Afternoon roundup

Some of the worthies as I attempt to get the tabs down to a more manageable level...

• Michael Reddell keeps documenting the problems at RBNZ. They make stuff up when reporting to the Finance and Expenditure Committee. "But it gets harder to believe such a pro-incumbent bias is playing no part (consciously or unconsciously) in their words and actions."
• Most polled restaurant owners would make covid-infectious employees show up to work. Great advertisement for restaurants. 
• If a rezoning increases your property value by more than 7 times, then either council's supplying free-to-users infrastructure that ought to be covered by charges on users over time, or it isn't zoning anywhere near enough land, or both. 
• One reason for crypto-regulation: add a large fixed cost to a low marginal cost service to protect incumbents. 
• A link tax won't save the newspaper industry. 
• Helen Clark chats Ukraine war with Australian defence expert Mick Ryan. 
• NZ's alcohol licensing authorities still are J-Curve deniers.

Afternoon roundup

The worthies, on the closing of the browser tabs

• I still have great difficulty understanding why it is worse to draw up to 5000 cubic meters of water per day from an aquifer to put into bottles for people to drink than it is to run the same amount of water through cows.


• We have a desperate shortage of nurses. Meanwhile, the Nursing Council is blocking a nursing school from training new nurses. It's just nuts that ComCom is likely going to waste its next market study on a populist beat-up on bank mortgage interest rates. The opportunity cost is high.


• Lianne Dalziel on the review into the Auckland cyclone response. Good thoughtful piece from someone who's been there [should ungate tomorrow by removing the /pro from the URL]. 


• Transpower's increased the expected amount of solar generation coming onto the grid by 2030. In 2020, they expected about 1 GW by 2030. Now they expect over 7 GW. Wow. 


• Ice cream is associated with lower risk of diabetes. Unsurprisingly, the NZ public health people aren't having a bar of it - their latest recommendations on diabetes stick to the ban-and-tax stuff. Why not make ice cream part of school lunches? 


• Good summary from Pattrick Smellie on the work that Robin Oliver commissioned from Sapere looking at effective tax rates (average and marginal) across different income bands and family situations. I had a chat with Robin about that work yesterday. 

Afternoon roundup

The morning's worthies:

• A virtual art gallery of DALL-E created works. My favourite:
  
  The link gets you the annotated guide, as well as a link through into the gallery so you can walk around for a look.
• A stress test run for the ECB shows that climate change really isn't a prudential issue for central banks. Doubt it will encourage Adrian Orr to stop tilting at this windmill.
• More experts warning about MoH's advice on Covid testing. MoH currently only notes that a negative test isn't required for ending isolation. MoH should be advising people that there's substantial risk they're still infectious if they're testing positive. It was about two months ago that Anne Wyllie was describing the Ministry of Health's advice as 'dangerous misinformation'...
• Dodger Stadium is banning Roger Owen from throwing peanuts to punters.
• Aged care facilities are short on nurses and having to shut down beds. Labour seems generally of the view that it's bad for the sector to rely on migrant nurses. It'll be interesting to see how this one ends; it has a lot of potential to end badly. How many people will be pushed out of care?
• Marc Daalder has a modest proposal.
• Some fun and absurd trolley problems.
• The Gods of the Copybook Headings return to Germany.
  
• Lindsay Tedds works out the implications of Alberta ending its indexation of tax brackets. NZ really really should start indexing its tax brackets, or insist that the RBNZ do its one big actual job so it doesn't matter as much.
• Immigration restrictions don't just impinge on the liberty of those abroad. They are also a substantial hindrance on the liberties of those already here. Just ask Ilya Somin.
• Chloe Swarbrick is pushing for a lot more controls on alcohol. She's citing the BERL figure as part of the motivation. I wish people would remember that BERL's $7b+ figure isn't from a report. Their old $4.9b figure was from a report, which was severely flawed. They then multiplied that old figure by GDP growth over the period to get the new number. That's it. The initial number was nonsense but even if it had been right, the inflation requires that alcohol harm be a constant proportion of GDP. Wouldn't you even want to check whether consumption had dropped over the interval? The Greens like to claim to be evidence-based...
• Starting salary for lifeguards in Wellington, requiring a 40-credit certificate that can be done from age 16 on the job, is $51,663. It matches the starting salary for teachers with a Bachelor in Teaching. The lowest rung on the Lecturer scale at Canterbury is $82,882 and would generally require a PhD. So spending 8 years training for a PhD, after finishing NCEA at age 18, means forgoing half a million dollars in lifeguard salary as compared to starting lifeguarding at age 16.

Morning roundup

The morning's worthies:

• Robert MacCulloch brings the prosecution's case against the RBNZ. A future better government will have some work to do in restoring Bank credibility. Firing the Board and Governor; resetting the Remit so it only cares about an inflation target; appointing a hawkish Governor who recognises that inflation is his job and climate change, as important as it is, is somebody else's job; and requiring that those on the Monetary Policy Committee have expertise in monetary policy rather than treating it as a conflict might be a start. 


• This has got to be the stupidest argument in favour of recycling. It begins with a grudging recognition that most recycling is pointless, before saying it might be a gateway drug to caring more about climate. The more plausible explanation for the survey results: people who get warm fuzzy feelings about environmental things in general are more likely both to recycle and to buy an EV. 


