A Growth Maximising Tax Structure for New Zealand∗

Annual growth rates of real GDP in New Zealand have varied widely, from 18% to −8%, since World War II. During this period the tax burden (the ratio of tax revenue to GDP) has trended upward from 23% to 35%. The tax mix (the ratio of indirect taxes to direct taxes) has varied between 0.31 and 0.75, having increased recently with the introduction of the goods and services tax. In this paper we estimate a combination of the tax burden and the tax mix which would maximise the rate of growth of real GDP. We find that such a tax structure would have a time-varying tax burden with a mean of 22.5%, and a time-varying tax mix with a mean of 0.54, which implies a mean share of direct taxes in total tax revenue of 65%. We also find that a move to such a tax structure would generate nearly a 17% increase in real GDP, and while this increase would yield a 6% reduction in tax revenue to the Treasury, it would deliver a 27% increase in purchasing power to the remainder of the economy.