A $150,000 pay increase?

David Farrar states that this is how Labour has framed the idea of tax cuts – a $150,000 pay increase for Jack Paul Reynolds, and only a few dollars for the rest of us. David states that we must look at the macroeconomic impact, and that we can’t focus on who gets what, specifically he says:

If the debate becomes one of simply who gets how much, they will have problems

However, I think the debate about who gets what is important.  However, I do not think that it actually falls in Labour’s favour.

Jack Paul has specific skills, he is hard to replace, and is seen to add a lot of value.  The “elasticity of demand” for his service is very very high low.  Furthermore, he has a lot of high paying outside options – he has a good reputation as a CEO.  This means that his “elasticity of supply” is very high (note that I am using quite a discrete margin in this case).

What does this mean?  Well, when he labour income is taxed, the FIRM will pick up the tab – as a result his gross wage is representative of this.  Now this also indicates that, when taxes are lower, the tax payment by the firm will be lower.  As a result, over time his gross wage will adjust DOWN to represent this lower tax rate.

As a result, the direct impact on Jack’s Paul’s pay packet is likely to be very low proportional to both income and what other people receive.  It is Telecom that faces most of the “incidence of tax” in this case – not him.

As a result, a tax cut isn’t a $150,000 pay increase for Jack Paul.  Nowhere near in fact.  National should be using basic economics to debunk these sorts of myths, so that Labour can’t try to pitch it as a class war.

  • StephenR

    How would you condense this down to a couple of lines that everybody understands then eh smart guy!? 😀 Took me a couple of readings to get it I must admit.

    Reynolds is actually ‘Paul’ not Jack, but whatever.

  • @StephenR

    “Took me a couple of readings to get it I must admit.”

    That has to do more with my poor writing style then anything else – I mean I’ve already found a huge typo 😛

    A couple of lines:

    When there is a tax bill the firm and employee have to figure out who will pay it. If the employee is really important (like a CEO) he has a lot of power to negotiate that the firm pays it. As a result, when taxes are lower most of the benefit goes to the firm to the important employee – as they have a lower bill to pay.

    “Reynolds is actually ‘Paul’ not Jack, but whatever.”

    Crap, you are right. I just took the name straight off Kiwiblog and didn’t think about it. Lets just assume it is a “hypothetical CEO” – I suspect that is what Kiwiblog was doing, and it still works in this case 😀

  • Yeah I got it towards the end. It’s easy to see how the media can position things differently whn the need to and no one questions it.

  • Bren

    So, instead of Paul Reynolds getting a $150,000 increase – Telecom will.

    And this is better spin wise?

  • That’s the problem with the media. They for one, blow things way out of proportion which is totally ridiculous. When I first looked over this article, my assumption was the rich gets richer and the poor gets poorer.

  • wow that what i call a big pay increase