• The Government proposes a tax principles bill. I like that Minister Parker agrees that horizontal equity, vertical equity, administrative efficiency, and minimisation of tax-induced distortions are core tax principles. But he points to high EMTRs for some lower/middle income earners as evidence that the tax system isn't progressive. Progressivity is defined as the marginal tax rate being higher than the average. Those EMTRs will hit in over short ranges for some folks, and are bad, but they aren't really evidence against the tax system being progressive. And remember that some of our progressivity is delivered by transfers like Working for Families. 


• The Niskanen Centre explains how EV subsidies are generally a bad idea - you wind up providing a lot of cheap EVs to rich people who don't drive them very much. But if you could get the people who put on the most kilometres into an EV, that could be good. Now what would set that kind of incentive? Carbon charges in fuel. Cost adds up fastest for high-users. 


• A reader sent this through after my Newsroom piece on carbon forestry: the biodiversity within a pine forest.


• NZ has a lot of old people, but aged care facilities are shutting down. Why? Government banned immigration, so there are no nurses. 


• Good piece from Dileepa Fonseca. Everybody complains about costs in the construction sector, so why don't we let the folks who put up excellent cheap apartments in South Korea, Singapore and Japan build some here? I suspect we'd also want to have Japan's zoning and consenting system. And abolish the Overseas Investment Act.


• Season 6 of Kids in the Hall starts in May. Get your Amazon Prime subscription ready. 


• The unserious people oppose waste-to-energy plants, because the plants make it harder for them to push zero-consumption lifestyles. FFS any carbon dioxide coming out of them is in the ETS. 


• Craig Renney makes the case for a Parliamentary Costings Office. I like the idea in principle; would be a fair few difficulties to work out in practice. To begin with, which Parties get access, and how much of the Office's time? If it's just Parliamentary parties, you introduce a barrier to entry. If it's everybody, you get every nutjob setting up a Party and demanding a costing on their pet thing. If it's allocated by vote share in prior election, that also puts in a bias toward the status quo. I still like the idea of a costings unit that runs rolling reviews of existing spend between elections. 


• I'd missed this 2019 AEJ- Ec Policy piece. Sweden put in a high carbon tax; petrol use dropped a lot. NZ is part of the counterfactual synthetic Sweden used for comparison. The Swedish carbon tax is a lot higher than current ETS prices, but NZ ETS prices will rise. The regulators here seem to believe that prices won't ever affect transport emissions here. Sweden suggests otherwise.


• An urgent appeal that masking in classrooms be the default for winter.


• I really need to read this whole book. "Questioning the Entrepreneurial State", reviewed here.  There has been far too much naive enthusiasm for the Entrepreneurial State approach in the dumber parts of the Ministries. 

Interest deductibility

Last year, Victoria University's Chair in Public Finance Norm Gemmell sounded a few warnings about Labour's tax changes. 

• The new 39% rate seemed unjustifiable as a revenue-raising mechanism. The distance between that rate and the trust rate would create problems. Deadweight costs would be high relative to the revenue raised. As Norm put it, "It is hard to avoid the conclusion that the new higher top tax rate is a policy designed to deliver the appearance of redistribution by focusing attention and revenue raising on top earners. However, especially given the way the new policy has been structured, the actual effects are likely to be minimal on equality and small on revenue, but will impose significant costs in terms of the efficiency and integrity of tax revenue raising in New Zealand."
• The housing tax package is a mess. "If tax deductions on housing investment loans are to be denied, what about other types of business loans which future governments think should be favoured or disfavoured?" He warned that the policy did not close a tax loophole but introduced "a major tax distortion to a previously coherent regime." 

Go read the whole thing. Norm knows this stuff. 

Interest.co.nz reports that the government has ruled out allowing build-to-rent investors to deduct interest. There is a carveout for those building to sell, but not those building to rent. Instead they'll find some other special rule for build-to-rent. 

The simpler solution? Drop the whole stupid mess. It introduces a distortion between investment to provide housing and investment in other business activities. Why make it harder to finance new builds, in a housing shortage?

Afternoon roundup

The afternoon's closing of the browser tabs brings a few worthies:

• Vincent Geloso's case for not getting rid of a ceremonial monarch. 
• Chris Snowdon on the effect of COP9 on vapers. The coming framework conventions on tobacco control meetings risk making things worse for vaping. 
• Pattrick Smellie goes through the proposals around excluding deductibility of mortgage interest as business expense for residential property investors. It's going to be very messy. And I doubt it does anything to improve affordability. 
• What Patrick Collison, Tyler Cowen and Patrick Hsu learned doing fast grants. This one's really really good. They got piles of grant money out the door, fast, and helped in research important for the Covid response. And they learned a lot about current messes in granting agencies along the way. 
• And how Tech helped us get through Covid.

Tax burdens and the proposed new tax rates

Susan Edmunds at Stuff asked me what effect Labour's proposed new tax rate on earnings above $180k might have on the usual "people in the top x% pay y% of all income tax" figures.

The actual answer is complicated. Some on those kinds of incomes can just reduce their wage income and keep income within a company structure, where it would hit a lower tax rate until earnings might be dispersed. 

But Labour had had estimates of that the new tax rate would earn $550m per year from the top 2% of earners. If we take the total income tax paid by those on >$150k per year, add the $550m from those above $180k, you can ballpark it. 

