Matt Nolan

Household structure, economic units, and income splitting

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There is talk in the air that the New Zealand government may one day look at “income splitting” as a form of providing tax relief.

Income splitting changes the fundamental economic unit that is taxed from the individual to the household. The most likely form of income splitting we could see in New Zealand would see the gross income of the main income earner and their partner (either through marriage, civil union, or some other definition) aggregated and then split evenly between the two partners before being taxed at the individual tax level. As tax rates increase with income, this would lower the tax liability of all two-person households.

However, is this policy fair, or even sensible?

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metrosideros

Treading on our human rights!

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Being urged to blog, I shall respond with a counter-knee-jerk against kneejerking by others. http://www.stuff.co.nz/4492587a11.html is a link to a great DomPost article, one of the most recent in a series that reports on the rising outrage amongst the New Zealand population as petrol prices rise. Does anyone else get the impression that New Zealanders believe they have a human right to cheap petrol? So we’ve constructed whole aspects of our economy and society around cheap petrol. So now we’re feeling the pinch in a whole lot of ways… Well, cry me a river, people! Granted that the effects of a price rise are likely to cut the deepest on low-income families who aren’t those driving Pajeros to the dairy and back, isn’t it about time we started paying something even approaching the true cost of this environmentally disastrous stuff? We’ve no entitlement to be profligate with fossil fuels when their use is threatening our climate system (a.k.a. the thing what makes the earth a liveable planet). If it takes a price rise to wean New Zealanders off the private car and onto walking or – shock, horror! – public transport, then it’s a damn good thing.

Metrosideros

Matt Nolan

April 08 OCR review

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In a widely expected move, the RBNZ left the official cash rate unchanged in April. As a result, primary interest turned to the statement.

In the statement the RBNZ admitted that economic activity has weakened more markedly than they expected in March. However, they placed the labour market, government spending, and commodity prices that will keep inflation outcomes elevated.

The most significant change in position came from there weighing of the risks: Read more

jamesz

More smoking in public

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I’ve talked a lot before about hyperbolic discounting, time inconsistency and smoking. Reading a paper by Gruber and Koszegi on the topic yesterday, I came across an interesting little aside.

They point out that, for an addict, smoking in different periods is complementary. That means that taxes to overcome time inconsistency problems are substitutes: if your tax in one period is too low then you can compensate by raising it in another period. The same holds in a spatial sense: if you can’t prevent smoking in the home then this rationale suggests that over-regulating smoking in public places is optimal. It’s an interesting way to look at banning smoking in public places because it is specifically targeting the welfare of the smokers, not considering externalities to third parties.

Matt Nolan

OCR review preview: April 2008

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Tomorrow will see the Reserve Bank make a decision on whether to change the official cash rate from its current level of 8.25%.

Although some commentators believe that the slowing pace of domestic economic activity merits a rate cut, most economists agree that leaving rates unchanged at the moment would be prudent. Here’s why:

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jamesz

Save the people or save the world

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An excellent, and often forgotten, point in favour of limiting our response to climate change is the opportunity cost of reducing carbon emissions. Opponents of a policy response often point to the monetary cost to the developed world. Proponents reply that you can’t put a monetary cost on saving the planet. As economists we should always try to think about things in real rather than nominal terms, so what is the real opportunity cost of climate change policy? It could be investment in the developing world, reducing the number of people living in poverty or controlling the African AIDS epidemic.

Are the costs of limited climate change enough to persuade you to sacrifice the lives of so many who will die if the funds that could be used to save them are spent combating global warming? Read more