Things that should be common knowledge that seem not to be: Petrol and excise and GST edition

Petrol excise is charged per litre of petrol. It isn't ad valorem. 

That means that excise's fraction of petrol prices have been going down as petrol prices go up. MBIE says it's $0.77/litre, plus another $0.10 in Auckland. Check it for yourself on MBIE's website.

Excise is $0.77. Add $0.10 for Auckland gets you to $0.87. Add carbon costs of maybe $0.20 when carbon is $80/tonne gets you to $1.07. GST on excise and carbon gets you to $1.23. 

GST over the base fuel cost would add more. If petrol is $3/litre all up, then total GST is $0.39. GST on excise and charges is $0.16; GST on the rest is $0.23.

There's good reason not to add GST in here at all, unless you're making a generalised case for abolishing GST.

Consider a family that spends every dollar it earns. If the price of petrol goes up and it's paying a lot more GST on petrol, it's by definition spending less on other stuff. Its GST expenditures on other stuff goes down. Government gets 15% of that family's spend through GST before and after the change in petrol prices. 

Yes, GST on petrol goes up as the price of petrol goes up. But the effect works both ways. Would you argue that excise or GST should increase to compensate whenever oil prices drop? I know I heard some calls for that when oil prices were lower, but those were also stupid. 

Or think of it this way. Cutting excise when fuel is particularly expensive is a tax cut particularly benefitting owners of less efficient vehicles. Does that seem like the kind of thing that is likely to make sense?

And remember that the relatively inelastic side of the market bears the burden or enjoys the benefit of tax changes. When global oil markets are a mess and ordering in more fuel is likely to be hitting all kinds of chokepoints, does it seem likely that fuel supply is relatively inelastic in supply? Would a ditching of petrol excise not lead to a bidding up of fuel prices from the demand side, getting us most of the way back to where we were ex-ante?

Petrol excise (and Road User Charges) go into the National Land Transport Fund. That money gets used to build and maintain roads. Unless you think the costs of building and maintaining roads is countercyclical in oil prices, it is dumb to want them abated just because petrol costs are currently high. For a start, aren't roads made using bitumen? Isn't that an oil derivative that should covary in price with oil and petrol? Don't all the big yellow machines use a lot of diesel?

That's also the simplest explanation of why GST has to be charged on top of excise. Excise covers the cost of providing road services. Imagine if all the roads were privately owned and charged a fee for driving on them. There'd be GST on that fee, right? Same for excise. 

It would be coherent to argue that government raids NLTF for a bunch of stuff that shouldn't be funded out of road user charges. Some people like the idea of funding rail lines or public transit out of there, but the case is pretty weak. 

You could then sensibly argue for a permanent end to that, which would result in permanently lower excise and RUC. 

Except for one thing. 

Central government often also uses general revenues to pay for big highway projects that otherwise have a hard time passing a cost-benefit hurdle. It'll have to stop doing that, if you want to be consistent. And that will make RUC and excise go up again, unless you run a tighter CBA on roading projects. And I have no clue which way that cashes out. 

Here is the defensible argument that could be made. 

The Government's ETS revenues have gone through the roof. Carbon is $80/tonne. The government in 2022 will collect enough money in ETS revenues to give a cash transfer of over $1200 to every family of four in the country. It could even weight the thing so that more money went to households with Community Services Cards, and a bit less to households like mine. Call it a carbon dividend, tell families that they should use it however makes most sense for them in adapting to higher energy costs. 

It's almost surprising that the government hasn't gone for this yet. They're under a lot of pressure over rising petrol prices and rising prices of everything else. Some of that is rising carbon prices. Most of it is RBNZ letting inflation get out of control. But government could announce a carbon dividend, right now, give every family a big cheque, and buy a lot of insulation against complaints about rising fuel costs. 

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?

Let the ETS do its job

This week's column in the Dom Post and Stuff papers covers the results of the second Expert Economist Survey. 