Using 2019 figures, the top 3% of earners on $150k+ paid 23.5% of all income tax. Adding the expected revenues from the new tax rate would increase that to 24.7%.

I don't think that's any material difference. 

So my notes back to Susan included this bit that she used:

“Income tax is only one part of the Government’s overall tax take, though. GST, company tax and excise all also matter. Focusing on income tax alone would then overstate the proportion of overall revenues paid by the highest-earners.

“On the other hand, the Government provides many income transfers, some of which are targeted by income, some of which are universal.”

He said data from 2010 showed the bottom 40 per cent of households each received about $20,000 more in services than they paid in taxes, while the top 10 per cent of households paid about $50,000 more in tax than they received in services and transfers.

Crampton said lower-income people had been more heavily affected by Covid-19 job losses, which could skew the tax bill even further to higher incomes.

But he said some higher earners would also restructure their affairs to make the most of lower company and trust tax rates, to reduce their overall tax bills when facing a new, higher rate. Most companies are taxed at a flat rate of 28 per cent.

It would be great to get an update of those 2010 Policy Quarterly figures; it would be a big job to do it though. 

For my sins in being helpful when a reporter called asking for an update on a commonly-used figure: 

(The story the NZ Initiative is trying to put around is here: https://t.co/VtXU8xkBco. As Zucman points out claims like this partly just highlight how unequal NZ is, and how much is earned by the top 3%. It’s no reason for alarm.) /2

— Max Harris (@MaxHarr03421445) November 5, 2020

I think it's pretty funny. Running a simple calc when a journalist calls asking for an update on a basic number, well, if that's raising an alarm, I'm not quite sure how I'd characterize my more normal ways of raising alarms. 

When I'm trying to raise some kind of alarm about something, it isn't that hard to tell. I'll be jumping up and down about it on Twitter, putting out press releases, and writing reports or short policy notes. 

I'd not bothered running the calculation before because I'd never seen it as being all that important. 

I had seen misperceptions of the effects of the Greens' proposed wealth tax as being important. 

My raising the alarm about stuff tends more to look like this:

The Greens' proposed wealth tax would catch WAY more than 6% of Kiwis.

Over 20% aged 66-69 have over $1m in net wealth. Somewhere between a fifth and a quarter of Kiwis should expect to be liable, if the thresholds adjust with inflation.https://t.co/1Il8W3xxuV pic.twitter.com/3tJIcELQPf

— Eric Crampton (@EricCrampton) October 12, 2020

Newstalk:

One economist claims the Greens' wealth tax will hit more Kiwis than the Party thinks.

The Greens say the tax, which has become a hot issue in the final week of the election, would only affect the top six per cent of the population.

However, New Zealand Initiative economist Eric Crampton told Heather du Plessis-Allan the real number's closer to 20 per cent.

He says right now, about 20 per cent of retirees would be subject to it.

And he expects future generations will also build wealth over their lifetime, reaching a peak after retirement.

"We need to be thinking not just about who is currently subject to the wealth tax, but who can we expect to be subject to the wealth tax."

Newsroom

But the Greens’ numbers have their own problems. To go through those, we need a brief detour through basic wealth dynamics. It is a problem plaguing every iteration of wealth inequality surveys using static comparisons to make claims about what proportion of wealth is held by which proportion of people.

Wealth builds over time, and that matters for every question about wealth measurement.

Most people start life with little wealth. Taking on student loans to earn a higher income later on means beginning adulthood with a heavy net debt position, as education does not contribute to measured wealth on Statistics New Zealand’s balance sheets. As graduates move into employment, they begin paying down their student loan debt while (hopefully) building up savings. If they buy a house, they take on debt that has an offsetting and appreciating asset. Otherwise, they build up retirement savings.

Individual net wealth peaks shortly after retirement. Retirees then draw on those savings.

A cross-sectional snapshot of the country will reveal a lot of people with net debt, a lot of people with few net assets, and a few people with a lot of net assets. That, and the failure to account for the effects of New Zealand Superannuation, can make wealth distributions look more unequal than they really are.

Even if every Kiwi followed exactly the same wealth trajectory, beginning with net debt and ending with the same retirement net worth, simple differences in ages would mean that a small proportion would be wealthy at any given time.

The Greens argue that only 6 percent of Kiwis would be subject to their wealth tax. But that seemed almost certainly to be based on a misleading cross-sectional snapshot. A reasonable proportion of today’s youth would be subject to the tax as they reach retirement. After prodding their representatives on Twitter more than a few times if they had checked what proportion of retirees might be subject to the tax, I decided to ask Statistics New Zealand instead.

I asked Stats to go back through the 2018 Net Worth Survey and sort net wealth holdings by age.

Without any sorting by age, the 2018 survey suggested 8 percent of individuals held net wealth in excess of $1m – so that was already rather higher than the 6 percent suggested by the Greens.

And, as expected, there was a severe age skew in the data. While only 1.5 percent of those aged 15-44 held a $1m in net assets, that proportion rose steadily for older age groups. Just over 18 percent of those aged 60-64 reported more than $1m in net assets, along with just under 18 percent of 65-year-olds. Wealth peaks among those aged 66-69 which means 21.8 percent of retirees would be liable for the wealth tax.

I'm not exactly subtle when I'm actually raising an alarm about something. I tend to get a bit excited and go on about it. 

