Wednesday 18 September 2013

Ladies and Gentlemen... the Greens' would-be Finance Minister

Russel Norman, recently ruled out as Finance Minister in any Labour-Green coalition by Labour, tweets from the Finance Committee:

Taxes are a bad, public services are a good. Saying the first doesn't mean denying the second.

More importantly, economists use the word 'burden' in a particular way. A few useful notes about Principles-level (maybe intermediate) economics for someone who thinks himself qualified to be finance minister:
  • 'Burden' measures the total cost of a tax. The 'excess burden' is the amount by which the cost of a tax exceeds the amount collected. Treasury tends to reckon that excess burden is around 20%: it costs us about $1.20 to raise $1.00 in tax. The $1.00 raised is a transfer from the public to the government; the $0.20 is pure loss due to distortions in economic activity consequent to increases in our current mix of taxes.
  • Tax incidence theory is important: it tells us who bears the burden of any particular tax. Suppose we wanted to add another 5% compulsory Kiwisaver contribution. The 'burden' of the tax would fall on both workers and on employers with the precise mix depending on how employers and employees change their labour demand and labour supply with changes in wages: it doesn't much matter whether we say that employers have to pay it or whether employees have to pay it. Regardless of statutory incidence, economic incidence - the burden - will remain the same. Meteria Turei understood this when she said that the accommodation supplement paid to tenants is largely a subsidy for landlords. Alas, public understanding of such things is imperfect, allowing for shenanigans where measures imposing burdens on one group are framed as costing somebody else instead.
  • If a genie appeared able to provide public health services, for free, this would be a good thing, right? It's impossible, but it would be good. The services paid for by taxes are good, the taxes are bad. We need to be sure that the value delivered by services are greater than the burden imposed by the tax. At current measures of excess burden, a project must return at least $1.20 for every dollar in spending. 
Russel Norman suggests only "right wing" economists talk about tax burden. Here is a JSTOR search on "tax burden". There are 61 pages of search results with 100 results per page. Item number 177 on a date-sorted list is famous Right Wing Economist John Maynard Keynes discussing the Colwyn Report on Natinoal Debt and Taxation. Item 398 is rabid right-winger Nicholas Kaldor's call for wage subsidies to reduce unemployment (1936).

Burden is just the term used by economists to describe the cost of the tax and to help sort out the difference between statutory and economic incidence. Like "While X writes the cheque to IRD, the burden of the tax falls on Y and Z." That's it. It's the standard term used in the main texts to describe this thing. Richard Musgrave (centre, maybe centre-left) uses it. James Buchanan (right) uses it. Pick a random public finance text, you'll find "tax burden" or "excess burden" somewhere in it.

Update: egads, it gets worse. Lance Wiggs tries explaining that it's just a word we use. Russel Norman replies:

Update 2: this is way too funny. A Twitter correspondent points me to two press releases by Russel Norman.

"It's not fair to expect income-earning New Zealanders to carry a disproportionate share of the tax burden while some of New Zealand's wealthiest individuals pay none," said Green Party Co-Leader Russel Norman.
Unlike the National Government that has chosen to shift the tax burden on to the lowest paid New Zealanders, our tax changes would focus on those not currently paying their fair share.


  1. Or the fact a lot of our modern description of these things comes from Hicks - that wildly right wing economist .... oww wait a second :P

    It is jargon for him to talk to a specific group - he is an ideology like all his fans, they just like to pretend they are trying to have an "honest adult conversation" about issues.

    If he provides us a counterfactual description of the world, and how he thinks his view is then superior to what Treasury is discussing with burden, then that is fine - in fact I'd go as far as saying that economists would love it if we had even better ways to interpret, explain, measure, and understand the distributional consequence of tax.

  2. Jargon that shows up in every Principles text should be familiar to a guy who wants to be freaking Finance Minister.

  3. Agreed, which is why I'm convinced he is simply using it to communicate to a specific group - people that dislike economists and will never try to even understand or fairly discuss arguments.

    A group of people who prefer the simple rallying cry of common sense above reason - as all economists are trying to do is reason about social situations, and are often more than willing to admit the wide variety of ways and factors that can be and need to be discussed with these issues.

  4. Oh dear oh dear. Norman's comment on "burden" was just ignorance of technical language (albeit an ignorance that we wouldn't want to see in an aspiring finance minister and one that should give him pause before attributing views to the user of the language), but his ridiculous comment on "general equilibrium model", seems to be trying to convey the impression of someone who has learned some economics, but betraying complete ignorance. Do you think he has confused general equilibrium analysis used to think about the economy-wide effects of a tax with dynamic stochastic general equilibrium models in macro that have come in for some criticism since the GFC?

  5. Or he is trying make that group bigger by making comments that tar all economists....

  6. Regarding the general equilibrium comment: I would place a small wager that Mr. Norman is a fan of Dr. Keen. See this blog post for an example of what intelligent people who don't know any economics "learn" from reading Debunking Economics. Note the emphasis on general equilibrium.

  7. I think calling a tax a tax is ideologically left wing. I prefer to call it theft. Perhaps Russel and I could agree on a politically neutral term like "money the government takes from you whether you like it or not"?

  8. It's not fair to expect income-earning New Zealanders to carry a disproportionate share of the tax burden while some of New Zealand's laziest individuals pay none.

  9. Ignorance of technical language, ridiculous comments, and utter hypocrisy.