Guaranteed minimum income

Nolan at TVHE notes Gareth Morgan's support for a move to a guaranteed minimum income plus a flat tax.

I don't agree with Morgan's wish to fund some of the move by the imposition of a capital tax. In an ideal world, I could go with Arthur Grimes's preferred land tax, but we're not in that world.

Interesting to note that Charles Murray proposed moving to a guaranteed minimum income in the US as well.

In Murray's proposed system, every adult American not incarcerated would get $10K, beginning at age 21, of which $3K must be used for health care. Every other welfare and aid programme would be abolished: TANF, Medicare, Medicaid, social security - everything. The system's total cost would be higher than the current welfare system but, as it would also replace social security, would be cheaper in the long run as more folks retire.

Murray notes that the current system places lots of restrictions on individuals with respect to eligibility whereas a straight cash transfer lets people make their own decisions about how to run their own lives. Moreover, since everyone would know that everyone gets the transfer, an element of personal accountability is induced: everyone knows that everyone has $10,000 a year, so someone who then requests further assistance from the private charitable sector has to answer some relatively hard questions. Other effects: fathers cannot evade child support as the judge will know the location of the bank account where the $10,000 is deposited.

In the New Zealand context, this latter point could be important: eliminating the DPB and ensuring judges have ready access to fathers' bank accounts would provide a powerful inducement for fathers to be named.

Sounds great, but I'm still worried about whether the system is an equilibrium. What happens when some poverty advocate puts out a report showing some grandmother taking care of 20 kids under the age of 18 trying to get by on her $10K entitlement. Does Labour then win on a platform that brings back much of the old system in addition to the guaranteed minimum income?

I also worry about what happens to the stringency of immigration restrictions: I like immigration, but would worry that a guaranteed minimum income would provide a powerful inducement for tighter immigration controls. Presumably benefits could be restricted to citizens rather than just permanent residents. But is that stable either?

I could probably be convinced to push the button for a scheme of this sort in preference to the current system. Not sure that I'm there yet, and I'm not there if it's funded through a capital tax, but I could be convinced.

Political charities

Hmm.

I'd wondered a while back whether the rules in New Zealand were different than those in the US: Doug Sellman's anti-alcohol lobby group here gets charitable status (contributions tax free) though its main purpose seems to be political advocacy.

But today I read that the Sensible Sentencing Trust is likely to have its charitable status revoked because the Charities Commission views its main purpose as being political.

Maybe the Charities Commission is doing some random audits.

No tax changes without spending changes

Unless National shows some backbone in cutting back the rather large run-up in government expenditures that occurred under the last term of the previous Labour government, any moves to make the tax system more efficient are a rather bad idea.

In 2004, core crown expenses totaled about $42 billion. In 2007, $54 billion. 2008: 57 billion. We're on track for about $63 billion this year. That brings central government spending from about 30% of GDP to about 35% this year. Some of this year's figure would reflect the effects of the recession, but we're likely on track for a steady state of 34% absent changes.

Labour's spending increase from 2004 to 2008 was about $2000 per capita in inflation-adjusted terms. Median per capita income from salary and wages for those earning salary and wages is about $40,000 per year: Labour's spending run up was not insignificant.

National reckons any changes in spending to be too radical to contemplate. David Farrar thinks it politically impossible to reverse the three-year runup in Labour's spending in anything less than three terms of a National government.

So even if trading a reduction in the top marginal tax rate for the imposition of a land tax is efficient, it's a bad idea. Here's the likely outcome. The Tax Working Group recommends eliminating the punitive top rate imposed on "rich pricks" (our former Finance Minister's delightful term for the folks who pay the bills) and covering the tax reduction by increases in GST and imposition of a land tax. The new tax system is more efficient, but National doesn't reduce spending. Labour takes office in 2014, reinstitutes a high top marginal rate on "rich pricks" and boosts government spending to 40% of GDP, which it's only able to do because National made the tax system more efficient to start with. National takes office in 2020, considers any reductions in government spending to be "too radical", gets rid of the punitive top marginal rate and increases GST and the land tax to compensate for the loss. Lather, rinse, repeat.

