Tuesday, 2 February 2010

Ship money

Acemoglu's latest paper, on institutions, tax revenue, and state capacity, has this bit on the history of England:
The British tax revenues increased by over three fold in the quarter of a century following the Glorious Revolution (while French revenues remained constant). Notably, these revenues were used very differently from how the marginal revenue was spent during the reign of the Stuarts before 1688: instead of financing the consumption or the retinue of the crown, they were spent to strengthen the Navy, which would then play an important role in defending the overseas interests of those in the Parliament (who in fact constituted the main checks against the power of the Hanoverian monarchs).
But wasn't the levying of ship-money one of the big complaints against Charles by Parliament just before the Long Parliament? If I remember my Hume correctly, Charles levied a tax (as prerogative rather than through Parliament) to kit out a first rate navy, and Parliament, who otherwise refused to grant him adequate supply for anything, got mighty ticked off about this imposition despite it being very well used indeed. Charles, seeing the writing on the wall, gave up ship money in the lead-up to the Long Parliament, but Hume suggests ship money nevertheless as one of the spurs for the Glorious Revolution: hardly an indication that the navy was neglected under all the Stuarts.

Or does Acemoglu count ship-money as inframarginal? The marginal dollar, I suppose, under Charles would have been used trying to defend against the incursions of crazy religious fanatics from Scotland: navy not much use there. Or is Acemoglu referring more to Charles' predecessors? If the latter, then does the comparison of revenues pre and post revolution make sense?

Hume's chapter on Charles is depressing.

None of this detracts from Acemoglu's overall point though:
This paper points out why this argument needs to be qualified and why caution is necessary before increasing the fiscal capacity of the state becomes a silver bullet policy recommendation. Because the availability of more efficient means of taxation increases the potential benefits of controlling state power, it also intensifies political conflict aimed at capturing the control of the state. This indirect effect counteracts the benefits from more efficient taxation and may dominate these direct benefits; as a consequence, the allocation of resources may deteriorate when the society and the state have access to additional fiscal instruments.
As Farrant and I have said before, the last thing you want is for Stalin to have more efficient means of taxation. And as I've said here before, I oppose Key making the NZ tax system more efficient (flattening out the income tax and imposing a land tax) because I don't trust Labour not to keep the land tax while re-implementing a 39% top marginal tax rate. The imposition of a new tax needs be accompanied by a commensurate increase in our ability to veto future growth in the overall size of the state. Acemoglu again:
The more general lesson is that while state capacity and states with sufficient economic strength to tax, regulate and provide public goods are essential for economic development, these benefits may not get realized by an autonomous increase in the strength of the state because this will also increase the value of controlling the state and thus induce increased political conflict and infighting. Therefore, the virtues of strong states emerge when the increase in the economic strength of the state is a consequence of, or at least happens simultaneously with, an increase in the political accountability of rulers and politicians. This underscores the need for future work investigating dynamic models of the endogenous emergence of state capacity and its relationship to political accountability.
Indeed. Couple the tax change with a requirement that any future tax increases be passed by supermajority referendum (or big structural decreases in the overall size of government), and I'm all for it.  Otherwise, not so much.


  1. Interesting. I don't like your position on tax system improvements at all - it "feels" to me like a prioritising of small government over overall welfare purely for ideological reasons, and that creeps me out. But I also don't have my thoughts enough in order to thoroughly criticise it. Hence, just a couple of questions:

    In New Zealand, how would the costly conflict that Acemoglu highlights be manifested?

    The potential benefits of controlling state power, in NZ, are surely limited and not greatly changed by an improvement in the efficiency of our tax system. We don't have quite such a lootable state as many developing countries do.

    In NZ, the salary the politicians receive is one benefit; post-retirement plushy connected positions on boards or in overseas diplomatic postings are another benefit; the ability to bestow pork upon friends / donors / communities is a further benefit that those who control government here receive. These all exist, to some extent, but are also meliorated by our systems of checks and balances.

    How would a more efficient tax system in NZ enhance the size of these 'benefits of controlling state power'? And even if perhaps more pork can be doled out following a rise in general prosperity, would this really create much in the way of 'costly conflict'? Where and what are these 'costs' that may make efficiency-improving reforms undesirable from an objective perspective?