A snippet:

New Zealand’s emissions trading scheme (ETS) has improved considerably over the past few years. Through the 2010s, the ETS was a lot more like a low carbon tax set at $20 per tonne.

Now that there is a real and declining cap on net emissions, the price of carbon has risen to $80 per tonne. The carbon charge in a litre of petrol rose accordingly, from about $0.05 to about $0.20.

A lot of Wellington officials support adding policies on top of the ETS. They argue that doing so can force emissions to reduce more quickly.

But when policies target sectors covered by the ETS and those sectors purchase fewer carbon permits, more permits are left for others to buy instead.

And while it is true that the government could take that opportunity to cut the ETS cap more quickly, it could cut the ETS cap more quickly and at less cost to the country as a whole without regulating fuel economy.

We asked whether our expert panel agreed or disagreed with the following proposition: “Tightening the ETS’s cap on net emissions would be a less expensive way to reduce carbon-dioxide emissions than a collection of policies, such as fuel economy standards for imported vehicles, that target emissions already covered by the ETS.”

Thirty-one per cent strongly agreed with the proposition, 54 per cent agreed, and the rest were either uncertain or had no opinion. No surveyed economist disagreed.

But that hardly means that economists see no role for complementary policies. Complementary policies can have an important role to play if there are complementary problems to solve.

The ETS puts a price on carbon that deals with the market failure we would otherwise have in carbon emissions. If other market failures unduly hinder adjusting to rising carbon prices, policies directly targeting those market failures may reduce the cost of mitigating emissions. Seventy-seven per cent of our surveyed experts agreed, and none disagreed.

So it is not that economists are opposed to regulatory activity per se. It is rather that those policies need to be appropriately targeted at real additional market failures.

To take an example, if you thought that an $80 carbon price hurt biodiversity because of pine tree planting, the solution would not be to tweak the ETS settings to ignore carbon sequestered in pine forests.

The solution instead would be a subsidy for planting native forests, or a charge reflecting the biodiversity cost of additional pine tree planting in places where more pine trees caused demonstrable harm.

Finally, we asked our experts to choose between two options for dealing with the harms that rising carbon prices can impose on poorer households.

The Government has been trying to target emission reductions in sectors that might be less likely to affect poorer households while also providing subsidies for electric vehicles.

But the Government has another option. It planned on selling 19.3 million ETS credits this year. At $80 per tonne, that would raise enough money to give every family of four a carbon dividend of more than $1200.

Our experts agreed that a carbon dividend is the preferred option: 15% strongly agreed, 54% agreed, 23% were uncertain, and 8% had no opinion.

The full results are up over at the NZAE page.

Wellington has been trying to gaslight me for too long, trying to make me think that I'm the crazy one for continuing to think that the standard lessons I taught at Canterbury, the same standard core micro that's taught everywhere, is now somehow all wrong. The Survey is a nice sanity check for me. I'm not mad; the Ministries are madhouses. 

Afternoon roundup

I got tabs, they're multiplying. Let's deal to that.

• The NZ Govt covid testing strategy is being rewritten. I didn't know we still had one. There's no surveillance testing. There's no wastewater test results that might give some kind of handle on whether things are peaking. I don't see much strategy at all.


• Science has a hard time keeping up with the data. Nature reports results of a large trial on RATs. Plus side: they seem pretty accurate. Downside: data's all from the first half of 2021, on a variant that's no longer prevalent, with little sense of whether the results hold with Omicron. Omicron seems to express in saliva before nasal passages, and the RATs generally take nasal swabs. Remember how, when I used to think there was some point in trying to help get to better policy on Covid, I'd rabbit on about trialling different testing methods side-by-side in MIQ as horseraces? We could totally have known, right now, relative performance of a bucket of different RATs against both swab and saliva PCR, for Omicron. Government is just so hopeless. 


• I didn't watch any of the $4m+ public information campaign promoting the government's 3-waters programme.


