It’s a hard road, trying to figure out what economists love

Personally, I love movies about epic historical dramas, or potatoes – but this is hardly representative of economists.

And when it comes to economics two things hold true:

  1. Economists actually agree about a lot more things than people realise.
  2. Many of the things people think we agree upon we don’t.

With this in mind I thought I’d have a quick look at the policies economists love that were put up over on Kiwiblog.

The third one states that economists would love if corporate tax was taken away – because it really is double taxation on an income stream, and an inefficient form of redistribution.  This is true.

However, I wouldn’t say that economists widely agree that we should set corporate taxes at zero – especially since there is some debate about whether we should be taxing investment/interest income.  There is an agreement that we should treat all investment classes the same, but less of a consensus about the level of taxation then there used to be.

On that note comes point four.  Yes, economists generally prefer consumption taxes to incomes taxes – but the way to view this is as a cut in the tax on interest income … as a tax on labour income and consumption are equivalent, implying that an income tax in of itself is a tax on labour and interest income.

This comment in particular is disturbing:

Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

A tax on income and a tax on consumption both reduce real after-tax income – by taxing one instead of the other we don’t “magically” discourage different things … this is confusing partial equilibrium logic with a more general view of the economy which is appropriate for discussing tax.

On top of this, a switch from income to GST taxes is an immediate transfer from savers to borrowers – is this fair?

Five is tax carbon because it’s “bad”.  But is this really the reason?  I was under the impression that in a small open economy like NZ we tax carbon due to raise funds for a potential Kyoto liability – as any “externality tax from global warming” would not do anything because we are so small.  Hence why there needs to be international co-operation.

Six is legalise weed.  There is wide agreement here that something should be done, and a general swing towards legalisation and treatment of addicts as suffering from a mental health issue rather than a criminal one.  But I’m pretty sure we could also find many economists that feel that legalising may provide an inappropriate signal that could lead to worse outcomes – after all, it is well known that when you explicitly give something a price people do treat it differently.

Note:  I am pointing out there are issues here – even though many of these policies are central to my own view of what is appropriate.  See, I can attempt to be objective 😉

  • Will

    <blockquote>a switch from income to GST taxes is an immediate transfer from savers to borrowers</blockquote>
     
    How does this work?

  • “How does this work?”

    A saver by definition has a bunch of earned income that they can dissave (to get consumption) in the future.  A borrower has to earn more income in the future to pay for past consumption.

    By lifting income taxes and cutting consumption taxes, you are then lifting the average tax rate paid by people that have saved up until that point (as they aim to consume more than they aim to earn) and push down the average tax rate for people who have borrowed (as they have to target earning more than they will spend on consumption).

  • DetMackey

    Yes, the fourth is very strange.  As I said on Danyl’s post on the same topic:

    We like income, so why tax it?’, they ask, but then go on to suggest a consumption tax. People don’t like income by itself. People like income because it allows them to purchase and consume things! We like consumption, so why tax it?
    There are legitimate reasons why we might favour a consumption tax over an income tax, and vice versa. Would have been nice to see those reasons outlined as opposed to some silly ‘consumption is bad’ statement.

  • Ben

     Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

    This bit I don’t understand at all – I thought consumption taxes werre a terrible way to restribuite income. Didn’t we just have this debate with Labour’s GST policy? And it’s expensive.