    My impression is that you're trying to use academic work with very limited relevance for a country like NZ in support of your own preferences over the size of government. Interspersing Acemoglu's arguments about institutions and development amongst your own views about the appropriate role for government in a developed democracy seems a bit dishonest to me, because you haven't clearly shown the relevance of the former for the latter.

    My wager is that you can't do that (ie, that you can't seriously argue the relevance of Acemoglu's arguments for policy decisions about land tax).

    And I also don't see that any argument you've presented so far in favour of 'throwing away' an efficiency-improving tax policy change can be logically supported without the implicit premise of 'bigger government is bad', which of course is not something that is widely agreed-upon or can be demonstrated to be true.

    Happy to be proved wrong of course.

  2. On your first point, my main worry is that we won't wind up with an efficient tax system at the end of the process. Rather, the shift would allow a move to a new equilibrium as inefficient as the old but at a larger aggregate size of government. We'd have the more efficient system for the short interval until Labour finds it useful again to soak the 'rich pricks' and re-implement the 39 cent rate. All the inefficiencies from having corporate rates disjoint from top marginal rates return, but with the added fun of having a land tax and a higher sales tax besides. Yuck.

    On the second point, you're basically repeating Tullock's excellent "why so little rent seeking" question. Overall resources devoted to rent seeking are smaller than we'd expect given the stakes; however, they remain proportionate to the potential gains. If the potential gains rise, we expect aggregate rent seeking to rise as well.

    One kind of conflict in NZ consistent with the Acemoglu story is the amount that the major parties are willing to bid for minor party support. Not bribes but rather how expensive and inefficient a program they're willing to support in order to gain a coalition partner. Suppose we shift to the more efficient tax structure. The overall system can bear more inefficiency and so more expensive promises can be made to minor parties. I didn't think this so opaque a connection.

    You are certainly right, though, that most of my arguments against the tax shift are that it will ultimately lead to an increase in the size of government and should be opposed on that basis alone. I've not been exactly shy about making that argument. You would be right that I'm begging the question IF there were general consensus that the tax shift would lead to larger government. Then we'd have to trot out the lit on size of government and economic performance and argue about that for a while. So, if Key stood up at the budget and said "forget revenue neutrality; we have a deficit to fight. We're implementing a land tax and not reducing other taxes", I'd be wasting breath just pointing out that this makes government bigger.

    But the tax change isn't being sold that way. Rather, the proposals are all about a revenue neutral shift that enhances efficiency. I'm worried that it won't look all that revenue neutral ten years hence as I put better than even odds that a new punitive top marginal rate gets put in by a subsequent Labour government.

  3. "One kind of conflict in NZ consistent with the Acemoglu story is the amount that the major parties are willing to bid for minor party support"

    Interesting reply, and you're correct - it's not opaque at all - but it's something that hadn't previously occurred to me. Thanks for the reply.

    I suppose it is obvious that I'd be quite happy to see an equally inefficient but larger government sector in the longer run. So I can't share your concerns about that scenario (this position purely reflects my personal values of course, so has about as much objective worth as standing up at the footy and shouting "rarr").

    In terms of objective advantages and disadvantages of efficiency-improving reforms, I guess we're down to a trade-off between two desirable things: the improvement in efficiency in the short term (the size of government expenditure taken as given, it's objectively better that its revenue be collected in a less costly way), versus the waste that results from costly MMP-bargaining promises (or increased advertising and lobbying expenditure, or any other of the methods of securing power for your political allies) given that there's a wee bit more personal gain for the chaps who get themselves control of a more efficient economy.

    Without having had the time to read Acemoglu and understand how and when the indirect efficiency losses may outweight the direct efficiency gains, I feel it would be difficult to argue that this outcome is possible in the NZ context.

    If that's true, the argument for improving the tax system has merit irrespective of one's political stripes. And although I don't want to pigeonhole economists as purely positive scientists, I do like it when they're upfront about whether (a) they're arguing strategically in favour of a particular aim that reflects their personal value judgements, or whether (b) they're arguing in favour of policy improvements that benefit the country in an objective sense.

    As long as it's transparent that you're being (a), we can all go home happy. (Well, excepting myself, because I wear Team Big Gov pyjamas to bed at night and hence I'm a bit grumpy that Key has poured cold water on the Land Tax proposal).

  4. I think I was making a "c" argument: legislation X leads to R, not to S, and if you agree with me that R is less desirable than S, then you should also not like legsilation X. Since you like S, then it makes sense for you to like X.