An odd approach to tax policy

Pattrick Smellie has had about the best summary on the messes in the last round of proposed tax changes.

Earlier this week, the government put up a pile of tweaks to tax policy. This sort of thing is usually pretty bland. But included in the mix was a change to the GST treatment of management fees on Kiwisaver funds. 

Pattrick writes:

A regulatory impact statement, which it’s not clear if most ministers had read or been briefed on before waving this proposal through at a cabinet meeting, warned that maybe $103 billion of KiwiSaver savings would not occur as a result of the changes. 

Stuff’s Rob Stock broke the story yesterday afternoon and all hell broke loose on a policy whose introduction broke every rule in the political book. 

Quite apart from apparently attacking the KiwiSaver scheme's basic premise – to build funds for the future – it was introduced without so much as a press statement. A properly prepared government would at least have tried to control how such a political hand grenade was first reported. 

No such effort was made. 

Cynics will think this was the government sneaking it in and hoping no one would notice. 

Well, maybe, but look what actually happened. 

It is equally likely that somehow, amazingly, this proposal didn’t cause even a momentary flicker on anyone’s political radar.

It's a really strange one because the change looks like it could have been defensible. 

The most recent Tax Working Group laid out the usual case for exempting financial services from GST. There can be huge valuation problems in sorting out what's the value of the service provided and what's the value of the underlying traded thing when it all gets bundled together.

I'm hardly an expert on this stuff, but I know that motivated people sometimes point to the exemption for financial services when they try arguing for exemptions on other stuff. So I'd looked at it at that point, saw that there was darned good "It's just too impracticably difficult to levy GST here so we're not going to" reasons for it, and concluded that the "let's exempt meritorious things" people were being disingenuous in pointing to the financial services exemption. 

So when news broke on a plan to set GST on financial services here, it seemed odd. Hadn't IRD already concluded this stuff is just too hard? I checked back in the papers from the TWG Secretariat and they hadn't foreshadowed any areas that could be pulled from the actually-too-hard basket. 

But those difficulties shouldn't apply when it comes to explicit fees levied in financial services. Whether it leads to other distortions and new structures to try to turn fees into margins, that's beyond me. It's at least possible and possibly even probable that the proposed change had made sense on a basic-tax-principles assessment. 

It seems the kind of thing where, if the RIA on it has, at paragraph 49, $103 billion in reduced Kiwisaver fund balances by 2070, they might have considered better preparation on this one. It's plausibly defensible, but got killed within a day through bad comms. 

The same bundle brought GST changes for platform service providers like Uber, and this one could turn into a right mess. It's very much a what-sucks-least problem, and all options are going to suck. I'm just not convinced they've picked an option that sucks least.

Recall that there's a de minimus regime around GST where if an outfit has less than $60k in revenue it isn't required to file for GST because the time and hassle for everyone involved is greater than the amount of tax that might be collected. Makes sense, right?

So what then happens if a tech innovation means a lot of new small part-time entrants are able to enter a sector, many of which will be under the de minimus threshold because it's a part-time deal for them? IRD might start worrying about base erosion and about distortions favouring the small-time operators. 

But how can you do anything about it that doesn't make things worse? All the options are bad too. 

IRD canvasses some in the RIA, and came up with the following. 

For driver-partners who work with platforms like Uber and who are GST registered, no changes. They charge GST, claim back expenses; Uber pays them a GST-inclusive price from riders and claims back the GST that they've charged. All fine. 

But for drivers below that threshold, the platform will charge GST on the ride. 

Now that's a problem because the drivers will have paid GST on their fuel, oil, maintenance, vehicle - all the inputs where GST would normally be claimed back. Remember that part of why the de minimus threshold works is because minimus is smaller than you might have thought. At the same time as they're not charging GST, they're also not claiming back GST on expenses. So the net is a lot smaller than you might have figured. 

If Uber, or Lyft, or whoever, is charging GST on the full cost of a ride, and the suppliers aren't claiming GST on inputs, then you've double-charged GST. And that's a big problem. 

IRD proposes a workaround. The platform would collect 15% GST on the full cost of the ride. It would submit 6.5% up to IRD and send 8.5% back to driver-partners as a deemed input cost proportion. 

I don't know where the split came from - whether it's some overall average of how this stuff nets out, or one specific to transport, or something else. 

But it will wind up requiring the platforms to implement a pile of new accounting to track things, which might need runway to sort out.

