Rob Salmond has written a post claiming that New Zealand’s tax system is unfair on poor people and generally inefficient. His evidence boils down to this chart of tax rates across incomes:
Rob’s an expert on tax systems so I trust that the figure is accurate, but there is so much it doesn’t say that bears on his conclusion. There are a few points that immediately spring in to my mind, although I’m sure you can think of plenty more.
- Most importantly, a tax system’s incidence should be judged by net taxes, rather than gross revenues. Taxes don’t disappear into a bottomless pit; they accrue to someone as a benefit. Looking at the net tax people pay, once government services are taken in to account, shows a different picture. As you can see, lower deciles receive more services and transfers from the government than they pay for in taxes, and the reverse is true for wealthier deciles. So, even if there is a flat effective total tax rate, that is not the same as a flat tax incidence. I have no idea how this compares to tax incidence across similar nations, so maybe we still have a high relative incidence on poorer people.
- We might also ask why it is that Rob believes it so intrinsically unfair that tax rates are flat. From the same publication by the Institute of Policy Studies, here is the average income tax paid by each decile: Now we can have different views about what fair is, but it isn’t obvious to me that that distribution is unfair without a lot of normative judgments being mixed in.
- Rob also claims that the high GST in New Zealand is unfairly regressive, which has been discussed by Matt numerous times previously. To summarise, GST is not regressive over a person’s lifetime but it may affect the welfare of low income people more than the welfare of high income people.
Rob finally concludes that the tax system is bad for efficiency and the economy. He doesn’t draw any causal links between his discussion and conclusions, and it’s not immediately clear to me why a fairly constant average tax rate across income groups generates any of the outcomes he describes. I haven’t read Rob’s book, so I probably don’t see the connection because it’s complicated enough that you need a whole book to explain it. At least, I hope so because no effort is made to draw the connections in his blog post. This is really the nub of what bothered me about Rob’s post: it suggests a lot more than it shows and the content doesn’t appear to support the conclusion.
Maybe I’m being unfair because he’s trying to summarise a lot of material in a very short post. But, when you’re a really smart political scientist, you don’t need to provide charts without context and conclusions without justification in order to convince people of something. Particularly if you’re so familiar with the arguments that you wrote a whole book about it! I really hope that this post is just a teaser and we’ll see more in this series to back up the hefty conclusions that have already been drawn. Or, perhaps, this is just a ruse to get us out to buy the book 😛