Macroeconomic effects of income and consumption tax reforms in New Zealand

We examine how the macroeconomic effects of income and consumption taxation depend on country-specific institutions and earnings dynamics, using New Zealand as a case study. We develop a heterogeneous-agent overlapping generations model with endogenous human capital accumulation, calibrated to New Zealand’s institutional and fiscal environment. Using administrative microdata from the Integrated Data Infrastructure (IDI), we document distinctive features of New Zealand’s life-cycle earnings — moderate dispersion, mild skewness, and flatter age profiles than in the U.S. — which we attribute to differences in learning incentives, human capital depreciation, and initial conditions. We find that consumption tax reforms mainly affect contemporaneous consumption, while income tax reforms substantially influence labor supply, human capital accumulation, and welfare. Greater income tax progressivity reduces lifetime inequality and increases aggregate welfare. Our results highlight the context dependence of optimal tax design.