Very true – externality taxes are a huge sticking point.

The best way I can think of them is that they should either be set in the PTA, or set “relative” to the general tax measure in the PTA – depending on how we view the “externality tax”.

I would prefer that revenue is raised through externality taxes instead of other forms of tax myself – hell we are getting efficient price signals and some revenue 🙂

But I agree that the design will be difficult. Personally I would like to see us tax areas where there are externalities more, e.g pollution, water use, possibly replacing some income taxes. These sorts of structural issues would become more difficult if we hand over tax to a third party, as they are contentious and probably best decided on by elected representatives.

I think we are very much on the same page here – it is just the way the issue is framed.

It seems that many people agree that a flat, single rate, tax could be set by a central authority – however, the other welfare considerations associated with other tax types have to be taken into account.

This is an issue of design isn’t it – give a flat tax instrument to some independent body subject to a PTA. Use the PTA to set the other taxes relative to this central tax (as well as setting up the “medium term” in some more detail. And furthermore, the government can adjust benefit policy to try and “increase progressiveness” if that is its prerogative.

However, having this central tax set centrally will still add transparency and make stimulatory fiscal policy a possibility.

“If they want to spend less, they can just return the difference in benefits, with transaction costs and perverse incentives compared to not collecting it in the first place.”

Benefit spending is spending less 😛 I can’t really imagine a situation where the government would want to “spend less” – and so I assume that in this case Treasury would probably look at immediately cutting taxes.

Their goal would be keeping the budget balanced in the “medium term”.

Furthermore, I think the cost of “churn” is very over-rated in New Zealand – as computer systems become more efficient churn will become a complete non-issue.

“If they want to spend more, they can just borrow, thereby forcing Treasury to increase taxes so we can repay it. Or they could find inefficient ways to raise extra revenue, e.g. road tolls or vehicle license fees instead of a petrol tax.”

This is an important point agreed.

There are two things here – first, they “overspend” and Treasury increases taxes.

That is what we want to happen – and Treasury then tells the public, if the government wants to spend that extra we have to pay more. It is more transparent then current policy where the tax cost is often treated separately from policy. As a result, I see this as an advantage.

The second thing, “other taxes” is an important issue to sort out.

Ultimately, tax rates on other things should be set by Treasury as well so the government has no way to “raise” revenue – the government should pick a spending path and the way of raising that spending should be determined separately.

The problem is though that a “petrol tax” is often termed an “externality tax” – the purpose of this tax is to actually achieve some policy with pre-determined value judgments, a subject which involves the “role of government” rather than technocrats.

As a result, “externality taxes” do pose a potential difficulty – if in a policy targets agreement the government can state that externality taxes should be set to maximise “efficiency” then we have no problem, but it would be hard to get agreement surrounding that.

If they want to spend less, they can just return the difference in benefits, with transaction costs and perverse incentives compared to not collecting it in the first place.

If they want to spend more, they can just borrow, thereby forcing Treasury to increase taxes so we can repay it. Or they could find inefficient ways to raise extra revenue, e.g. road tolls or vehicle license fees instead of a petrol tax.