The spending cuts have to come before the tax changes to make it credible. And Finance Minister Bill English's pre-emptive response to the 2025 Productivity Commission's report does the opposite.

No land taxes without spending cuts.

Update: Fran O'Sullivan rightly excoriates Key as well. (HT: Kiwiblog).

Afternoon roundup

Posting has been light as I've finished one set of grading and polished off a submission with Matt Burgess to the Law Commission on their alcohol issues paper. More grading for the weekend. In the meantime, enjoy these:

• The University of Akron demands a DNA sample from staff. I don't worry much about my DNA being out there, but is the kind of place that would want this the kind of place that you'd want to work? Sheesh.


• George Soros throws $50 million at funding anti-economics economists. Will the academic outcries be as loud as when BB&T gave $1 million to fund a course in Ayn Rand studies? Similar bequests on the right have led to endless handwringing about subversion of the independence of academia: just remember the establishment of the Friedman Center. Why the silence now? Hmm.


• I'd warned that ACC might have cause to worry about annoying John Small. Seems I was right.


• Lindsay Mitchell points to a new Treasury document showing that

  Households (with children) in the bottom half of the income distribution effectively pay no income tax or receive tax credits, because of the interaction with the income support system.
  
  The top 10% of income earners (those earning more than $70,000) pay more than 40% of all income tax revenues and about 20% of GST revenue.

  The bottom half pay zero net tax; the top 10% pay 40% of the tax. Yikes.

Hoisted from the comments: Ramsey pricing and alcohol

Seamus reminds us that Ramsey pricing does not necessarily recommend taxing inelastic goods; rather, it recommends, because of the existence of untaxed leisure, that optimal taxes will vary with goods' cross-price elasticity with leisure. Goods complementary to leisure draw a higher optimal tax than goods complementary to labour. Seamus's interpretation of Ramsey follows, I belive, Corlett and Hague's classic rendition.

The Tax Working Group's paper on "Other Base Broadening Ideas" takes an alternative interpretation of Ramsey

Ramsey taxation

The Ramsey theory of taxation recommends higher tax rates on goods with the most inelastic demand as a means of raising revenue in the most efficient way possible. This is based on the assumption that taxes on goods with inelastic consumer demand would have small distortions relative to goods with more elastic consumer demand, and therefore lower dead weight costs.

The McLeod review found that in the New Zealand context, where tobacco and beer are thought to have the most inelastic tax bases, while the demand for wine and spirits are more elastic, it was not possible to justify the then levels of excises and duties on Ramsey taxation grounds.
p.28

Note that "not possible to justify" means "the excise tax should be cut substantially or eliminated", not "too low".

The Tax Working Group uses the standard undergrad textbook formulation of the Ramsey Rule (see Hindriks and Myles, for example). The result holds under assumptions of infinite supply elasticity (because otherwise deadweight losses to consumers are only part of the welfare effects); if there are cross-price effects between taxed goods, things also get much more complicated - Ramsey then doesn't reduce to the inverse-elasticity rule. And if there are cross-price effects between taxed goods and leisure, then we get the Corlett and Hague result.

So, is alcohol a greater complement to leisure than are other goods, and in particular is it a greater complement to leisure than to labour? Tough call. Lots of business lunches are facilitated by alcohol, and there is decent evidence that drinkers earn more than never-drinkers, partially due to complementarity between drinking and business activity. But neither forms of the Ramsey rule particularly suggest increasing the alcohol excise tax, and the McLeod review firmly opposed it.

A bright point in tax

Last week's Treasury figures were very bad indeed. I still haven't wrapped my head around how forecasts of a decade of deficits are consistent with the Fiscal Responsibility Act, but neither did I ever wrap my head around how the RBNZ's interest rate policies back in 2005-2006 were consistent with the Policy Targets Agreement.

Just how terrible are the numbers? The deficit's at $2500 per capita or, somewhat terrifyingly, about $4500 per member of the work force. $2500 per capita doesn't mean much as lots of those capitas aren't ever planning on joining the workforce to pay the bill. Recall that average income from all sources for someone in paid employment is $930 per week. So the government, this year, has taken on debt equivalent to a little more than a month's earnings for each and every member of the labour force. Let's hope the upcoming budget has some serious rolling back of new entitlement spending brought in under the prior government.

