Matt Nolan

More winners and losers from GST

/5 Comments/in , /by

So, us New Zealander’s are switching some income tax to consumption tax.  Good for us.  In order to think about whether this is a good thing we need to discuss costs and benefits.

It turns out this switch is also a “transfer” of resources between two groups, relatively speaking.  These groups are people that HAVE borrowed and people that HAVE saved.

When we increase GST and lower income tax we are saying “we will tax future consumption more and future income less”.

If people have borrowed this implies that they purchased consumption when it was relatively “cheaper”, and are now going to be taxed at a lower rate on the income they are making to pay it back – as a result, borrowers win.

If people have saved, this implies that they have deferred consumption when it was cheap – and will buy things when they are more expensive.  As a result, savers lose out from the change in relative taxes.

Since it is “true” that people on low incomes borrow relatively more of their income, then in a static sense this switch could be seen as more “progressive” right?  I don’t really like static definitions, but if people are complaining about the poor and saying that the poor borrow more then it is important to keep this initial transfer in mind …

Personally, I think borrowing and saving  is based more strongly on lifetime income, impatience (which I think is income neutral) and the lumpiness of consumption – as a result, I’m don’t see to much progressivity here.  However, this does tell us that people with a stock of liabilities will benefit and people with a stock of assets will lose.

Matt Nolan

Why the income to GST shift isn’t pointless

/1 Comment/in , , /by

There is a feeling out there that the increase in GST would be pointless if completely compensated.  I’m not sure I agree.

Even with a fully compensated scheme, and even given some welfare costs, there are reasons why we may want to shift the burden from income to consumption:

  1. Consumption tax is easier to enforce (self-reinforcing) – therefore it will be cheaper to implement and have less avoidence,
  2. On a similar note, with a consumption tax it is easier to ensure that the tax falls equally on all income,
  3. Given income tax also hits interest income, a consumption tax treats current and future income equally while an income tax promotes current consumption, (note that this does imply that the baseline rate must be slightly higher

Now, having it set up in the fully compensated way does imply that effective marginal tax rates are unchanged – and therefore so are labour supply incentives.  When thinking about “productivity” and the such the changes to the top tax rate, and to taxes on property, will be more important – but we won’t know about that until May 😉

Matt Nolan

On compensating for a change to GST

/3 Comments/in , , /by

When discussing the upcoming changes to the New Zealand tax system the National party has made it clear that they want any change in GST to be “compensated”, so that those on low income aren’t “worse off”.

Now this is actually a wildly complicated question.  Any change will create winners and losers, that is undeniable.  If we think of compensation in welfare terms there is no way to perfectly compensate everyone without making any change viciously complicated – or not making any changes at all.

My presumption is that the goal isn’t “welfare compensation” per see.  My guess is that any compensation will be such that people (outside the property sector and those in the top income bracket – where a rejig “might” take place) will pay the same proportion of their lifetime income in tax (although any progressivity from any change in incomes will also be accepted).

Why do I think this?

Read more

Matt Nolan

Video: On the unemployment leap

/3 Comments/in , /by

Agnitio sent me a couple of links to an interview I did on unemployment last night (here and here).

It is consistent with what I wrote yesterday, even if it doesn’t seem that way.  Furthermore, I don’t believe the government was too “inactive” in this case – we aren’t a centrally planned economy, blaming the government appears pretty arbitrary.

Relative to my expectations (which albeit were low) the government actually performed quite well in terms of the recession – by not really doing anything excessive, but still trying to make sure that any painful transitions are smoothed over (by not removing, and augmenting, automatic stabilisers).

Matt Nolan

Zero tax threshold: No thanks

/4 Comments/in , , /by

I don’t like the idea of a “zero tax” threshold at the bottom of the tax system.  I see it was suggested today by Mark Keating, so I thought I should explain why I feel this way (ht Kiwiblog).  I’ll put down three reasons, in reality the third reason is by far the most important:

  1. I don’t believe the cost of “churn” is very substantial – implying that any benefit from setting a zero tax will be negligible compared to taking the tax and sending it back.
  2. The effort required to set a zero tax and enforce payment of tax when moving out of the bracket requires effort as well – as a result I don’t think it is self-evident that setting a new bracket would reduce administration costs (it might even increase them).
  3. If we set a zero tax bracket this also acts as a tax cut for EVERYONE earning more than that amount.  This has to be paid for by INCREASING other tax rates (substantially as well, since the loss of the bottom bracket will cost more than an equivalent cut anywhere else).  As a result, effective marginal tax rates will be higher than if we taxed and paid benefits (for the same average tax rate in other words).  This reduces labour supply incentives for higher income earners.  As these earners tend to be more responsive to tax there would be a SIGNIFICANT efficiency cost.

Yes, the zero tax rate at the bottom will increase labour supply incentives for those on very low incomes.  But this will only lead to efficiency gains if we believe it will get the more elastic secondary earners into the labour market.  If we are doing it to promote equity it doesn’t make sense – as those that are actually poor are likely to provide very inelastic labour supply.  Overall, it is likely that the negative impact of higher EMTR’s on middle and high income earners will outweigh any positive impact through a increase in, our already enormous, part time labour force.

The purpose of the zero tax bracket is to make sure that people get a minimum living standard.  The better way to do this is to ensure that society pays everyone a living wage at whatever level it believes is fair.  Leave redistribution to the welfare system (where our social value judgments are transparent), tax needs to be applied on the basis of efficiency in order to be effective.

Matt Nolan

Burgeoning government bureaucracy? Links

/3 Comments/in , /by

There is some suggestion that the size and scope of governments around the world has become excessive.  Two recent examples of this are:

The Standard has suggested that similar comparison in NZ could be a little out of whack, and in the most part I agree with them.  After all, Labour was elected to a third term on the promise of larger government, National was re-elected to keep it at that level, as a result I think society is suggesting that they want government to continue spending a quarter of our income.

However, I do disagree with them with regards to the idea that government spending didn’t markedly rise as a proportion of GDP in Labour’s third term – to me the GDP Statistics seem to suggest this was the big mover (with the recent increase solely the result of a recession, and “automatic stabilisers”):