Matt Nolan

Quake levy and timing

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Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now.  I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).

But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events.  As a result, we want to pay off one off events with a temporary levy.  Ok, I’ve assumed that.  Now assume that we want two other characteristics of the levy:

  • The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed.  As a result, it must be a relatively short-term levy.
  • We are concerned about the economic recovery, and would prefer to not delay it if possible.

Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.

However, even with these big assumptions there is no reason to put in such a levy right now.  We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”.  Advantages are:

  1. The impact on economic activity is indeterminate instead of negative.  Future wealth for this generation is lower, however the relative price of consumption now is lower.  As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
  2. This is a relatively short time horizon, so the current generation is paying for it.
  3. We make the levy money.

So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession.  Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉

Update:  Eric Crampton covers the issue more widely here.

9 replies
  1. greg
    greg says:

    no factoring for the likelihood that a levy will actually get implemented at some point in the future?

    seems to me that putting it off probably means never charging it, politics will change and the focus will move.

  2. Matt Nolan
    Matt Nolan says:

    @greg

    That is indeed a HUGE public policy risk. However, if we don’t trust government to implement it then that is a reason for changing tack once we have figured out the “ideal” policy – we were just doing the first step of thinking about the policy transparently first.

  3. rauparaha
    rauparaha says:

    Do you ever wonder about the opportunity cost of thinking hard about policy? If we just made it up then what would the welfare cost really be? Is it actually worth thinking hard about most policy questions or is it all about signalling intelligence?

  4. Eric Crampton
    Eric Crampton says:

    Risk of levy not being implement and spending cuts being too long/large; worse risk that levy becomes permanent. Pick your poison.

  5. Matt Nolan
    Matt Nolan says:

    @rauparaha

    It is all about the margin. At the current margin I think that the cost of thinking about policy is lower than the benefit, substantially.

    And trust me, I doubt anything I write here signals much in the way of intelligence 😉

    @Eric Crampton

    The real kicker for me is that I don’t believe any of the assumptions required to generate a levy to start with. Hell, we are talking about rebuilding the capital stock – what is the problem with borrowing to fund that. If we are worried about a structural deficit then we need to ask questions about tax and spending – but this has nothing to do with the earthquake.

    All these politician dudes are just being punks in my professional opinion (IMPO)

  8. Eric Crampton
    Eric Crampton says:

    @Matt: The levy could be in ten years’ time to start paying off the bonds issued for Canterbury reconstruction. At least that’s how I always imagined a levy.

  9. Matt Nolan
    Matt Nolan says:

    @Eric Crampton

    Which is preferable to sticking it in now.

    I still don’t see why we don’t spread the cost over the lifetime of the asset though, like anyone investing would if they could …

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