Suppose I drove for a few ride-share companies. Would I be able to set up one GST-registered company where all my driving for one platform gets accounted, have it take more than its fair share of the costs of fuel, maintenance, and everything else, and have my driving for the other platforms come under the deemed cost regime? Possibly isn't worth the hassle to set up, but IRD might need to watch that driver-operators aren't trying it on. 

GST normally avoids this kind of problem; folks claim back GST on expenses while paying GST on sales. But a deemed-expenses kind of set-up would break that. 

Maybe the thing is defensible if it really is less bad than potential base erosion and distortions where platforms change industry structure, but I'd hope that they'd talked with the platforms about practicabilities and implementation. It sounds like it could be tricky. 

Afternoon roundup

It's been a busy few days. The tabs, they've accumulated. Some worthies:

• Bans on paying surrogates are a bad idea. 


• California might break the internet. 


• Where Rob Campbell is Chair of Health NZ, do we even still pretend that we have a politically neutral public service?


• BusinessDesk on Effective Altruism in New Zealand. 


• A Newsroom roundup on population and immigration, including a bit on Clive Granger's visa difficulties. If I remember right, they'd figured they had no chance of getting through Immigration New Zealand's points system because of age, so were deterred from applying in the first place rather than being turned down after applying. If anything, that's a worse problem - who knows who else might have been deterred from even trying?


• A suggestion that learning Te Reo will become necessary for getting to the front of the queue for working in the public sector. I do remember those sorts of policies causing no small amount of discord in Western Canada, and being part of what got us the Reform Party. 


• Simeon Brown is not wrong about problems in transport policy.


• If the Rail and Maritime Transport Union is right that "KiwiRail is not going to make a profit, not in my lifetime - and probably never", isn't that an argument for ending the thing?


• Sounds like it's time to flip all vehicles onto RUC, including electrics that currently get a free ride.


• The Building Code is bigger than you thought. 1500 pages, plus 20,000 more web pages and documents. 


• The new Google News showcase is decent. Lots of coverage of regional papers I'd otherwise have missed. 
  
  

OCR and other tools

When Susan Edmunds emailed asking about tools other than OCR for controlling inflation, I asked her whether she was suggesting I say Voldemort repeatedly while hoping for the best. 

There are a lot of bad alternatives, some best not spoken.

First Union suggested taxes on the richest. It's the opposite of where you'd want to target taxes aimed at reducing aggregate demand if you followed Keynesian-style arguments around marginal propensity to consume. Stopped clocks, eh?

I noted that monetary aggregates used to be targeted, but increasing difficulty in defining the targeted aggregates, combined with changes in the velocity of money, pointed to price/inflation targeting rather than money supply targeting. I also noted that the Bank's LVR rules a decade ago seemed most easily explained as an attempt to shave the peaks off of asset price appreciation, but that I didn't think it was a great idea. 

An old Labour idea of having Kiwisaver contributions vary over the business cycle also got play. It never made any darned sense: you require higher contributions at the top of the cycle and lower contributions at the bottom of the cycle: buy when high, and buy less when low, doesn't seem like all that great a default setting for Kiwisaver funds. 

Bad times make people reach for bad ideas, which worsen overall economic conditions...

Public transport and getting what you pay for

Carbon News asked me about the government's proposed shake-up around council public transport options. The government figures having councils run bus services again, rather than contracting out for them, would reduce national net emissions while getting better bus service.

They're nuts. But the union isn't nuts for supporting it. They'll probably do well out of going back to council monopolies. 

But will the plans – which could see most public transport back in public hands after a decade-old experiment in privatisation – deliver the promised reductions in carbon emissions?

The response from the NZ Initiative’s chief economist Eric Crampton is as predictable as it consistent: transport is covered by the ETS and therefore the proposals will make virtually no difference to overall emissions.

“Because transport is covered in the Emissions Trading Scheme, bus operators, whether Council- or privately owned, have plenty of incentive to weigh up whether to provide electric or diesel busses,” Crampton says.

“An all-electric bus fleet would simply free up emission credits for others to purchase and use instead.”

Former IPCC lead author and Massey University emeritus professor of energy and climate mitigation, Ralph Sims, on the other hand, says the ETS has done nothing to encourage public transport use to date and there’s nothing to suggest that it’s likely to have much impact in the future.

Yeah, this is one of those "We're all part of the equilibrium" days. If carbon prices going up to $200/tonne (or whatever it gets to) as the ETS cap drops on the path to net zero doesn't encourage flips to public transit, that is perfectly fine. The cap limits net emissions. It finds the most cost-effective ways of mitigating net emissions. We don't have a public transit maximand, we have a net emissions target. I'd expect, with fuel being maybe $0.30-$0.40 more expensive, some folks would flip to public transit. But the binding cap binds regardless. If they don't, that just means emissions reductions in other spots are more cost effective, so the emission reductions happen there instead.

