Matt Nolan

Zero tax threshold: No thanks

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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

Tyranny of the majority

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Any policy to ban smoking, on the basis of this, would count as “tyranny of the majority” in my opinion.

This reminds me of my favourite rule of thumb for policy:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

On the flip side, any regulation that increases coercion (as banning tobacco seems to) is likely to be bad policy.

Matt Nolan

Dovish Jan for the Bank

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Reserve Bank statement is out for January.  They seem more negative on the world and feel inflation is more “comfortably” in the band.

If we want to know when they are going to move rates we have to keep an eye on:

  1. Monetary aggregates (for household debt accumulation),
  2. Labour market,
  3. Global growth.

Rates Blog also comments here.  Personally I’m more positive on both the world and near term New Zealand economic activity – and if the data shows this I would expect the Bank to move more quickly.

And also, what the hell – the 90 day bill rate is around 2.8%, inflation is around 2%, we are talking a real rate of 0.8% with expected real growth of say 2.5%.  We are in very very stimulatory territory here.

Matt Nolan

Tax working group: The corporate tax rate

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The Tax Working Group has released their report, as you all already know.  The recommendations are as expected, so its not particularly exciting in that sense.

However, there are some issues I would like to discuss – lets start with the idea that we “urgently need to cut the corporate tax rate” if Australia does.

Currently there is talk that, if Aussie cuts the corporate tax rate to 30% we need to do the same immediately.  We are told this as if it is a self-evident truth, and told that if we don’t all investment will head to Australia.  This is a touch over the top.

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The Hand

Means testing fines: economic efficiency, or unjust policy.

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As recently reported, European nations are increasingly pegging speeding fines to income levels, in an attempt to standardise punishment for such infringements.

The intuition is simple: a $100 fine to a person of wealth in excess of a billion dollars is trivial. Clearly, there is no (or at the least little) incentive to curb one’s behaviour.

However, in examining a recent USD $290,000 (euro203,180.83) speeding ticket slapped on a millionaire Ferrari driver in Switzerland,  one cannot help but feel this is somewhat excessive.

Conversely, it would seem that such laws have the potential to induce ridiculously low penalties to those without any assets. Is New Zealand society willing to burdening the rich with the external risks created by the poor?

Matt Nolan

A note of caution for NZ

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Things are generally looking better for New Zealand.  Consumer, business, and forecaster expectations of growth have improved, our trading partners are stabilising, and financial markets are functioning.  Yay.

But one piece of data that leaves me a little cautious is the money stock data.  The broadest measure of the money stock (M3)  declined 2% on a year earlier in November.  This was the largest decline on record (going back to 1960).

Furthermore, following this release the New Zealand dollar has climbed sharply.

If the declines in the money stock are sustained, and the higher dollar is also sustained, there is one clear interpretation – market expectations of demand driven deflation.

Of course, this data is volatile and rising commodity price expectations and the such can be used to explain the change in the dollar, but …