• The only thing I've been watching on 3 Waters Reforms are whether the amalgamated entities be entirely separate from Council balance sheets for debt issuance, and whether they'll be under a commercial regulator that ensures they have strong incentive to lay out lots of pipe. Recommendation 5 here gives the balance sheet separation, potentially reinforced at 44, and certainly at 47. That matters. If you don't have that, then the entities can't issue debt that doesn't come back to a risk on Council main balance sheets. But I'm not seeing a price setting methodology yet. Basically: follow the weighted-cost-of-capital kind of method used for the lines companies, which encourages putting up more lines because that's what lets you get more revenue. The first order problem currently is not-enough-pipes. 


• Catching Covid isn't inevitable. We've been having our own personal lockdown, watching Covid sheet through places that we'd pulled the kids from the prior week. 


• At what point will we get a Commerce Commission Market Study into competition in medical service provision? The Medical Cartel is not being particularly opaque in denying entry to potential competitors. Read this one. Read the testimonial from the President of the Neurological Society about the neurosurgeon who the Cartel figures isn't good enough for New Zealand.


• Ilya Somin pleads that America should admit refugees from Ukraine and from Russia. New Zealand should too. 

Barriers to entry in grocery

Yesterday's final report from the Commerce Commission was a lot better than I was expecting. 

In the draft report, the real problems were relegated to Chapter 6 and did not feature prominently. Zoning and consenting were noted as a problem but were mostly punted as not being ComCom's bailiwick. 

In the final report, zoning and consenting made up a hefty chunk of work, tallied together as their first recommendation. Exclusive covenants were recommendation 2, and the messes from the Overseas Investment Act came in as recommendation 4.

I got a quick column through to Newsroom summarising things shortly after the report landed. 

Apart from places that are already supermarkets, very little land is zoned for larger footprint grocery. And land with the right zoning is often tied up by restrictive land covenants forbidding their use in grocery retail.

If the would-be entrant managed to find the right set of sites, there’s another problem. Council consenting can take anywhere from months to years – or even a decade in some cases. And councils too often decide that a new retailer should be blocked if it would hurt the amenity provided by other retail centres, sometimes after the retail developer has already built premises.

We wind up in the ridiculous spot where a new supermarket may have to demonstrate that it will not do too much to draw customers away from other places. Where we should want and welcome retail grocery competition, the would-be competitor may have to prove it will not compete very much at all. New Zealand’s zoning and consenting processes have treated competition as a harm to be mitigated rather than a benefit to be sought. 

A new entrant, if it can find the right set of locations, will easily have over $100 million in capital tied up in sites that it has purchased while having no clue when it might possibly be allowed to start building grocery stores. Try planning a distribution network when you can’t tell when different stores might be allowed to open. It won’t be easy.

But it gets worse. The Overseas Investment Office adds hurdles if you have more than a trivial amount of foreign backing. If you want to run full-service stores, you will need to get a liquor permit – and those processes are highly anti-competitive.

It is hardly a surprise that international retailers like Aldi and Lidl have decided that New Zealand is not worth the hassle.

The Commerce Commission’s report strikes at the root. The report has other recommendations, but the only recommendations that matter for ensuring competition are removing the barriers to entry and making it de facto legal to open new supermarkets, rather than just “New Zealand legal” and impossible in practice.

My submission on the draft report and cross-submission after the hearings emphasized freeing up land use to enable entry. The submissions also noted the absurdity of even considering breaking up existing supermarkets while Councils were still forcing new supermarkets to prove that they wouldn't compete very much.

I wonder whether the corrupt-looking mess in Ashburton, noted in my submission and presentation, helped in getting the recommendation to ban councils from considering reductions in amenity value of other shopping areas in consenting processes. 

The Ashburton case looked so very dodgy. As I'd put it in the submission:

And, again, consider the position of a potential international entrant. If small councils are in the habit of using plan changes to frustrate new entry, is it safe to invest here? Would it be unreasonable for a potential international entrant to conclude that cartels of existing connected property owners collude with councils to set anticompetitive zoning rules to frustrate entry and that the Commerce Commission ignores such activity? 

