Kiwiblog states that he disagrees with the Herald on a tax levy being introduced now. I think his points on it slowing the economic recovery are valid – increasing taxes to pay for investment when the government can borrow the money at a lower rate of interest AND many consumers are actually locked out of credit markets AND incomes are well below what the economy can achieve is bad policy for economists of all political stripes (ceteris paribus).
But lets say that we currently have spending and taxes balanced over their lifetime IGNORING one-off events. As a result, we want to pay off one off events with a temporary levy. Ok, I’ve assumed that. Now assume that we want two other characteristics of the levy:
- The current generation wants to pay for the rebuild – even though it is their capital stock that got smashed. As a result, it must be a relatively short-term levy.
- We are concerned about the economic recovery, and would prefer to not delay it if possible.
Ok, so I’ve made a bunch of huge assumptions that point to us, at some point, HAVING to have a temporary earthquake levy.
However, even with these big assumptions there is no reason to put in such a levy right now. We should say “we will introduce the levy on consumption goods from December 2013 till blah which is the period when we think the economy is back at its “potential” level”. Advantages are:
- The impact on economic activity is indeterminate instead of negative. Future wealth for this generation is lower, however the relative price of consumption now is lower. As a result, the net impact on spending could go either way – when we have insufficient aggregate demand having an indeterminate impact is better than having a negative impact.
- This is a relatively short time horizon, so the current generation is paying for it.
- We make the levy money.
So if we have to have a levy, why don’t we do it when the economy is on an even keel – rather than during a point in time when we are in a historically potent recession. Unless the people claiming that we need a levy don’t actually think the recession is particularly large … in which case a lot of other things that have been said about NZ’s economic performance by these people would be inconsistent 😉