Matt Nolan

Dom Post article: Defending the Bank

/2 Comments/in , , , /by

Did an article on why we should leave the Reserve Bank Act alone in the Dom this week.  Given I’m too lazy to put up new material this morning I will just link to it (on Rates Blog, on the Infometrics site).

Money quote:

Warping the Reserve Bank Act to focus on a multitude of different goals will not solve these underlying issues; it will just cloak the symptoms by damaging other sections of the economy.  Although pretending to solve an issue may be beneficial for politicians, it is not the best way to run New Zealand economic policy.

Update:  A bit of pointless filler – again because I’m not up to writing anything fresh today 😉

Matt Nolan

Points on optimal taxation

/in , , , /by

There has been a lot of talk about tax (eg here).

When thinking about tax systems it is useful to run the following train of thought for optimal design:

  1. Start with a target level of government spending.  Goal is to raise this revenue at the lowest cost to society.
  2. First start with taxes which improve the allocation of resources by correcting a market failure (externality taxes).
  3. Then design a nice flat tax (either on all income or consumption) which treats everything equally.
  4. Then shift relative taxes in broad areas based on the long-run elasticity of supply and demand, and constrained by the potential for tax avoidance (Ramsey principle).

Once this initial tax system has been designed, and government spending has been sorted we face a clear “equality-efficiency” trade-off.

In a final step we then adjust the progressivity of the tax system, or the type of government welfare spending, in order to achieve the type of trade-off between these factors that society desires.

Now this doesn’t tell us what the scheme should be, but it allows us to directly look at the trade-offs we are making and make a clear decision.  If the goal is to make fiscal policy that represent the preferences of society at the lowest cost this is the way we need to think about it – instead of saying “more growth”, “more redistribution”, “more tax on land/capital/houses/consumption” etc etc without thinking about it in general terms.

Furthermore, even when we come up with a scheme based on this train of thought we only get told what would be optimal “in the long run”.  The required transition path for the tax system from now until then is still far from clear.

Matt Nolan

Tax links, Rates Blog and Offsetting Behaviour

/1 Comment/in , , /by

The Rates Blog is doing this cool thing where they have written segments on different tax policies.  They have:

They are good pieces for sure, go have a look.  We promise to write something on tax in the next week or two, although I can’t vouch to live up to the high standards these guys have set.

Also have a look at Eric Crampton’s post on spending and tax.  The tax discussion is about trying to figure out how to set up the tax system to get revenue at the lowest economic cost.  There is also a separate, but important, discussion that we need to have on the optimal level of government spending – as these taxes we use to spend on government projects do have very real costs, both in terms of taking money out of peoples pockets AND the loss of efficiency associated with this taxation (deadweight loss).

Matt Nolan

Guaranteed minimum income. Where did it come from

/19 Comments/in , /by

So I see Gareth Morgan is suggesting a set minimum income level and a flat tax rate.  Very nice, I can see merits in some of the set up for sure given my personal value judgments.

Some on the left will think this is right wing (where is the progressivity!),

Some on the right will think its left wing (we are giving benefits to everyone!),

Others will like it (it lowers effective marginal tax rates and ensures that everyone can live),

Others will hate it (churn in the tax system, don’t need to work to live, its tax, it involves government, the rich will pay less)

So where did this come from?

Hint *.  Guess who else suggested it in the 80s.

Tell me, does this change the way you view these two people as well?  Or does knowing that these people came up with the idea change how you view the idea.  If that is the case, why?

Update:  The Standard supports, DimPost does not.

goonix

California knows how to ban stuff

/10 Comments/in , , , , , , /by

The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

Matt Nolan

Questions on NZ stimulus

/7 Comments/in , , /by

Bill English says it is now time for New Zealand to begin pulling back from its stimulus measures.  The RBNZ also says that they won’t lift rates because they expect fiscal stimulus to be withdrawn.

However, I have a question.  Other then the cycle way (which will still be constructed) and permanent tax cuts (which won’t go away) what stimulus did we actually take on?

If this is the only stimulus we did, and we are not withdrawing it, then isn’t the statement that we will withdraw unnecessary stimulus absolutely meaningless.

So, what DISCRETIONARY spending did the government add solely because of the recession?  [automatic stabilisers do not count – as the economic cycle deals with them itself]