Taxing tobacco in a world of vaping

If you're in Auckland, come catch me in a LEANZ panel discussion on tobacco tax, along with Marewa Glover and Peter Wilson. 

Here's the blurb; register at the link above.

Tobacco taxes are both an important source of revenue and an attempt to deter behaviour that can lead to social costs (e.g. healthcare costs from both active and passive smoking). Even in a world with just traditional tobacco products such taxes may not be as effective as their advocates would wish, leading to higher-quality products (e.g. filtered cigarettes) being substituted with lower-quality ones (e.g. unfiltered roll-you-owns). They can also be regressive, harming vulnerable communities like Māori, and in a “well-being” world, how do we balance pleasure and harm?

Like many other sectors, the tobacco industry is under “disruption”, with the advent of a range of alternatives to conventional tobacco products, such as vaping. Should these alternatives be taxed the same or less as conventional products, or possibly even encouraged? Will they result in less harms (and pleasure) then conventional products, or introduce whole new segments to the pleasures (and harms) of “smoking lite”?

LEANZ is delighted to bring together a panel of prominent experts to traverse these questions, from medical, economic and fiscal perspectives.

Panel Details

Professor Marewa Glover is a New Zealand public health academic specialising in smoking cessation. Her research includes comparisons of electronic and traditional nicotine delivery, as well as of different types of conventional tobacco products. She has also researched the impacts of smoking cession programmes and tobacco taxes on Māori. Professor Glover was a Finalist in the 2019 New Zealander of the Year Awards.

Dr Eric Crampton is the Chief Economist at The New Zealand Initiative, and has published on the challenges of regulation in a world of disruption. He served as Lecturer and Senior Lecturer in Economics at the Department of Economics & Finance at the University of Canterbury from November 2003 until July 2014. He is also the creator and author of the well-known blog “Offsetting Behaviour”, in which he has discussed the pros and cons of tobacco taxation.

Peter Wilson is Principal Economist and Head of Auckland Business at NZIER, which he joined in 2015. He has over 30 years’ experience in the public and private sectors, including time as a senior policy manager and economic adviser on tax policy at the Treasury. His professional interests range over regulatory economics, local government and planning to climate change and social policy.

Tax Working Group

The Spinoff asked for a few words on today's Tax Working Group report. They're here, and copied below.

The Tax Working Group’s proposed capital gains tax would exclude the family home, making for a more politically saleable tax but one which makes far less economic sense.

Not only would it provide incentives to invest in the family home instead of other assets, it also has the potential to encourage couples to ‘divorce’ for tax purposes to be able to exempt two houses rather than just one. If you’re laughing, note that family friends back in the United States would divorce and remarry semi-regularly for tax purposes. They’d have a small party each time they did. Good luck to IRD in policing that.

It would also provide a strong tax incentive to pass the family farm along to the kids rather than sell it, even if the kids aren’t all that interested in farming. Because passing it on rather than selling it allows any capital gains tax to be deferred. We can expect complicated tax arrangements to make selling to the kids to fund the retirement look a lot more like inheritance.

And it hardly applies only to homes. KiwiSaver and other investment portfolios will feel the pinch. While Sir Michael Cullen’s group is certainly right that those assets are disproportionately owned by those on higher incomes, the effect of the tax is far more complicated.

Because the tax would be assessed on nominal investment gains rather than inflation-adjusted gains, the real effective tax rate on investment portfolios could be very high indeed. And the effect of that on business access to capital for investment will have flow-on effects throughout the economy.

Since the group proposed exempting the New Zealand Superannuation Fund from capital gains taxes, the fund would be at a strong advantage over private investors when bidding for assets. One might wonder how long it would be until the Super Fund winds up owning much of the economy.

But I’m sure that others will write many more column inches on the real-world difficulties of trying to bolt a capital gains regime onto a tax system that has, for the past 30 years, evolved around the absence of one. There’s a reason prior tax working groups concluded that it is, on balance, too messy to be worth the effort and that there were strong dissenters within this latest group.

Let’s look instead at some of the less-expected features in the report.

The Tax Working Group recommends shifting towards environmental taxation. In principle, this has a lot of merit. Taxes that correct underlying distortions provide a double dividend. Not only do they raise revenue, but they also improve overall economic efficiency if they’re done well.

The group recommended strengthening the Emissions Trading Scheme and having it shift, in effect, to being more like a tax by having the government sell more of the permits over the longer term. That recommendation should be supported if implemented well.

So too should its recommendation to use congestion charging to help fund the roads – it makes a lot more sense, and is far more equitable, than measures like the Auckland petrol levy that fall very heavily on poorer families with less fuel-efficient cars.

The group also recommended using taxes to improve water quality if the government isn’t able to find better ways of dealing with the problem soon. It suggested water taxes and taxes on fertiliser as potential measures.

Making sure that water users face the cost of that use is important, but tax is a blunt instrument. A tonne of nitrogen fertiliser has very different effects depending on where it’s used. And water taxes have a hard time recognising regional differences in water scarcity. Water should surely be more expensive in Canterbury than on the West Coast, but the government would have a hard time finding the right prices. A cap-and-trade system like the Emissions Trading Scheme is more appropriate.

Other suggestions, like hunting for reasons to justify increasing existing waste levies, or giving tax preference to buildings constructed to tighter environmental standards, might give the appearance of doing good for the environment but seem destined to be a boondoggle if pursued.

