Greens announce greater income redistribution: What does it mean?
I have been remiss talking about this election – as I am a touch bogged down. My apologies – I’ll try to write about things when I see them.
As a result, here is the Green’s plan to increase the level of income redistribution. From the Stuff article:
- 3 per cent – of taxpayers affected by the Greens new top income tax rate of 40 percent on every dollar earned above $140,000
- $500m – the extra revenue raised every year from their new tax rate
- $620 million – raised from hiking the trust tax rate to 40 percent and limited tax avoidance through trusts
- $60 – a week extra in a Childrens Credit, which would extend the In-Work TAx credit to parents currently ineligible
- $2,200 – in a Parental Tax Credit over ten weeks for new born babies whose parents don’t get Paid Parental Leave.
The Greens are a left-wing party, and they are suggesting greater redistribution through the tax-benefit system, and less work testing for benefits. That is consistent, good good.
Of course the costing are not perfect, but political party costings never are. At least, on the face of it, they aren’t blatantly ridiculous.
Update: Good post by Seamus Hogan here. I’m surprised we made so many of the same points without communicating – there must be a strong econobond going on.
Now as they are a political party they are keen to talk up the benefits, but I thought I should note a few countervailing factors here:
- Revenue from the top tax rate. Assuming no behavioural responses (eg changes in the type of job the person works in, changes in the way people are remunerated to “avoid” tax, no changes in where the income source is defined to come from) there is about $9bn of income sitting above this band. Increasing the tax rate from 33% to 40% would then net an extra $630m. Take off the “offset” to deal with GST and company tax, and extra income comes in at ~ $528m. So this looks like the method they used to calculate the revenue effect – which is perfectly admissible for a political party to do. However, we have to keep in mind that this exaggerates both the short-run revenue impact (due to the issues we said were ignored above) and the long-run impact (due to the broader impact on capital accumulation/investment). Treasury gives these caveats here. If we look at recent research, a higher top tax rate (all other tax-benefit components equal) may give very little extra revenue!
- Tax incidence: Just a broad note that tax doesn’t always fall where you think it will – both due to the response of those buying and selling labour in the labour market, and the fact that firms can attempt to pass on tax to those who purchase products. With the above paper suggesting that the elasticity of taxable income for high income earners is high in NZ, and with the most profitable firms likely to be producing goods and services where demand is relatively inelastic, a high top tax rate can easily (and inadvertently) fall on the very people we are attempting to reduce the tax burden on. I fear economists are sick of repeating this point, as it often gets ignored or made fun of – but it is amazingly important if we are actually concerned about the livelihood of the most vulnerable in terms of access to goods and services.
- Abatement rates: If child payments are going up further, how are these payments going to be “abated” back through the tax system. There is a significant portion of the tax system, say for sole parents, or families with two children, where the abatement of family benefits (in conjunction with other taxes) implies that household income stays nearly unchanged as gross income rises (the effective marginal tax rate is close to 100%). How we deal with this strongly influences how costly a scheme is, and how much it actually influences the after-tax and transfer income of households – for a clearer example Labour’s suggestions about the minimum wage are likely to lead to close to no increase in take home pay for the groups they are “targeting” with it due to this strong abatement!
- I would like to see details of how trust rules will be tightened – I am always suspicious of free-lunch money of this type. Note that tightening tax rules and cutting out evasion is one of the key ways to reduce the elasticity of taxable income – so it is encouraging that they have tied this things together.
- Extending childcare credits to those out of work: There has been some analysis of WFF and its impact on labour supply (here and here) – overall it lowered hours of work, by reducing second earners involvement in the labour market. But it did significantly increase sole parent engagement in the labour market. Now my impression was both these outcomes were actually goals of the policy – so that is all well and good. However, removing the work testing will reduce labour supply by sole parents – if that is part of the goal that is fine, but we sort of need to justify why NZ policy makers have suddenly changed their view on the benefits and costs of having sole parents integrated in the labour market.
- Comments like this are a bit misleading “Kiwi kids growing up in poverty are three times more likely to be admitted to hospital, five times more likely to die of cot death, and 27 times more likely to get rheumatic fever, and die earlier than those who are better off.”: This doesn’t tell us what the marginal impact of income transfers will be – as we need to know WHY this is occurring within a group. Is it income adequacy – or is lack of income adequacy correlated with some other factor that drives these outcomes (education, cultural/social institutions?). These questions are ugly – but if we are interested in dealing with certain outcomes we need to put some effort into understanding the outcome, rather than inferring that income transfers alone will solve it! This is one of the bits that makes analysing and dealing with poverty so very difficult, and is why community organisations are such an incredibly important part of this.
I am not going to argue here about what child poverty is, how we should deal with it, which institutions matter, and which policies are effective – these are good areas for debate, but I’m not arguing a specific conclusion around them. Instead I am just pointing out some of the shortcomings regarding the stated impact of the suggested policies that haven’t been raised, and which to be honest you wouldn’t expect any politician of any stripe to raise.
Am surprised not to see more comments responses. But – wonder of you would talk more about “with the most profitable firms likely to be producing goods and services where demand is relatively inelastic” because, as I understood the greens proposals, they are not suggesting a rise to company tax, just income tax. So, in theory, a proposal that will not affect firm profitability.
Hey VMC,
The point was about tax incidence – where the tax is levied isn’t the main issue, it is where the burden ultimately falls! My point was that we may have the firm taking on some of the incidence of the tax in the labour market – but if demand is very inelastic in the goods market they will pass these costs onto consumers! If it is profitable firms, which a left wing government would view as having a greater “ability” to pay, that can pass on the incidence this may be taken as unfair.