I swear these people have a billion non-carbon objectives and then damn the ETS for not achieving them. 

And they've fundamentally misdiagnosed the problem, mainly because they just hate private provision through contracting of stuff they think should be provided by government or councils.

And that’s a point of view echoed by the NZ Initiative’s Eric Crampton. 

“People should not get their hopes up that councils taking over bus services will improve outcomes. While there have been obvious deficiencies in service in some places, the problem is not that some bus services are privately owned and operated. The problem rather is that councils have gotten exactly what they have paid for. Councils set contracts with fairly low penalties for missed or cancelled services.

"To win tenders, given council specifications, bus operators ran lean staffing models. Avoiding cancelled services means having enough drivers on staff to provide coverage even if many drivers are out sick or on leave. If Council had wanted fewer missed services, it would have had to set greater penalties for missed services. But it would have had to pay bus operators more to provide the service,” Crampton says.

If there's poor quality service, don't blame the private bus operator. Blame the terms of the tender for service. If council wanted frequent, reliable, non-cancelled, luxury services, they could have contracted for that. But it would have been really expensive. The costs would have been transparent. 

All kinds of worthy-sounding things could have been included in a contract for service:

• Reliable, frequent, non-cancelled services. How? Set a large penalty for missed stops and cancelled services. But the operator would demand to be paid a lot to run the route. A thin staffing model wouldn't have worked.
• Cleaner, more environmentally friendly buses. How? Require that every one of them pass an emissions test (SOx, PM 2.5) every four months (or whatever interval). But the operator would demand to be paid more to run the route, because they might have to upgrade the fleet to meet those requirements. 

Shifting it over to council owner-operators will mean either far higher and more opaque cost, or worse service, and probably greater risk of transit strikes where unions see councils as pushovers. A private bus operator is using its own money. Councils use ratepayers' money. And know what's something that encourages people to keep a car that they might not otherwise need? Threat of transit strikes. 

The few things not currently stupid and broken are being broken. 

Morning roundup

The morning's worthies:

• Treasury are the heroes in this story, where Daalder paints them as villains. Treasury tried to stop the dumbest of the climate spend. GIDI, which either pays companies to invest in tech they were already going to buy, or subsidises them to invest in cost-ineffective ways of mitigating emissions, is such a rort. 


• Justin Giovannetti left New Zealand because of our housing policy disaster. He tells Canadians about the problems.


• Dileepa Fonseca suggests council rates should be apportioned only over land value, rather than land plus capital. I agree - at least for urban councils. For rural ones that don't use user-fees for services provided in towns, there will always be temptation for the townies to screw over the farmers by loading them with costs for services they rarely use. 


• Auckland Council bans people from building infill housing in places where people want to live through special character designations. Allowing infill housing where people want to live is the single most cost-effective thing that councils can do to reduce demand for carbon emissions. Meanwhile, Auckland Transport puts up aspirational plans of how many people they'll force out of cars. If you run a comprehensive price on carbon, you don't need this micromanaging BS. But those who know they are your betters want to dictate how you live. Just letting prices work within an ETS with a binding cap isn't good enough for them. Instead, NZTA is advertising for a Principal Advisor on reducing vehicle kilometres travelled. That just shouldn't be a goal. NZTA should be making sure that road users pay the costs of their road use rather than try to stop it. Maybe the advisor will suggest even worse maintenance on the roads, so the threat of broken axles will discourage driving. 


• Meanwhile, Minister Wood thinks breaking the public transport contracting model is needed to push up wages for bus drivers, among other worthy-sounding outcomes. It's all nonsense. Greater Wellington set a contracting model with trivial penalties for cancelled services and then was shocked! and aghast! that the bus companies ran lean staffing models, eating the fees for cancelled services rather than paying enough for staff to ensure reliable services. Council could have contracted for different outcomes, if it had been willing to pay for them. It'll be interesting to see what they do when they no longer have a scapegoat I suppose. 


• The Auditor General warns about some implications of the proposed 3 Waters Reforms.

Market Studies and Section 43

My column in the Herald last week, ungated here, on the Commerce Commission's market studies powers and their ability to look into previously forbidden places.

I wish they'd have just kept my title: The Spice of Competition Must Flow. 

