GST carveouts

I haven't blogged on Labour's proposed vandalism of the tax system, but I have been busy elsewhere on it. Along with pretty much every other public-facing economist and tax person.

Labour's proposed pulling GST off of fresh and frozen unprocessed fruit and vegetables. It might give $4/week in savings on average, and less than for lower decile households that spend less on fruit and veg.

They've pitched it partially as a response to cost of living pressures. But the income tax thresholds haven't been adjusted since 2010. If you only partially adjusted the bottom tax threshold to account for inflation since 2017, increasing it from $14k to $17k, you'd give everyone $210. Even jobseeker benefits are now above $17k. 

So beneficiaries would get the $210 as well. 

The same $4/week, except everyone gets that amount, rather than more going to those who spend a lot on fresh vegetables. 

And without wrecking GST.

It's so stupid. 

Some roundup, mainly so I can find this all again in a decade when someone's dumb enough to propose it again:

• RNZ morning report. They couldn't find tax expert or economist who supports the idea.  I show up a bit in here.
• Jo Moir at Newsroom points out some of the problems. Marc Daalder says its government by focus group. 
• They're paying for this mess by getting rid of depreciation for commercial buildings. But commercial buildings depreciate. So they're funding the creation of a distortion by creating another distortion. Dumb. Dumber than a sack of hammers. 
• I'd hit some of the problems in Newsroom, when it was just a rumor. And at RNZ. 
• I hit it again after the announcement, noting the obvious alternative of just increasing the bottom tax threshold. 

Forestry and the ETS

I got our submission in on the ETS review and forestry just under the wire last Friday. 

For those interested, it's here.

I really hate the precedent that the government is setting here. 

Farmers are mad about afforestation, and afforestation can have adverse consequences that have nothing to do with net emissions. But those can and should be dealt with by the parts of government best suited to dealing with each of them as they arise.

The alternative to sound Tinbergen-style policy is that we wind up in consultations about different ways of breaking the ETS every time changing carbon prices lead to changes in activities that have their own potential externalities. 

I go through a few examples:

2.12 Consider the perils of the alternative approach, which would require the ETS to reconsider which forms of carbon sequestration or gross emission reduction it might recognise or to what extent – because carbon prices encourage ‘too much’ of the activity resulting in other ancillary problems. A few simple hypothetical examples follow: 

2.12..1 Carbon sequestration through olivine transformation proves highly cost-effective, but olivine mining causes changes in land use and community concerns about heavy truck traffic. Rather than use consenting processes to mitigate externalities from mining or appropriate road-user charging and roading upgrades to deal with truck traffic, the Climate Commission is asked to pretend that this form of direct-air capture carbon sequestration does not sequester carbon – to reduce the incentive to engage in olivine mining. 

2.12..1.1 A new methane inhibitor for livestock proves highly cost-effective in reducing biogenic methane emissions. For sake of argument, let us imagine that this happens after biogenic methane emissions are brought fully into the ETS as CO2-e and are subject to the ETS cap – or are subject to their own methane trading system. The new methane inhibitor unfortunately increases nitrogen concentration in cattle urine. And because dairy farmers face lower methane charges with lower emissions, dairy farming becomes more profitable and there is an increase in dairy conversions. All of it puts increased pressure on overburdened water catchments. Rather than appropriately regulate water quality, the government asks the Climate Commission to put a thumb on the scales to discourage use of the methane inhibitor. 

2.12..1.2 A new type of cement is developed that produces vastly fewer emissions. The technology for producing the cement powder is owned by an overseas company who can easily deliver the powder to New Zealand; when used here, emissions from cement are trivially low. But because the overseas company will not licence the powder to large domestic incumbent cement producers and because it will outcompete domestically produced cement, the incumbent faces difficulty. The Climate Commission is asked to level the playing field by requiring surrender of NZU for use of the new cement as though it had the same emissions profile as existing cement – to avoid unemployment at community cement plants. A ‘just transition’ path is suggested that would allow the new cement to be treated fairly in twenty years’ time. 

2.12..1.3 A new direct-air carbon capture technology is developed. It can sequester carbon at a cost of $50/tonne and can scale infinitely. It could not only offset the entirety of New Zealand’s gross emissions, but also prior emissions if allowed to run at scale. The Climate Commission is asked not to recognise this new technology because, if it were allowed to generate NZU at $50/tonne, there would be weaker incentive to reduce gross emissions and New Zealand would not achieve the wholescale industrial, social, and economic transformation that some might otherwise desire. 