The only bright points in the government's books, where tax revenues from almost all sources dropped considerably, came from reasonably large increases in alcohol and tobacco excise tax revenues. Total alcohol excise taxes increased from $795 million to $829 million while tobacco increased from $963 million to $1,063 million. ACC's earnings also went up, but of course their main problem is on the spending side. Congrats Treasury (Sam Direen!) on listing excise equivalent duties split out by category in the main figures rather than burying them with all other duties as was prior practice.

So Kiwis owe a debt to the drinkers and the smokers for keeping the deficit from being even worse than it is. Recall of course that tobacco tax revenues far exceed health care costs while alcohol tax revenues are greater than fiscal costs to the government (health) and roughly match overall "social costs."

In related news, Luke Nicholas of Epic Beer reports on a survey for the Brewers' Guild showing craft bottled beer sales up ten percent (with Epic being up 200%), despite indications that one of the mass market brands, DB, is seeing shrinking sales.

Bollard on capital gains

A month ago, I said

Now, it could be the case that some property investors who improve and resell properties quickly are able to disguise normal income as capital gains by this mechanism, but I'd be surprised if the efficient solution were a broad capital gains tax rather than IRD just watching things a bit more closely.

From the National Business Review, we find that Reserve Bank Governor Bollard agrees.

“We’re particularly interested in the prospect of seeing a flattening of the tax incentive structure around housing investment.

“It seems to me the most obvious part of that would be around taxation on people who intend to flick on investor housing.”

And, asked by Mr Cunliffe whether he believed the current tax system favours of property investment, Dr Bollard drew a big breath and said, “the short answer is yes.”

That though is somewhat short of calling for anything, let along a capital gains tax. As Dr Bollard well knows there are existing provisions in the income Tax Act which allow the Commissioner for Inland Revenue to treat the gains on the sale of property by people who are consistently buying and selling properties as income.

What it boils down to is determining those people are buying and selling property so frequently they are essentially traders, and any capital gain is treated as part of their income.

There is no need for a capital gains tax to remove purported distortions in the housing market. I can imagine a case for a move from an income tax to a land tax as efficiency-augmenting, but I have a hard time believing that such a move would be an equilibrium.

Capital gains tax and distortions

I'm no expert on the Kiwi tax system. But a few things strike me.

First, we're hearing a couple of different stories for a capital gains tax. The first story is that the current tax structure gives investors a disproportionate incentive to invest in housing relative to other assets and that this causes distortion. While I can see the case for a distortion away from interest-bearing assets and towards assets that carry capital gains, I have a much harder time seeing how this necessarily twists investment towards housing. Now, it could be the case that some property investors who improve and resell properties quickly are able to disguise normal income as capital gains by this mechanism, but I'd be surprised if the efficient solution were a broad capital gains tax rather than IRD just watching things a bit more closely.

The second story is that we need to reduce our reliance on income taxation and move towards a broader tax base; reducing income taxes in favour of a higher GST and a capital gains tax could be part of such a move. But at least some of the arguments running this way are that the New Zealand savings rate is too low so we need to encourage savings and discourage consumption. It's rather unclear to me that putting a tax on the fruits of investment is a good way of encouraging savings.

My bigger worry on the latter story is that it's pretty unrealistic to think this will be a revenue-neutral move. During the session on tax at the New Zealand Economic Association Meetings, there was at least as much talk about introducing a capital gains tax as a way of avoiding having to cut entitlement spending going forward as their was about using it to replace other forms of tax. Call me a pessimist, but even if the first move on introducing the new tax is to reduce other taxes at the same time, the odds on income taxes going back up to the status quo ex ante are, well, pretty high. Even if the current government is perfectly sincere about wanting to just broaden the base in a fiscally-neutral way, it's then awfully cheap for some subsequent government to ratchet things back up.

Unless the move to introduce a capital gains tax is coupled with serious spending cuts that hit medium term budget projections - like increasing the retirement age - a current move to introduce the new tax while cutting other taxes just isn't a stable equilibrium. It instead makes it more likely that the medium term budget problems are resolved by overall tax increases rather than by spending cuts. I rather prefer the latter, so I worry about moves that make the former more likely.