The full set of briefings to incoming ministers (BIMs) following the recent election are now helpfully available on a single page, and between them cover a host of quite interesting, practical, and in some cases timely economic questions. One quite meaty suggestion that I noticed in Treasury’s BIM related to taxation, but it was given very little space (perhaps they knew that it would be ignored?).
The full passage is quoted below, but the bit of interest is in the final bullet:
Over the medium term, there is a need to shift taxes from bases
that are internationally mobile and have the most detrimental
impact on growth to tax bases that are less mobile and less
damaging to productivity growth. Policy direction that will
contribute to productivity improvements and revenue
• reducing high marginal personal tax rates in order to improve
incentives for labour supply, entrepreneurship and the
retention of skilled labour within New Zealand
• equalising rates of tax on different forms of investment to
improve savings and investment, including reducing the rate of
tax on some existing forms of investment income and
introducing a tax on capital gains to reduce the diversion of
investment into tax-favoured or tax-exempt forms
• moving towards a tax system more heavily weighted towards
consumption taxes and, over a longer horizon, with a greater
contribution from property taxes.
Now I have always found our tax system (and most tax systems internationally, actually) bizarre. I’m actually not against progressive taxation, but taxing labour always seemed a bit daft to me. The only really good explanations that I have ever found for the government funding its activities in this way is that: (1) it is administratively efficient; and (2) it is easier to impose taxation progressively by imposing it on income. [A third point might be that ‘we have always done it that way’, and I think that this could be the biggest reason why we continue to levy funding for government activities through income tax].
Now I don’t necessarily disagree with these points, but I do wonder if we couldn’t manage to achieve these objectives through different tax systems if we really tried. Consumption taxes would certainly be a component of this (and already are to an extent), but I feel that they would need to be used in conjunction with other forms, since I don’t think that fully raising tax revenue on consumption is either equitable or constitutes good fiscal risk management.
Taxing externalities is generally supported in theory, but seldom introduced (barring cigarettes and alcohol and a few other product classes) and there is certainly room to do this more. I sometimes hear that taxing externalities isn’t a very good solution since you can’t fund much of the governments need for dough in this way, as the ‘economically efficient’ externality tax is only equal to the difference between social and private costs. However taxing labour is not in any way related to externalities – so why not over-tax the ‘bad’ things, since it is no worse than the status quo and at least some of it will be efficient? There could be a precautionary principal here – we don’t know exactly how large the externality is, but if we overshoot we will at least know we covered it. Again, I see how this is inefficient, just not how it is less efficient than the status quo.