In Frank Hebert's classic Dune series, the Bene Gesserit sisterhood's supernatural abilities extended only so far. There was a place where their powers could not see – a place that repelled and terrified them.

Over thousands of years of careful influence over royal marriages, the Bene Gesserit sought the birth of the Kwisatz Haderach – the one able to look where they could not and shorten the way.

The Commerce Commission's relatively new market studies powers may not quite make them the Kwisatz Haderach.

Nevertheless, there are parallels.

The Commerce Commission has long been able to pursue anti-competitive activity. Cartels are illegal. Some cartel conduct can draw criminal penalties.

Anti-competitive activity running short of cartels is also prohibited.

But there has been a place the commission has not been able to look.

Section 43 of the Commerce Act exempts activities authorised by government. If a law or Order in Council authorises an activity, that activity is allowed even if it appears to be anti-competitive.

There is some sense to the Section 43 exemption if you think that government generally works well. Parliament and the ministries, at least in theory, will have weighed the public interest and considered any effects on restraint of trade when setting laws and regulations.

A statutory regime may have anti-competitive effects but still be desirable on balance.

In an ideal world, ministries overseeing these regulatory regimes would be running rolling reviews to ensure the regimes continue to be beneficial.

But successive governments have done an abysmal job in ensuring that regulatory and statutory regimes remain fit for purpose.

Reviews of regulatory regimes, when undertaken, tend to have a narrow focus. They do not look at how a regime intertwines with other agencies' regulations and practices and its effects on competition.

Statutory regimes have been the place where the Commerce Commission has been unable to look.

I conclude:

In both its review of grocery retail and building materials, the commission turned its gaze to the place it had not previously been able to look: statutory regimes exempted by Section 43 that combine to thwart real competition. And it found things in serious need of remedy.

Like Dune's Kwisatz Haderach, the commission's market studies authority is powerful and just a bit dangerous.

The commission's very detailed work documenting what had been well understood by sector observers at a high level was not without cost.

Supermarket executive teams would have been tied up for months responding to requests for information while also trying to run supermarkets during a pandemic.

Some future ill-intentioned minister could direct the commission to undertake market studies on areas he wishes to punish. The study process itself imposes a substantial cost, regardless of its findings.

The commission would do well to provide its minister with a list of areas most in need of future investigation. And top of that list should be the places where it previously has been barred from action by Section 43.

Conditions of competition in the provision of medical services would make for a superb market study.

Earlier this year, it was reported that some 150 foreign-trained doctors living in New Zealand have been unable to practice because the rules require them to take up a supervised training position first.

Those positions do not exist for foreign-trained doctors.

The simplest explanation for regulations setting impossible conditions is that the medical professionals who help to set the standards wish to prevent competitors from entering the market.

If we are to have a Kwisatz Haderach, best it be directed in beneficial ways. Let the spice of competition flow.

I chose not to elaborate on the risks of jihad and war that could engulf the known universe, in part because the Commission is only resourced to do one of these a year. 

Three waters and revenue bonds

Will be up at Select Committee tomorrow, along with Nick Clark, to talk about three waters reforms.

The Initiative is a member of the Local Government Business Forum - a peak body of organisations that interface with local government. The Initiative didn't put in a submission on the Three Waters bill (there's just so much on) but the Forum did, and I helped a bit with that. Nick Clark is the Forum's secretary and did much of the drafting. 

The Forum's submission is here. As always, not all members of any peak body outfit will agree with every word on a consensus document - some will be part of organisations that have decided to stay out of the fray on 3 Waters. But it isn't far from my own views either.

We just don't see any of the proposed reforms as being necessary. 

There's a real problem that the legislation is trying to address, but it's gotten itself bogged down in piles of other issues. 

The real problems are water quality enforcement and monitoring, which is already being dealt to by a new regulator, and access to funding and financing tools to ensure that the pipes are up to spec and can be rolled out to support urban growth. 

That latter problem is serious, but seriously doesn't need forced amalgamation into four enormous water service entities. Just let councils issue long lived infrastructure bonds backed either by special rates on serviced properties, or by user fees, or by volumetric charges, or by connection charges, or any combination of all of them. How? The Local Bodies' Loans Act 1913 isn't a bad place to start. It's how councils used to be able to fund the building of stuff, back when it was possible to build stuff. 

Don't need complex new governance arrangements that open up piles of additional contentious issues. Just let councils issue ring-fenced debt. If solving water's what Parliament actually cares about. If they have some other agenda, they can just keep going as they are - but it won't work and it'll get overturned come a change in government.