Let's make a polling deal

IRD has gotten in trouble for doing some polling about potential changes to the tax system.

Inland Revenue has admitted it was wrong to ask for New Zealanders' political persuasions in a survey they are carrying out for the Government on the eve of the release of a crucial tax reform report.

The taxman is researching the public's views on globalisation and fairness in the tax system. Questions had included where respondents sit on the political spectrum, prompting questions of whether taxpayers are funding sensitive political polling.

It would be bad if IRD were doing this kind of polling to help its political masters to sell whatever tax changes might be coming, but that's not the only possible interpretation.

We can also imagine scenarios where the political masters wanted changes that IRD knew to be a bad idea, that the politicians thought were popular, and that IRD wanted to be able to demonstrate were not only bad policy but also bad politics. "See? It isn't just rich pricks and right-wingers who hate this particular part of your tax package which we've also told you is a terrible implementation issue. Would you please now consider not doing this?"

I have zero inside line on this one, but it's not unimaginable.

Perhaps, as penance, IRD could just release the polling data for all of us to play with. It would be super awesome to have the full results. And then there'd be no worries about whether they were doing secret political polling for Labour - the results would be up for everyone to play with.

Around 1000 people are being asked questions about their views on Inland Revenue, whether they are generally trusting, believe what they read in the media, pay too much tax or whether public services should get more funding.

A question on where respondents sit on a left/right political spectrum threatens to skirt the department's legal obligation for political impartiality.

Polling experts said the results could give politicians valuable insight on how different demographics view the tax system

I for one would love... hmm. I'll try OIAing the full results.

Tax Working Group Tea Leaves

Tom Pullar-Strecker has a flip through the new documents released by the Tax Working Group.

The group, chaired by Sir Michael Cullen, has been advised by officials not to recommend cutting company tax or offering a specially discounted tax rate to small businesses.

However, it has been encouraged to consider dangling a couple of other lollies in front of investors and businesses.

In particular, Inland Revenue and Treasury officials advising the working group said there was a case for inflation-adjusting the tax system – even though they acknowledged that would be a "significant change".

That would be a boon for people with money in bank savings accounts and term deposits.

They would then only pay income tax on interest on their savings after interest payments were adjusted for inflation, rather than on the whole sum.

Age Concern, Consumer NZ, the Financial Services Council and the Taxpayers' Union lobby group argued for the change in their "Fair Tax for Savers" campaign in 2014.

It had already been raised as a possibility by Cullen in March.

Inflation-adjusting the tax base would remove "one of the biggest distortions" in the tax system and would also have implications for business tax, the officials said.

But in less positive news for some taxpayers, the officials advised against cutting New Zealand's 28 per cent company tax rate.

They said the rate was "relatively high by international standards" and looked at the implications of cutting it to 23 per cent.

But they concluded a cut would not be in the country's best interests, mainly because a lot of the benefits would go to foreign investors.

I like inflation-adjusting interest earnings. The current setup means that during times of higher inflation, the real tax on interest earnings is very high. This builds a wedge between returns from investing in real assets and investing in interest-bearing assets.

It would also mean there would be little case for a capital gains tax where getting rid of the interest distortion would get you most of the way towards what capital gains tax fans want anyway.

On company tax, you're always balancing a few margins. Too high a company tax rate relative to other countries and you scare away foreign investment. But too big a wedge between the top personal tax rate and the company rate and you encourage sheltering income in companies. So, all else equal, if international company tax rates are dropping, then New Zealand's should also drop somewhat, but if top personal tax rates are increasing, then the company tax could go up a bit.

Recommending a hold-steady on company taxes despite declining international rates then could be a signal of income tax increases at the top end. Or a recognition that the current government has shifted scaring away foreign investors to the benefit side of the ledger.

Sugar redux

Responses to NZIER's literature review on sugar taxes have been fun.

As reminder on the background: the Ministry of Health commissioned the New Zealand Institute for Economic Research to do the work. NZIER's report is dated August 2017. The Ministry did not release the report. I heard it existed and put in an OIA request 30 October. The Ministry delayed the release until late January.

I don't know why the Ministry didn't just put the report up on its own website when it was received. Maybe they wanted to brief any incoming Minister on it first, and there was an election that got in the way. But it still took a long time and the Ombudsman's chasing them up. Bureaucratic cock-up is always a plausible explanation, but for a report that was just sitting on their desk, for months, and that took no redacting or anything other than a signoff... I suppose there are advanced degrees in bureaucratic foul-up.

Anyway, we received the report and put out a press release on it; would be a shame for good work to go unnoticed. Best I'm aware, it's not available anywhere on the MoH website, just on NZIER's website.

