Matt Nolan

Taxes are self-funding?

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I just read this over at the Hive:

“New operating allowances will be the same for National over the next three years as they would be under Labour. National’s rebalancing of the tax system is self-funding and requires no cuts to public services or additional borrowing.”

What the hell? Self-funding? We aren’t on that side of the Laffer curve. But then we hear that:

Mr English says over the next term of government the total cost of National’s personal tax cuts is balanced by the revenue savings from:
Changes to KiwiSaver.
Discontinuing the R&D tax credit.
Replacing Labour’s proposed tax cuts.

Ahhhh. Ok, so by tax system they are talking about other areas (like Kiwisaver) where they are cutting spending.

So just to be clear, it isn’t that the tax cuts that are self financing – the set of changes to tax and spending packages are expected to be neutral, whew!

Matt Nolan

2008 Election: Tax offer comparisons

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Kiwiblog (*, *) and the Standard (*) discuss the size and scope of the tax cut. (Note: some of the discussion can be viewed as partisan).

NZIER economist Patrick Nolan created a calculator that allows you to compare the packages on offer from Labour and National for yourself (Media release, Calculator). Enjoy!

Note:  Other NZIER calculators can be found here.

Matt Nolan

Fundamentalists vs Realists: The gap in economics

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Paul Romer states that the current crisis represents the gap between the Fundamentalist economist and the Realist economist (ht Economist’s View, Greg Mankiw, Econlog – as I had them all open at the same time and would have felt mean only picking one 😛 ). I find this characterisation a bit extreme, and definitely subjectively loaded.

Fundamentally, a better characterisation (which more fairly divides up the discipline) was provided by Mankiw, comparing the groups to scientists and engineers (we have discussed this here).

Anyway, let us put down the definitions that Romer provides, and see what we can get out of them.

Read more

Matt Nolan

Opinion on National’s tax policy

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I’ll be honest, I don’t think too much of it. I view tax as a structural thing that just needs to be set. Both National and Labour have this “incrementalist” view of changes taxes, which gives the potential for shifts in policy and creates uncertainty in the economic environment.

I am also disappointed that they leave the tax bands fixed – when inflation adjustment of the tax thresholds is the only way to ensure that the real tax burden isn’t rising over time.

Finally the independent earner rebate seems like an ad hoc addition that they tacked on in order to provide “$47” relief to the “average worker”. This policy does nothing to increase efficiency in the economy – the very issue that National said it was trying to chase.

The reduction of the 39c tax band makes sense – as it is a dis-incentive to save and punishes people with highly variable annual income. But reducing it at 1c a year is just too slow for a structural issue like tax policy – if it is going to grow the economy so much, why not just cut the damned thing now.

Matt Nolan

NZIER September QSBO: A troubled quarter

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The September NZIER Quarterly Survey of Business Opinion told us that businesses were more confident in September (than in June). However, they also experienced less activity started laying off workers and are still facing record cost pressures (ht NZIER).  The decline in firms activity was the sharpest since March 1991!

Although this isn’t wildly out of line with the National Bank results – it is weaker. Overall, the poor own activity result implies that GDP could easily fall in September and December – a whole year long recession. This definitely shoots my pick of a September month pick-up in economic activity out of the water (*). Although, I still don’t believe that December will be a negative quarter – and I’m not convinced that we haven’t hit a bottom, a bottom that we will stay around for a little while, but a bottom none the less (note this is something I would like to discuss if anyone wants to talk about it in comments).

My advice is still, watch commodity prices, watch interest rates. The difference between a slightly bigger than 1997/98 style recession (as a result of the tanking housing market) and a 1991/92 style recession will be commodity prices.

Matt Nolan

National’s tax cuts: Prior to the release

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It now appears that National is going to scale back its tax cuts (ht Big News, Kiwiblog, The Standard) – stating that poor economic conditions have made larger cuts uneconomical. There are two ways I can read this:

  1. The economy is only temporarily weaker so we can cut taxes more later,
  2. The economy is structurally weaker than we expected but the level of spending we want to make is unchanged, therefore we cannot cut taxes as much,

The first way doesn’t make sense (as tax rates should be independent of the economic cycle, they are “structural”). We have discussed this before here.

The second reason is defensible, but if this is the case then the structure of their package seems a bit strange. They still want to give the $50 a week tax cut to an average person worker, so they are reducing the tax cut to high income earners. This will increase the progressiveness of the tax system further, which may increase equity but will definitely reduce economic efficiency (relative to a flat tax cut scheme – as it increases effective marginal tax rates).

Given that Labour states that focusing on equity is one of their primary goals, and National has been stating that it will improve economic efficiency, this sounds more like a Labour party policy than a National party policy. How can National say that it is going to “grow the economy” compared to Labour, when its tax policy does not add any growth impetus and its spending policy is pretty much the same?

If National is differentiating themselves from Labour, then I think they need to advertise it because I can’t see the difference. (Apart from the fact that National said they won’t mess with the Reserve Bank Act – for an economist that is a big issue where I think National wins, but I don’t imagine this will get non-economists particularly excited).

Of course, we will have more details about the potential for National’s tax policy to “grow growth” once it is release. Once the policy is out we will comment on whether National is threatening to be as fiscally irresponsible as Labour has been – by the sounds of things it appears that the demands of politics will lead them down that way.