Like many developed economies, New Zealand faces difficult choices about how to finance public spending. Among the various policies on offer ahead of next week’s general election are promises to raise the top income tax rate.

The Green Party and Te Pāti Māori use different income thresholds, but propose raising the rate from its current 39% to 45% or 48% respectively.

New Zealand’s top personal income tax rate (which applies to earnings over NZ$180,000) is relatively low by international standards. It’s possible that rate could be higher – maybe up to 56% – and therefore raise more revenue.

But simply raising the rate isn’t as straightforward as it might seem.

Because taxpayers change their behaviour in response to higher tax rates, those higher rates may raise less revenue than expected.

So, the questions we need to ask about proposals to raise tax rates are: how much revenue would a higher rate actually raise, what would it cost the economy, and who would gain or lose?

People can respond to higher income taxes by changing when or how their income is taxed, or by changing their economic activity.

An employee might arrange with their employer to receive a bonus before a tax increase, or a business owner might change how income is reported. Such responses can involve costs – such as time and resources spent on tax planning – but need not reduce productive activity.

Others might take on less work, put less effort into securing a promotion, or turn down a better-paid job requiring relocation. In the longer run, career and education choices may change. These responses can reduce economic activity itself.

Economists summarise both types of responses using what’s known as “elasticity of taxable........

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