So in National’s tax package they have dumped the R&D tax credit. Businesses seem disappointed – but this isn’t enough information in of itself to tell me whether getting rid of the credit is socially optimal or not.
In order to analyse this we have to think about why an R&D tax credit could be socially optimal and then see whether that scheme actually worked in the appropriate way to increase social welfare.
Let’s give this a go 😉
We have a guest post over at No Minister.
The conclusion:
Ultimately, I doubt that the government has a role in investing in large scale projects in the absence of “externalities”. The best thing the government can do is make sure that the economic environment is open and transparent – such that firms with greater technical knowledge, and a better understanding or the risk-return trade-off, can invest in the most efficient way possible. The purpose of government is to oil the wheels of commerce – not to build the cogs.
I’ll be honest, I don’t think too much of it. I view tax as a structural thing that just needs to be set. Both National and Labour have this “incrementalist” view of changes taxes, which gives the potential for shifts in policy and creates uncertainty in the economic environment.
I am also disappointed that they leave the tax bands fixed – when inflation adjustment of the tax thresholds is the only way to ensure that the real tax burden isn’t rising over time.
Finally the independent earner rebate seems like an ad hoc addition that they tacked on in order to provide “$47” relief to the “average worker”. This policy does nothing to increase efficiency in the economy – the very issue that National said it was trying to chase.
The reduction of the 39c tax band makes sense – as it is a dis-incentive to save and punishes people with highly variable annual income. But reducing it at 1c a year is just too slow for a structural issue like tax policy – if it is going to grow the economy so much, why not just cut the damned thing now.
It now appears that National is going to scale back its tax cuts (ht Big News, Kiwiblog, The Standard) – stating that poor economic conditions have made larger cuts uneconomical. There are two ways I can read this:
The first way doesn’t make sense (as tax rates should be independent of the economic cycle, they are “structural”). We have discussed this before here.
The second reason is defensible, but if this is the case then the structure of their package seems a bit strange. They still want to give the $50 a week tax cut to an average person worker, so they are reducing the tax cut to high income earners. This will increase the progressiveness of the tax system further, which may increase equity but will definitely reduce economic efficiency (relative to a flat tax cut scheme – as it increases effective marginal tax rates).
Given that Labour states that focusing on equity is one of their primary goals, and National has been stating that it will improve economic efficiency, this sounds more like a Labour party policy than a National party policy. How can National say that it is going to “grow the economy” compared to Labour, when its tax policy does not add any growth impetus and its spending policy is pretty much the same?
If National is differentiating themselves from Labour, then I think they need to advertise it because I can’t see the difference. (Apart from the fact that National said they won’t mess with the Reserve Bank Act – for an economist that is a big issue where I think National wins, but I don’t imagine this will get non-economists particularly excited).
Of course, we will have more details about the potential for National’s tax policy to “grow growth” once it is release. Once the policy is out we will comment on whether National is threatening to be as fiscally irresponsible as Labour has been – by the sounds of things it appears that the demands of politics will lead them down that way.
I have to admit that I enjoy reading Brian Fallow’s economics articles in the Herald. His clear and concise writing about economic issues provides a public service to New Zealand.
His recent article describes what the Emissions trading scheme will do to the economy. The money quote for me is:
By ratifying the Kyoto Protocol in 2002, New Zealand took responsibility for its share of global greenhouse gas emissions. What the ETS does is devolve that responsibility from taxpayers to the firms and individuals whose decisions ultimately determine how large those emissions are.
Exactly! It is not the ETS that creates the costs we are going to face – it is the ratification of the Kyoto protocol.
Other posts that mention the article (Frog Blog – although I would ignore their Rod Oram style discussion on the “opportunities” 🙂 )
ISCR have just launched New Zealand’s first prediction market.
Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?
These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).
The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.
Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …
Mr Burgess says that iPredict is like a simple stock exchange, trading real money.
“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”
Mr Burgess says that prediction markets are the gold standard for forecasting.
“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.
“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …
Anybody can browse iPredict and see the predictions for free by going to www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.
Get some money on your account and get predicting.
Goonix