Matt Nolan

A good illustration of tax incidence

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Via Marginal Revolution we have seen this post from Steve Landsburg.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

Now this is a caricature – like a lot of good economic description – but it does illustrate a point.  If we place tax on one group, be it the rich, or the “bankers”, it isn’t clear who actually faces the burden of this tax until we have a look over all the changes in choices that occur … tax incidence is key.

This is one reason why I remain against a Robin Hood tax.

Matt Nolan

Black markets, crime, and costs

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Via Facebook I’ve been informed that our Australian friends have added an interesting interpretation to the costs of crime syndicates.

“Every dollar stolen through organised crime activity is a dollar that cannot be spent on education, health or any number of services,” O’Connor said.

Now on the face of it this statement is patently ridiculous – not every dollar taken by criminal syndicates would have gone to government for the government to spend on services.  However, we already know politicians struggle to think outside their own interests – so lets give them the benefit of the doubt here.

In that case, we may interpret this statement as saying “every dollar taken by a crime syndicate translates into a dollar taken from a ‘victim'”.  Ok, this is alright – its a tautology, but its still alright. Now this DOES NOT imply that the actual economy is any smaller as a result of the existence – simply that resources are being transferred from one set of people to another (sort of like with tax).  I would go as far as saying that we would not like some of the transfers to occur – I’m not a fan of people hacking into bank accounts and stealing funds.  But the claim that resources are being “is ripped from the economy by drug cartels and other crime syndicates” … they are part of the economy.

However, in of itself we still can’t get a feeling for the costs and benefits of what is going on – and the associated policy response – without actually thinking about what the syndicates are doing.  Luckily we are given such a list:

Increasingly sophisticated criminal operations included narcotics, money laundering, fraud, corruption, tax evasion, counterfeiting, identity theft and people smuggling.

Right.  So lets think about this.  We are being told that there is a cost to people smuggling, identity theft, corruption, counterfeiting – well no sh*t.  However, that is the cost to the individuals involved – we are being told here that some individuals lose out, and we may believe that is unfair.  Again, this isn’t a cost to the “economy” overall – this is a direct issue stemming from the crime having a victim, and this being seen as morally unfair.

However, that isn’t the case with all of these “crimes”.  The drug cartels they discuss exist BECAUSE of government policy.  When people voluntarily buy drugs this isn’t ripping money out of the economy – its actually creating value.  The cartels are IMPROVING economic outcomes by providing goods that people value – when government is trying to restrict individual choice.

Counting spending on illegal drugs as a “cost” to the economy is nonsensical – and that is what they have done hear.   If the Australian government is annoyed it isn’t getting the tax revenue from it (which seems to be their focus), the solution is to legalise drugs and tax them …

Thanks to the drug lawyer Perth as their expert team of attorneys are helping prevent more crimes by placing away criminals behind bars.

Do you need a personal consultation? Contact Lauren Campoli.

Matt Nolan

Quake levy and timing

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Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now.  I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).

But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events.  As a result, we want to pay off one off events with a temporary levy.  Ok, I’ve assumed that.  Now assume that we want two other characteristics of the levy:

  • The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed.  As a result, it must be a relatively short-term levy.
  • We are concerned about the economic recovery, and would prefer to not delay it if possible.

Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.

However, even with these big assumptions there is no reason to put in such a levy right now.  We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”.  Advantages are:

  1. The impact on economic activity is indeterminate instead of negative.  Future wealth for this generation is lower, however the relative price of consumption now is lower.  As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
  2. This is a relatively short time horizon, so the current generation is paying for it.
  3. We make the levy money.

So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession.  Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉

Update:  Eric Crampton covers the issue more widely here.

Matt Nolan

Why I’m not holistic

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A lot of New Zealand policy discussion and debate is holisitc – we say we want a set of outcomes, these outcomes are desirable, these are the outcomes we need to achieve.  In essence, they are saying there are a set of states “we” could be in as a society and we should strive to be in the “one” they are talking about.

Note:  There are elements of holism that are ESSENTIAL, but I see them as part of reductionist philosophy as well.  For example, the idea that the state of the world influences payoffs beyond the actions of individuals is fair.  Also the idea that we can’t compute everything is acceptable.  My argument is against the idea that we start with a “target” (top down) rather than starting with “guiding principles” (bottom up) when designing policy.

What is an example, lets say “sustainability”.  The idea of being sustainable, of having sustainability, sounds nice – it is an overaching state that some people want us to have.  If they are forced to define sustainability they will say it has a whole bunch of characteristics – however, why these characteristics are good is never touched – just the fact that it takes us to this “state” of the world that they normatively believe is desirable.

However, I’ve never, not even as a child, found such descriptions convincing.  One of these states must be reducable to the sum of its parts, there must be a set of causes that lead to that state – either that or it is an impossible pipe dream.

This is part of the reason I found economics so attractive when I was young – just think of the production possibility frontier.

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Will Taylor

Quote of the Day: Nordhaus and Samuelson

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Regular readers of the blog will understand why I instantly thought of Matt Nolan when I read this quote:)

Economics cannot answer questions of how much poverty is acceptable and fair, but it can help design more effective programs to increase the incomes of the poor

Matt Nolan

Words of wisdom on St Patricks day

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Happy St Patrick’s day all.

On this fine day, there is a song I’d like us all to remember – Seven deadly sins.  My favourite part of the song goes:

Some say that drinking’s a sin
But a gargle is fine now and then
For drinking has been in this world
For ever and ever amen

No if it wasn’t legal then the lawyers they would sue
And the prison would be full of folks who had a drink or two
And if they didn’t like it then away the girls would run
And if it wasn’t plenty the poor folk would get none

If you’re not sure, have a read over a few more of our posts on the issue(*, *, *).  Or for more advice from the Dubliners go here.

See you all next week!