• I chatted with RNZ's The Panel on it. The host was confused at first about the report, having thought that we at the Initiative had written it, and then pestering me about our membership. Our members are on our website; our work is independent of what any member might think about it. But even more to the point, we didn't fund the report. That was the Ministry of Health. we didn't write the report. That was NZIER. The report found the same thing that our 2016 report found: the evidence base for sugar taxes is weak. A sane Bayesian can then either downweight the chances that our report's conclusions were affected by some Big Sugar agenda, or expand the conspiracy theory to include the Ministry of Health, NZIER, the RAND Corporation, the Reverse Vampires and the Saucer People. I have a hard time telling when interviewers miss the point, and when they're seeking that a point might be explained to listeners who would miss the point. 
• Jenesa Jeram and I had a chat with Newsroom's Thomas Coughlan about it. It was nice to see Diabetes New Zealand agreeing. It was also nice to see Minister of Health David Clark saying he has no plans for a sugar tax - though I was a bit disappointed to see they're likely to be strong-arming industry into reformulation. At least with a sugar tax, I can still buy tasty things!
• Former Prime Minister Helen Clark was surprised that NZIER would dispute the WHO's findings. While the WHO might be a good source in telling you whether sugar is bad for you, they are not tax experts. To find out the effects of taxes, you have to talk to economists. Talking to dentists doesn't quite cut it. 
• The Toronto Globe and Mail covered the report, with a nice piece from Peter Shawn Taylor. 
• Australia's Menzies Research Centre also covered it. 

I wonder if the outfits that liked to paint opposition to sugar taxes as being exclusively ideologically driven or driven by nefarious interests will ever provide some apologies. The Public Health Brigade (NZ edition) likes to sue for defamation whenever their motives are impugned, but they're awful quick to assume that any opposition to their Good Works can only have evil motive. 

We don't know how lucky we are: tax edition

The second installment of my piece on The Outside of the Asylum is up at The Spinoff. It covers tax and airport security. A snippet:

America’s patchwork of state-level sales taxes are even worse. Every state can apply its own unique taxes. This is not limited just to deciding the rate of taxes, but also the definitions of what is and is not taxable. Some states apply sales taxes to candy but not to other foods, and different states have different definitions of what counts as candy. Wisconsin’s Department of Revenue even issued a 1,437-word memo explaining which types of ice-cream cakes, or slices thereof, are taxable or untaxed

The mess is just as bad at the federal level, where free tans at video-rental stores are taxable but not tans provided as part of a health club membership. A simple enough (albeit ludicrous) 10% tax on tanning services proved anything but.

The economic consequences of a system riddled with bread-deciders and jam-deciders and ice-cream deciders and tan-deciders can be staggering. Taxes become far less efficient not only because of the holes riddled throughout the system, but also the legal costs of producers trying to convince courts that their product is exempt rather than taxable.

When there are experts aplenty whose livelihood depends on complicated, messy and incomprehensible tax systems, with large penalties for anyone getting things wrong, it is difficult to make the tax system less complicated, messy, incomprehensible and punitive.

New Zealand’s GST is uniquely, and admirably, clean. It applies broadly. Every producer has an incentive to report honestly because they also report the GST they paid to their suppliers on every item when claiming GST on their inputs.

Were New Zealand to exempt healthy foods from GST, we would well be on the slippery slope. It is one of those things that sounds really easy, but would be an utter disaster in practice

What counts as healthy? Not only does the medical evidence keep changing, but there would also be a string of boundary cases needing adjudication. If beans are healthy, what about frozen beans? Beans in a can? Beans in a can with pork fat and sauce? How much pork fat and sauce before it is taxable? What if we use Jamie Oliver’s recipe and fly him in to say it’s good?

Even worse, think through the consequences of tax exemption.

The Spinoff also runs comments sections on their serialisation on Facebook. I'm not on the Book of Faces, but had a gander using the Initiative's account. If you're on the Book of Faces and are interested in such things, their thread on the first installment (published Saturday) is here; thread on the second is here.

A few notes on the budget

Your take on last week's budget should depend on whether you have your economist glasses on, your politics glasses on, or your "economic policy is constrained by institutions and elections" glasses on.

The economics of it are pretty average.

The increase in the accommodation supplement is likely to flow through primarily to landlords. Radio NZ has reported on work at MSD showing relatively little effect of a prior increase in the accommodation supplement on rents, but the basic tax/subsidy incidence on this stuff depends on market conditions. If supply is more elastic than demand, meaning that a given increase in rent does more to stimulate new construction of rental properties than it does to decrease demand for rental accommodation, then the accommodation supplement is good for low-income tenants receiving it. If you run your study when regulatory barriers to building aren't as binding, you'll find that increases in charged rents are pretty minor. But if you extrapolate from that period to now, you just might be making a mistake.

I also worry that there's not been quite enough attention paid to the long term fiscal outlook, where the costs of an aging population drive us into substantial net debt from 2030; to effective marginal tax rates, which barely changed; or, to the small-scale fiscal discipline that would avoid cash giveaways to the film industry in favour of measures addressing either of the two prior points.

The changes to the tax thresholds only partially adjust for inflation since they were last changed in 2010. The increase in the threshold for the 17.5% rate overadjusts for inflation, but the 30% rate's threshold was underadjusted, and the 33% rate's threshold wasn't touched.

My piece at the Spinoff, last week, covered what would have been needed for inflation adjustment to those thresholds:

Suppose that the government adjusted the tax thresholds to account for wage inflation since 2010. The top income tax rate would then kick in around the $83,000 level, the 30% rate would come in at around $57,0000, the 17.5% rate would apply from about $17,000 and the bottom rate would apply below that. Treasury’s tax calculator says this would cut just under $1.9 billion from government revenues. For the same drop in government revenues, every tax rate could be cut by a percentage point and the 17.5% rate could drop by two points. Everyone would get to keep a greater fraction of the next dollar earned.