Pay gap reporting

The NBR's Dita De Boni asked me for comment on the push for companies to report their gender pay gaps. Her story's now up here ($).

As always, space constraints mean she could only use a bit of what I'd sent through (all used fairly). Here's my full comment, for those who were interested:

Pay equity reporting mandates are fraught where worker compensation is more than just pay. Roles vary considerably, and people also vary in how much they value pay as compared to flexibility in hours or location of work or being on-call.

If a worker’s total compensation bundle isn’t just pay, but also include whether they’re able to work flexible hours, or whether they’re expected to be on-call at odd hours, or whether they’re regularly expected to put in overtime or exempt from having to do so, then measuring only one aspect of pay and reporting on it could provide a rather inaccurate picture.

The best evidence we have on gender wage disparities, at least out of the United States, suggests that a lot of existing differences in pay are explained by those kinds of differences in overall job conditions. Claudia Goldin’s work in particular shows a substantial pay penalty for workers putting in fewer than 40 hours per week, regardless of gender. But if there are gender differences in willingness to work longer hours, that would show up as a gap in measured pay. Is that the kind of gap that policy or companies should care about? If so, what should they do? If there are real advantages for the company in some workers being willing to work longer hours, forcing that to pare back could hurt overall productivity.

And what evidence we have out of the US is consistent with that worry. A recent NBER Working Paper showed that Danish legislation requiring publication of gender-disaggregated wage statistics did reduce the measured wage gap – by slowing wage growth among male employees. The reduction in pay growth for male employees was matched by a decline in firm productivity, so overall firm profitability was not much hit (pay less for less work) – but is that really a good outcome?

Disclosure legislation could easily have a lot of perverse consequences. For example, consider a firm making staff diversity a priority in new hiring. If new hiring tends to be at more junior levels, because there is usually greater churn at junior levels, then the measured ethnic or gender pay gap would increase because of that round of new hiring. Conversely, if the firm wanted to reduce its measured pay gap, it [could] hire junior staff from groups that the company pays more on average, to help bring down that average – potentially at the expense of diversity in overall staffing.

The exercise is inherently fraught because compensation is complex.

Luxon's tax proposals

National Party leader Chris Luxon announced a few tax policies on Sunday:

• Index tax thresholds back to 2017
• Abolish the 39% tax rate
• Abolish the Auckland Regional Fuel Tax
• Reverse the 10-year bright-line test extension and restore interest deductibility for investment property
• And if either the Light Rail Tax or the Unemployment Insurance Scheme go ahead, he'd reverse those.

I agree with most of this, with a couple quibbles, and a bigger overarching concern about long term fiscal sustainability. 

First the stuff in Luxon's pitch. 

Failing to index tax thresholds in a high inflation environment is a tax increase with distributional consequences that probably aren't what Parliament would choose if it were trying to increase tax revenue. I'd prefer that he formally index the thresholds so that they ratchet upward every 1 April when enough fiscal drag has accumulated. 

Whether you use $1000 or $500 increments would depend on how expensive it is to update systems to do this stuff - the accountants would have a better handle on it than I do. But it isn't hard in principle. Say you ratchet whenever the cumulative increase rounds to $1000 thresholds. Once inflation means that the $14,000 threshold needs to go up to $14,501, increase it to $15,000 at 1 April. But don't reset the inflation anchor to the new threshold, just keep it running from the old one. Then you have overs-and-unders where for a little while the thresholds are too low relative to where they should be, then too high, then too low again, but they never get far out of whack. And it only shifts by $1000 increments. 

Abolishing the 39% rate also makes sense. Remember what Norm Gemmell said about it last year. 

The new top tax rate In November 2020, Inland Revenue conducted a regulatory impact assessment of the government’s proposed new top personal income tax rate of 39% on incomes above $180,000 (Inland Revenue, 2020). This clarifies that the objectives of the policy were to: (a) raise more revenue to fund the government’s intended future spending; and (b) do so in a way that improves equity.