There is a bit much in there, but I think it shows just how convoluted tax incidence can be – and how hard it can be to figure out “who pays”!
Nice post. The. Trust tax hike will affect 100,000s of people.
Yes… especially those that created trusts last decade to avoid the 39c top tax rate and loaded up on loss making investment properties…
Regarding the estimated revenue from the increase in the top personal tax rate, and your point that increasing the top rate may yield “very little’ extra revenue, I was reminded of this document http://tinyurl.com/lqvwg57 It’s a joint report submitted to the govt by IRD and Treasury on the revenue effects of the proposed (since implemented) ‘tax switch’.
To cut to the chase, it puts the annual revenue loss of a reduction of the top tax rate from 38% to 33% at just over $1billion by 2013/14. My point is that if there is a substantial revenue cost to reducing the top rate of tax there must also be substantial revenue gains from increasing the top rate to not far above that which existed quite happily before 2010.
This is not to get into an argument about whether the proposed tax is good or bad, but just noting that if an effect works one way, as Treasury/IRD calculate it, from an existing tax level, it must also deliver significant new revenue if substantially reversed.
Another point is that if this http://tinyurl.com/n8zc2wb graph provided by Russell Norman is a valid comparison, then the twenty five (richer) countries ahead of us with a higher top tax rate must all be doing something really stupid!
Just because some other countries have higher tax rates doesn’t mean that NZ should also… you also miss out that the reduction in the top tax rate was in part an offset to the increase in GST to 15%. I’m reminded that when Cullen increased the top tax rate to 39% the revenue increase was far lower than expected…
So maybe there is a asymmetrical relationship between increasing the top tax rate and revenue gains compared to lowering the tax rate and revenue losses. And there is some good research to support this… it comes down to incentives.
Finally a higher tax rate in somewhere like Sweden doesn’t necessarily mean that the after tax/transfers income of the tax payers reflects this… its only looking at piece of the puzzle… effective tax rates may be far lower.
It’s not a matter, to me, of following the leader, it’s a matter of what works, and the empirical evidence that I recall is that there is a lower level of child poverty in countries that tax more highly. Feel free to disprove this. Of course there are definitional issues and wider issues to canvass as to the cause of the correlation, but broad brush evidence seems pretty clear.
The point of my post was purely the tax revenue effect of a change in the top rate of tax, remembering that the Clark government increased the top rate to 38% and it would appear that that increase generated significant revenue. So all I’m saying is that the quite small adjustment to the tax rate of a few high income earners is likely to raise the kind of revenue the Greens hope for, especially if compliance is given a high priority. Behavioural economics eg nudge theory may have a role to play here, which would be pretty cool to see.
I have now read Eric Crampton’s similarly impressive post on this and I think his last point is important. I don’t earn anywhere near 140k income, but I would be happy to pay a little more to have a decent go at making a difference.
Well I’m not so sure about the ’empirical evidence’ as there is plenty of evidence to support my assertion too. I guess it comes down to the overall structure of the tax and welfare system. For example, did you know in Finland that all tax records are public information?
In terms of compliance, there is always more that could be done… however, there has been plenty done in this regard over the past several years. What probably holds the IRD back from better work in this area is super clunky IT systems, which were designed for the tax system 25 years ago… the $1.5b spend on that is necessary to make the tax system work better, which may solve a lot of compliance issues…
Finally, I have a different view. I completely disagree with the notion that tax is somehow a morality issue. Its a deadweight cost on the payer. If you have a personal desire to see less child poverty (however defined) then you would probably be best served by donating some of your time. it would be personally more rewarding and less annoying to me if you did that instead of imposing your world view on my wallet…
Yep, more research needed for sure!
However, I think we can say for sure that since we deliberately marginalised the poor via Rogernomics, Ruthanasia and WFFs, we have ended up with an immoveable block of under-endowed kids and it’s time to try something different. I don’t think a small extra tax on the highest income earners and a relatively minor redistribution to the poorest children is particularly revolutionary or economically disastrous.
Morality issue? Not quite sure where that crept in. Is that my approval of Eric’s suggestion of a wider net?
And in an indication how these discussions can rapidly drift, we now have your bold assertion that all tax is a deadweight cost for the taxpayer. I can swallow the line that there may or may not be some deadweight cost in the sense of measurement of the utility derived from the government spending my money and the utility derived from me spending it, but it’s an extreme case to make that no utility is derived from any and all tax spending, but you may not have meant to make that case 😉
In reply to your final point, look, we abandoned the private charity fix a long time ago for the very good reason that it simply didn’t work. Universal provision is the proven successful strategy – apologies to Paula Bennet who ‘believes’ in targeting – and taxes are needed to pay for it.
To convince me otherwise, perhaps you can point me to a tax-free utopia in the advanced economies that I haven’t noticed.
Luc, I don’t disagree with you, except on your attributing my post to Eric Please note: Eric would never use a cricket metaphor!
There is significant disagreement about the elasticity of taxable income – and it needs to be estimated on a country by country basis. The only literature we have here that does that directly suggests very little revenue gain.
Note that I put it towards the end of my point though – as I didn’t want to go as far as saying there would be no revenue, especially with only one study. Instead my point was that the estimate of $500m was a MAXIMUM – it is likely to be lower.
I think some would argue that other countries are doing stupid things, or that the top rate cuts in further in the right tail of the income distribution. That is fine, but I’m not going to make that argument either 🙂