficiency losses that grow as rates rise.
- 39 percent
- Current top tax rate
- $1.1 billion yearly
- Predicted revenue at 45%
- $300 million
- Actual revenue at 45%
- Around 56 percent
- Peak efficient rate
Why it mattersTax policy doesn't deliver expected revenue because behaviour changes. So rate increases don't work as well as promised.
AustraliaAustralia faces similar tax policy debates; this analysis shows why simple rate increases are harder to implement than they appear.
✓ Claims checked against the source. checked 2 h ago
