Child Support and Effective Marginal Tax Rates

An "effective marginal tax rate" measures the amount of an extra dollar in income earned that is taken away not only in tax, but also by benefit abatements and changes in other income-related obligations such as child support liabilities.

New Zealand's Parliament resumes today (20 December 1999). It has indicated it wants to pass legislation before Christmas, which increases the top tax rate to 39 cents in the dollar for people earning over $60,000.

In 1994 the Child Support Act Working Party, headed by retired Chief District Court Judge Peter Trapski, CBE, put out: Child Support Review 1994: A Consultative Document.

To quote from p.30:

"Number of children in the formula assessment

There was also concern that the effective marginal tax rates that liable parents would face were [sic] be excessive if further child support formula rates were set to provide for additional children."

At that time the top income tax rate was 33% and the top child support formula rate was 30%, giving an effective marginal tax rate of 63%. Without a change in child support formula rates, the increase in the top income tax rate to 39% would raise the top effective marginal tax rate to 69%. Will this still be considered excessive, and can we expect a resulting change in formula rates?

Stuart Birks

20 December 1999