2.12..1.4 A high carbon price makes people wish to avoid housing that has high carbon cost and prefer apartments and townhouses near the city centre. However, cultural concerns are raised about the shift away from suburban living, with commensurate concern about potential reductions in family size and an aging population. A conservative government encourages the Commission to consider a higher NZU surrender requirement for electricity used in apartments as compared to electricity used in detached suburban homes to avoid this undesirable change in housing use. 

2.12..1.5 A rising price on biogenic methane emissions in agriculture, when those emissions finally face an emission price, results in reduced herd sizes and changes in rural land use. The Commission is asked to redo methane accounting to reduce the likelihood that emission pricing results in land use change, because of a view that emissions prices were not intended to result in land use changes. 

It is also interesting that the agricultural sector, which has been able to successfully evade pricing on biogenic methane for ages, is also lobbying for changes to the ETS that would sharply increase the marginal cost of reducing net emissions within the covered sector.

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.

End to the golden trade weather

Vangelis Vitalis knows what he's talking about in trade, making this particularly depressing. 

At BusinessDesk ($, you should subscribe; I do)

Vitalis said the rules NZ depended on at the WTO were no longer fit for purpose. 

“We can still take cases, but their foreseeability now is really in question because you can no longer hear appeals to the case.”  

Geopolitics 

Vitalis said geopolitics was back in a way “that we have not experienced previously”, particularly between China and the United States which was “intense and difficult”. 

“Don’t get caught in the cross fire. If you’re in any doubt about how challenging and bruising this can get, just ask Australian wine exporters, just ask Australia barley exporters, just ask Australia coal exporters.” 

As recently as the weekend, Australia withdrew its action against China at the WTO after it dropped tariffs on Australia barley, which had been in place for three years. 

Australia is, however, still pursuing its action on wine tariffs. 

Vitalis said the challenges out there were real and NZ was going to need to think about how it managed and mitigated those risks. 

NZ had relied on US leadership in trade policy for big achievements, such as Uruguay Round, however they were no longer in that space.

China is a more reliable trade partner for New Zealand than the US is, if New Zealand is willing to never say much about the Chinese Government's atrocities. 

The US claims to be a partner and claims to want to reduce Chinese influence in the Pacific. But when it comes down to it, Congress is more interested in protecting its farmers from competition from NZ meat and dairy. Persistent problems in US baby formula supply chains; NZ has lots to sell, but the US prefers to keep blocking it. 

So if you're Prime Minister, what the hell do you do? 

Take a more principled stand on geopolitics, which would likely mean sharp restrictions on NZ exports to China and continued US refusal to allow imports from NZ? Get friendlier with China, which could make it harder for NZ to keep doing awesome stuff in the aerospace sector that depends on tech transfer agreements with the US? Try to keep balancing on an ever-narrowing beam?

Canadian cautionary tales

My column in the weekend Dom went through Canada's messes in trying to make Google and Facebook subsidise Canadian newspapers. 

The Canadian Government passed Bill C-18, the Online News Act. And now, Canadians wanting to link to a news story on Facebook see this notice instead.

Earlier this week, I interviewed the University of Ottawa’s Professor Michael Geist about the problem. He’s the Canada Research Chair in Internet and E-Commerce Law and has been following C-18 more closely than anyone.

The New Zealand Initiative · Podcast: Media funding and regulation

Bill C-18 requires Facebook to pay whenever a user puts up a link to a news site. It is not a cost that Facebook can easily control or predict. It brings potentially unbounded liability.

News links are not particularly valuable to Facebook. If anything, links to news stories encourage users to click away from Facebook rather than stay on the site scrolling through pictures of relatives’ pets and children, and seeing ads delivered through Facebook while they’re there.

Facebook provided plenty of warning that they'd sooner stop allowing user links to news on their platform than be subject to unpredictable and potentially very large payments for allowing such links. 

Willie Jackson says the NZ government will have legislation in the background in case Google and Facebook don't fork over enough money to NZ media companies. It would go to arbitration. 

Listen to his interview, above-linked, and tell me this isn't a tin-pot shake-down. There can be defensible public-goods arguments for subsidising news production, but I just can't see why that ought to be funded by some tax or shake-down of tech companies.  

It sounded like he figures that Google fronting up $50 million might cover it. Who knows. 

