It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.One Prominent
Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that's mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.
Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn't love the New Zealand saddleback and support its recovery? Nobody.
Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.
The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters' beard oil. And if a tax on hipsters' beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.
But none of that much matters. Treasury would scream, because economists know that these kinds of taxes are abominations. But Labour dismissed Treasury critiques as ideological burps, and National's Gerry Brownlee has been no less dismissive of sound Treasury analysis. Politics rules in the end.
Taxing beard oil may sound frivolous, but consider campaigns to tax soda, or sugar, to fund public health campaigns. If a soda tax makes sense, then it makes sense regardless of whether the public health campaigns are the best use of funds. And if the public health campaigns are that valuable, why is the government not already cutting other less beneficial programmes to fund it?
The answer of course is that public health campaigns worth running are already largely being tried, and that a soda tax makes little economic sense – as Jenesa Jeram shows in her report, The Health of the State, released recently by The New Zealand Initiative. Putting the tax and the health campaigns together hardly improves the economics of the tax-and-spend bundle, but does make the package more politically appealing.
Note too that the case for hypothecated taxes would not at all be improved if the hipster beard thing had any connection at all to Tieke. This is pretty standard public finance textbook stuff. If the tax makes sense, it makes sense on its own. If the recovery programme makes sense, it makes sense out of general revenues.
We have hypothecated taxes on petrol, but that's really a form of user-pays. Petrol tax and road user charges reflect users' use of the roads; the roads are funded by the tax. And with RUC, vehicles that do more damage to the roads pay more. It's not perfect, but it's a pretty decent user charge. Sugar taxes aren't really a user-pays scheme for hospitals.
On a related note, John Roughan had an excellent piece on the public health campaigners' response to our report on sugar taxes and the like.