Sunday 18 October 2009

A bright point in tax

Last week's Treasury figures were very bad indeed. I still haven't wrapped my head around how forecasts of a decade of deficits are consistent with the Fiscal Responsibility Act, but neither did I ever wrap my head around how the RBNZ's interest rate policies back in 2005-2006 were consistent with the Policy Targets Agreement.

Just how terrible are the numbers? The deficit's at $2500 per capita or, somewhat terrifyingly, about $4500 per member of the work force. $2500 per capita doesn't mean much as lots of those capitas aren't ever planning on joining the workforce to pay the bill. Recall that average income from all sources for someone in paid employment is $930 per week. So the government, this year, has taken on debt equivalent to a little more than a month's earnings for each and every member of the labour force. Let's hope the upcoming budget has some serious rolling back of new entitlement spending brought in under the prior government.

The only bright points in the government's books, where tax revenues from almost all sources dropped considerably, came from reasonably large increases in alcohol and tobacco excise tax revenues. Total alcohol excise taxes increased from $795 million to $829 million while tobacco increased from $963 million to $1,063 million. ACC's earnings also went up, but of course their main problem is on the spending side. Congrats Treasury (Sam Direen!) on listing excise equivalent duties split out by category in the main figures rather than burying them with all other duties as was prior practice.

So Kiwis owe a debt to the drinkers and the smokers for keeping the deficit from being even worse than it is. Recall of course that tobacco tax revenues far exceed health care costs while alcohol tax revenues are greater than fiscal costs to the government (health) and roughly match overall "social costs."

In related news, Luke Nicholas of Epic Beer reports on a survey for the Brewers' Guild showing craft bottled beer sales up ten percent (with Epic being up 200%), despite indications that one of the mass market brands, DB, is seeing shrinking sales.


  1. Hmmmm, I wonder if the reliability of sin tax will have a bearing on what recommendations the Government accept from the Law Commission's review of booze.

    I need to get off my butt and write my submission, though I'm cynical about the point.

  2. Treasury has noted Ramsey reasons for alcohol excise taxes; of course, going down that line makes a hash of the uniform GST.

  3. A complete analysis obliges an economist to look at Ramsey justifications for high taxes on cigarettes and alcohol, but I'm not convinced that the theoretical optimal Ramsey tax does have a higher tax on those goods.

    The Ramsey rule is sometimes characterised as saying we should put higher taxes on relatively inealstic goods, but this is not strictly true. Rather the rule is (approximately) that we should put higher taxes on those goods with a low substitution effect with respect to the untaxed good (leisure). If preferences or constraints are such that the substitution effect on labour-lesiure decisions are approxmiately zero, then the optimal set of consumption taxes is uniform, no matter how inelastic some goods might be.

  4. If alcohol is a strong complement to leisure, then you could start building the Ramsey case. However, alcohol also is a complement to many work activities, as evidenced by higher earnings for drinkers. Consequently, optimal Ramsey policy is tough. Perhaps taxes but rebated for business expenses on alcohol? It would still require putting in the hard work of showing actual complementarity to leisure though.