But threat of going to arbitration with unknowable potential liability is what's had Meta pull news links in Canada. Listen to my chat with Michael Geist on it, or read his substacks. 

From my column again:

Finally, on August 1, Facebook began pulling the plug. Canadian Facebook users will no longer see news links and content. It affects not just Canadian news sites but also international news for Canadian readers, because the Online News Act can also be read as requiring payment for links to international sites too.

The big newspapers are getting exactly what they asked for. They thought that Facebook was stealing from them by linking. It’s always been nonsense – even the report commissioned by New Zealand’s Ministry of Culture and Heritage found that “digital platforms provide considerable commercial benefits to news firms”.

But, like Trump, they’d convinced themselves that they could have something for nothing. They could have media funding and make Big Tech pay for it. And it’s worked out about as well as Trumps’s wall.

Professor Geist explained that some of the biggest losers from Bill C-18 have been small independent news sites that have relied on links from Facebook for traffic.

I hope that our Minister for Broadcasting and Media, Willie Jackson, is paying attention to Canada’s cautionary tale.

Extorting payments from platforms to meet the Government’s news funding objectives isn’t just thuggish. It also doesn’t work.

 Will look forward to seeing the eventual legislation...

Afternoon roundup

The worthies, on a long-overdue closing of the browser tabs:

• Colby Cosh explains to Canadians something Kiwis have known for some time: the Party commanding the confidence of the house gets the Prime Ministership. And that might not be the largest party in Parliament. 


• New Zealand's judges keep bringing the administration of justice into disrepute. 


• Attempts to stop people from renting their houses to tourists on AirBnB. If cities just let people build more housing, none of this would be any kind of issue. 


• Agriculture emission pricing gets punted to post-election. It would have been heroic for Hipkins to hit this while milk prices are tanking.  


• ACT proposes weakening the medical licensing cartel. 


• The government adds a pile of cost-increasing conditions for receipt of film subsidies. It may have the laudable effect of reducing demand for film subsidies. Or, perhaps down the track, lead to higher subsidies to offset the cost imposed by stuff like carbon footprint audits. 

Leave GST alone

New Zealand's Finance Minister keeps sending signals that Labour's preparing to break GST. 

Vernon Small pointed to the GST guff as evidence that we're now deeply into the silly season, where no policy can be expected to make a lick of sense and everything is targeted at the election. 

In any case, I tilted at it in Newsroom last week, just walking again through the reasons that this is an extraordinarily bad idea. 

Stupidity here doesn’t just mean something I don’t like, or something economists in general don’t like. A policy is stupid if it is a terrible way of trying to achieve any reasonable objective, if it is incredibly costly relative to other available alternatives, and if it wrecks other important objectives along the way.

Taking GST off food generally, or from fruit and vegetables, is stupid.

Yes, other countries do not impose GST on food or have other exemptions for worthy-sounding goods or services. But those kinds of holes in GST come at substantial cost. They make it harder for the government to raise revenue for the things voters want, while imposing insane administrative costs.

And remember the excellent old post by Stephen Gordon over at Worthwhile Canadian Initiative on the Nigel Tufnel approach to tax economics. 

No matter how thoroughly you explain that a consumption tax can be partnered with other taxes and transfers to achieve whatever tax system progressivity someone might want, the idiots will just keep saying, "But GST is regressive." 

The NDP has never been a fan of the GST, and persuading Canadian progressives of its merits is a never-ending variation on the theme of "but these go to eleven:"

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?

Economist: Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue, and available evidence appears to be consistent with the theory.

PP: But consumption taxes are regressive!

E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren't worse off; that's what the GST rebate is for. And there will still be lots left over to fund those social programs.

PP: But consumption taxes are regressive!

E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.

PP: But consumption taxes are regressive!

E: I'm not disputing that point, but there's more to the analysis than that. Okay, let me explain the effects of the various forms of taxes...

<15 years later>

E: ...and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.

PP: But consumption taxes are regressive!

Clearly, that's a dramatisation: in real life, it would never have occurred to a progressive to ask an economist how to finance social programs without tanking the economy. But below the fold, I'll try to summarise once again why the NDP should abandon its traditional antipathy to the GST and start to view it as an important instrument in advancing its agenda.

These kinds of debates ought to remind us just how lucky we are that tax decisions are generally delegated to experts and kept far away from voters. Policy could be so much worse than it actually is. As bad as things are, it could always be far far worse.