If we rank options, here's my preference ordering:

• Adjust for inflation automatically by knocking income tax rates down by half a percentage point whenever accumulated wage inflation warrants it. Treasury's calculator provides the full-year costs of a one percentage point change in each of the tax rates. Whenever inflation gives the government an extra $740m in revenue through fiscal drag, cut each of the rates by a half point - at least on the current costings. 
• Adjusting things this way means everyone sees a change in their marginal tax rate, with consequent dynamic benefits for growth. Adjusting the thresholds provides a big marginal tax change for a small group, and large inframarginal changes for everyone else.
• Adjust for inflation automatically through annual changes to the tax brackets.
• Let politicians pretend inflation adjustments are tax cuts in an election year. We're probably stuck with this one because politicians really really like being able to announce tax cuts in election years.

And that gets us to the pure politics lens, which has the budget as a triumph. That lens is boring and has been done to death already. 

If we run it instead through a "what's the best we could have expected given that it's an election year and given the political constraints" lens, it's not too bad. Just consider how much better things are here than in Australia - the subject of my Australian Financial Review piece on the budget.

A better case for tipping

If New Zealand were to move towards a tipping norm, here's an entrepreneurial idea.

Set up a restaurant. The wait staff are all volunteers. They still have to pass through normal recruitment practices, but they're volunteers. List on the menu prices that there is no charge at all included in the prices for service: none. The wait staff receive no pay except that which is provided by diners as a gift, and list some suggested gratuity levels that would provide, if every diner paid those amounts, various wage levels from $15/hr to $30/hr.

Currently menu prices include not only the cost of wait staff but also the GST that applies on the service provided by the wait staff. My restaurant only charges GST on the non-waitstaff costs.

And restaurants normally have to compete for staff based on salary, but the gifts provided to my staff would all be before-tax. And since nobody's tracking how much the wait staff receive in donations, they'd be on their own recognisance when it came to things like income tax and ACC levies. Really, the tips are a gift, right? There's no gift duty in New Zealand (though I'm pretty sure IRD doesn't consider tips to be gifts).

I might change my mind about this whole tipping thing.

Tax cuts require fiscal discipline

It's budget day here in New Zealand. Much has been pre-announced; Chris Keall has the summary list over at NBR. But as Rob Hosking points out, there's a pretty big remaining surplus that could yet give us some surprises. 

I'd expect most of those surprises to be saved for later election promises, but it would be nicer if they were laid out in the budget.

When it comes to tax cuts, though, we need to be careful. The surpluses look fine for the next few years, but current tax cuts would need to be reversed in a decade's time if we've neither sorted out the costs of an aging population (NZ Super, health), nor increased productivity and economic growth. And temporary tax cuts do less good than permanent ones.

I cover it off over at the Spinoff.

The case for more substantial tax cuts is sound, but harder. It requires the government to be willing to cut programmes that deliver little benefit. And while the government has taken a sharper eye on the effectiveness of new spending programmes under the social investment approach, too much spending simply carries over, year after year, with little attention paid to whether that spending achieves its objectives.

Interest-free student loans cost the government $600 million dollars per year and mostly benefits students who are either from wealthy families or who are likely to go on to be higher earners themselves. That’s more than what it would cost to cut the 17.5% income tax rate down to 16.5%.

Deciding not to throw $300 million at the film industry over the next four years would allow the government to cut the 30% rate down to 29.5%.

Every billion dollar programme throws away the chance to cut the 17.5% income tax rate to 15.5%.

But, even worse, while the medium-term forecasts are very rosy, with plenty of room for tax cuts, the longer-term projections have health care and superannuation costs requiring substantial tax increases or substantial spending cuts – unless somebody finds the magic formula to reverse the long-term slump in productivity.

Net Fiscal Impact - disaggregated

Keith Ng's 'mythbusting' around net taxpaying annoyed me enough that I started digging around for more of the literature on this stuff. 

Keith argued that it's a myth that 40% of households pay no net taxes. While he's right that the commonly cited measure just focuses on income taxes paid versus cash transfers received, it isn't like correcting for that shows the system is less progressive or relies less heavily on the top deciles' tax contribution. When Aziz et al had a look, they found this:

The figure shows the cost of transfers and services provided to households in each income decile, net of the taxes paid by households in that decile. It includes all taxes, even GST. And when you look at it that way, the bottom four deciles receive substantial transfers, the middle three deciles net out close(ish) to even, and the top three deciles pay rather more in tax than the value of the services they receive. Or, put another way, the bottom six deciles receive more in transfers and services than they pay in tax, the seventh decile is tiny net tax contributor, and the top deciles contribute substantially. 

That should have been common knowledge among folks dealing with data, inequality, and tax. We even included the graph in our report on inequality.

What we didn't include, and I only recently had pointed to me, was the life-cycle and gender effect. Life cycle of course matters: government spends far more on kids than it receives in taxes from kids, and same for the elderly. Much of tax and transfer policy handles life-cycle income smoothing that would otherwise be generally handled by households on their own.

But I hadn't known the size of the gender gap. There had to be one, since men's earnings are higher than women's earnings; women live longer and then collect superannuation over a longer period; and, health care costs are higher for women. Even still, I was surprised. I hadn't known about the gender gap in education costs, for example. 

Here's Aziz, Gemmel and Laws.