Evaluation of the policy ex ante can therefore be decomposed into four important aspects: (1) How much equity improvement will be achieved? (2) How much extra revenue will be raised? (3) What sacrifice in efficiency will be made in pursuing these objectives? (4) Could the objectives be achieved at a lower efficiency sacrifice? 

On (1), empirical analysis from Inland Revenue (2020) shows that the effect of the top tax rate increase on the Gini coefficient – the most commonly quoted inequality index – is likely to be very small. It is forecast to fall by 0.2%, from 0.493 to 0.491. In fact, despite ‘raise the top marginal income tax rate’ being a popular mantra of the political left, changes to income tax rates at the top of the income distribution typically have little overall distributional impact. This is partly because the Gini coefficient weights each individual by the inverse of their rank in the income distribution.

...

Inland Revenue (2020) estimates that, averaged over the first three full years of its operation, the new tax policy will raise, on average, $510 million per year, 2021/22–2023/24.3 This represents just under (over) 0.4% of total Crown expenses (revenue) in 2020 (see Treasury, 2020). It is clear therefore that the new tax policy has a very limited capacity to increase Crown spending, or increase equality via the targeting of that spending at lower-income groups.

If tax revenues have to be maintained, it would be better – in terms of equality improvements delivered at lower efficiency losses – to raise GST rates (for all) and lower income tax rates only at the bottom of the income distribution. Alternatively, income transfers to lower earners (such as via family tax credits) could be paid out of higher GST revenues and almost certainly reduce inequality indices. Similar scenarios have been examined rigorously by Thomas (2015, 2020) and shown to be more effective for redistribution in many OECD countries, including New Zealand.

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 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.

Emphasis added. Norm is Chair in Public Finance at Vic. 

Abolishing the Auckland Regional Fuel Tax, which is meant to be funding transport improvements in Auckland, would mean some other way of funding transport improvements would be needed - or a rethink of how transport is funded more generally. That could be worthwhile.

Reversing the tax moves in property also makes sense. Go back and read Norm's piece - the housing tax changes had introduced incoherence into the tax system.

The UI scheme isn't in place yet and is a bad idea anyway. Promising to reverse it provides some certainty so people don't go and cancel existing employment insurance policies in expectation that the new scheme would be durable. 

But there remains a big overall hole. Treasury's long-term fiscal outlook is grim unless we have some combination of fixing NZ Super to deal with increasing healthy life expectancies, restraint in growth of expenditures on government services (primarily healthcare), or tax increases. And it will only get worse in high interest rate environments.

Luxon's tax moves get rid of a pile of measures that cost a lot relative to the amount of money they might bring in. It's good to be rid of them. But if we think that defence expenditures are going to be higher over the next decade, and that health expenditures will too, then we need some clearer signals about where restraint might be applied to cover the cost - or where taxes might increase to plug the hole. 

Gemmell's piece suggested that a combination of GST increases and reductions in income tax rates in the lower tax bands would be more efficient than the combination of policies Labour had put up. It also wouldn't be a bad start if looking for ways of raising overall revenue. Make the GST increase neutral for those on lower tax rates by adjusting their tax rates down, and the GST increase winds up being progressive in effect. And remember that GST hits spending out of capital income as well. 

I'd prefer starting with spending restraint and doing away with useless or harmful bits of spend where we can find it: make-work construction projects during a construction labour shortage; Envirojobs; and, Medsafe for starters. The last one only somewhat tongue-in-cheek. 

And definitely start indexing NZ Super to healthy life expectancy: have a one-off upward ratchet in the age of eligibility scheduled for a decade from now, then have it upward-indexed whenever healthy life expectancy increases. Complement it with an enhanced disability benefit for those ineligible for Super but no longer medically capable of working - and remember there will be some who are in that hole even with an eligibility age of 65. 

I'd chatted this morning with Newstalk's Mike Hosking and with RNZ on all of this.