Regions above the $0 line x-axis are cohorts that, on average, are paying more in tax than they are receiving in transfers and in services (valued at cost). They write:

The data illustrated in the figure suggest that, on average, males start having a positive net fiscal impact—per capita tax revenue exceeds the (allocated) expenditure they receive—in their early 20s. Women, on average, do not pass this “break even” point until their mid-40s. This is due to a combination of lower workforce participation, higher health and education spending, higher income support, and lower direct and indirect taxation.

A possible causal link may lie behind the high value of per capita education expenditure observed for women aged 30–44 and the lagged increase in per capita market income and direct tax for females in the 45–49 year age group. One possible hypothesis is that retraining during child-rearing years that precedes re-entry to the labor market results in an increase in market income and consequently higher direct taxation. The net effect of decreased education expenditure and increased direct taxation increases the net fiscal contribution of women in the 45–49 year old age group.

If we consider only the age patterning, this looks like what households and individuals would be doing for themselves absent the state. You consume less than you earn during your prime earning years in order to provide transfers to your children and to save for your retirement.

There's a similar aspect to the gender patterning where it is more common for males to be the primary earner. In households with a male primary earner and a female who takes a longer period out of work or in part-time work to be able to spend time in the home, you'd see males consuming less than they earn in the market and females consuming more than their market earnings. Were there no government-provided healthcare, taxes would be lower and families would purchase their own health insurance - which would have a similar 'net contribution' breakdown were anyone so daft as to try to produce that figure within a household.

This side of things didn't come in at all for the piece I wrote for the Dom Post on it, as it's largely irrelevant to the argument about household-level net tax contributions. But it's interesting and I hadn't known it before.

Thanks to John Creedy for the pointer.

Also: Fairfax produced this very nice infographic version of the Aziz et al figure. Excellent!

Stay weird, Portland - but not like that

Weird can be good and bad.

Good weird:

Bad weird:

Today, Portland, Oregon, became the first jurisdiction in the United States to use the tax code to address the phenomenon of outrageous CEO pay. The City Council passed an ordinance, sponsored by City Commissioner Steve Novick, that requires publicly traded corporations to pay a surtax if they pay their CEO more than 100 times their median worker.

It looks like the levy would run through the business license tax for firms that operate in Portland and who consequently would have to get a business license. The Tax Foundation comments:

Whatever the ratios turn out to be, however, the Portland ordinance, if approved, might be little more than window dressing—more of a gesture than a policy prescription. Maybe CEO pay is too high and maybe it isn’t, but a Fortune 500 corporation is unlikely to renegotiate its chief executive’s compensation package to avoid an additional tax hit of a few thousand dollars in Portland, Oregon.

And even if somehow the tax did lead some company (perhaps a Portland-based business, with much higher liability in the city) to reconsider executive compensation packages, there is very little reason to believe that any of the savings would accrue to employees. Like it or not, businesses are not benevolent societies, and it would be curious if companies with allegedly inequitable compensation schemes would, having made a savings on executive compensation, simply gift that amount to employees in the form of pay raises. Rather, any savings would likely accrue to shareholders or perhaps be reinvested in the company.

Assuming there are any savings at all. Corporations presumably seek to avoid paying their CEOs more than they are worth to the company. They may get this wrong—perhaps even frequently. If they thought that the company would do just as well with a lesser-compensated chief executive, though, they would likely go that route, and if their initial judgment was correct, a company that actually feels compelled, for tax purposes, to curtail executive compensation would see a decline in its fortunes, with attending losses for shareholders and wage earners alike.

So a surtax that raises little in revenue but makes a statement about the weirdness of Portland. I prefer Darth Vader with flaming bagpipes on a unicycle.

HT: Glenn Boyle

Google tax, again

A few things to remember for the folks angry about how much tax Google pays in New Zealand:

• Company tax is based on revenue less costs, not on revenue.
• Google New Zealand's costs include substantial payments to its foreign parent that allows Google New Zealand access to the foreign parent's IP;
• Imagine there were no Google NZ. Some NZ company is paying Google International for access to the adwords platform, and selling ads in NZ. What would they pay? Do you really think it would be less than Google NZ pays now?
• There is always opportunity for fudging things in transfer payments. For all the bluster, I have seen zero analysis showing that the transfer pricing is set inappropriately.
• Consider the value of all of the services that NZ gets from Google, for free. It is plausibly orders of magnitude higher than any potential tax take.
• Google disappearing wouldn't fix newspapers. Newspapers have been screwed since TradeMe siphoned off classified revenues. Want to make that disappear too?

Height Tax

Greg Mankiw proposed a height tax as a bit of a reductio on the efficient tax literature. You can't adjust your height; height predicts income. So tax height and incentives around income remain clean. Ta-dah!

Work in the BMJ suggests that the height-income link is causal from height to income and works through genes - but mostly for men. A standard deviation (6.3 cm) increase in genetically predicted male height is associated with a £1580 increase in income. Obesity matters too, but for women. A standard deviation increase in genetically predicted BMI reduced women's household income by £2940.

I still await confirmation of the Python hypothesis that taller archaeologists are better archaeologists.

More seriously, though: some of the fat tax arguments hinge on that the link runs from obesity to income through health. Otherwise, they couldn't run a counterfactual that earnings but for obesity would be the same. That underlies the productivity costs of obesity argument. Where predicted obesity from genetic markers drives income, the argument for fat taxes to improve productivity get a bit fraught.