Again with the middle class …

Good article in the Sunday Star Times on the middle class in NZ – the author seemed to share some of the sentiments I’ve had in the past (*, *, *, *,*), where he feels that concerns should be for the worst off in NZ not the “doing alright”.

I love this quote:

Of course, this is about statistics – the average. This isn’t you, living from pay cheque to pay cheque, scraping together the school donation, the football subs, the car repayment, the Sky bill, the rent for the bach this Christmas.

Although as a nerd I’d point out we are discussing the median not the average ;) .  I wonder how many people just nodded and completely missed the sarcasm here …

I found this strange

She argues we have a tax system “very generous” to the rich, with a low maximum tax rate. And she points to Working for Families cutbacks, our unusual lack of an initial tax-free chunk of income, and an increased amount of compulsory student loan repayments – now at 12 per cent – being taken from wage packets, which particularly disadvantages women returning to work.

I realise Susan St John is a good economist, and I’ve heard many good things about here.  But the top tax rate is just over 43% (33% on income, then 15% of 67% for GST), and we definitely have a progressive tax system – I mean, does 43% of each additional dollar sound low to people?  It may be lower than we believe is optimal, but I wouldn’t put it in the low camp.

Also, we don’t have an initial tax free rate because it is not a good idea. I’d point out that non-targeted cuts of this sort will lead to higher effective marginal tax rates for the same level of final revenue – reducing efficiency for no gain.  Essentially a tax free band forces us to increase EMTR’s for the same average tax rate … this is very undesirable.

And I could then say that instead we should target benefits and not get rid of tax on the first $X of everyones income.  In layman’s terms getting rid of tax on the first $X of income means that tax rates have to be higher on other income levels to achieve the same level of spending, it would be better to directly give the very poorest money but keep tax on the very low level of income – this would achieve the same equity outcomes at a lower cost.

When it comes to tax we should also think of tax incidence here – if the very poorest only get paid the minimum wage and would otherwise have no bargaining power, then the minimum wage ensures that the entire cut in taxes goes into their pocket!  Without a minimum wage, and with no bargaining power, it would go into the employers pocket.  This is ok, however it both ignores the impact on hours worked and employment, and insofar as those stay the same the same welfare gain could be provided by simply giving low income people a flat stack of income … targeting the benefit rather than creating another tax band.

And finally, student loan repayments and the payment on investment – people have a choice to invest in higher education.  This is only an equity issue if access to education is being restricted due to it, which is not the point being made here.

Final note, I enjoyed saying this:

“It seems strange,” concludes Nolan, “to demand transfers [of wealth] to the middle-class at the same time we’re demonising those unemployed during a recession and making it harder for them to get benefits.”

:D [Note:  My intention when I said this was to convey the idea that people were saying we should be harder on beneficiaries – the actual change in policy has been more mild, with at most an increase in work testing requirements.  While I think the push to get people to take the “first job available” is unfortunate, and bad policy, what I said to the author here in literal terms exaggerates the actual policy changes that have taken place IMO.  This is of course my fault – so I thought I should clarify here]

  • http://billbennett.co.nz billbennett

    “reducing efficiency for no gain.”

    In an economist sense maybe.

    One argument used in countries where there are tax free allowances is that it frees up tax authorities from collecting lots of small amounts – which is highly inefficient in a different way.

    I saw one news story in Australia saying it costs $X to process a single tax return. Eliminating all tax returns below a certain threshold means each tax payer contributes a positive amount to the total tax take.

    Also, the total number of negative net tax contributors is far higher than you might imagine – large numbers of young people might only earn a few thousand a year. Taking them out of the tax system means far fewer tax collectors, which also increases efficiency.

    • http://tvhe.co.nz/ Matt Nolan

      Hey Bill,

      I don’t disagree with that in an operation sense – and that is very much what IRD does in a practical sense at present.

      But this is a typical implementation issue – a tax free threshold at a low level is irrelevant to it. If we turned around and added a tax free threshold, this is equivalent to giving everyone who is working a direct income transfer … and as a result, we need higher EMTR’s for the same ATR … which has a negative economic impact.

      If we want to give people an income transfer, why would we want to do it for only people who are in employment? Not only is it random and indirect, it appears to be unfair.

      • http://billbennett.co.nz billbennett

        “If we want to give people an income transfer, why would we want to do it for only people who are in employment?”

        You mean like Working for Families? :-)

        • http://tvhe.co.nz/ Matt Nolan

          Indeed. If you want to subsidise children, just frikken subsidise children.

  • http://www.tvhe.co.nz/ jamesz

    If you believe Diamond and Saez then 43% is waaaaay too low. I think it’s your priors coming to bear here, Matt ;)

    • http://www.tvhe.co.nz Matt Nolan

      I did read Diamond, and that paper was poor, and very partial – disappointing coming from two economists I highly respect

      • http://www.tvhe.co.nz Matt Nolan

        On that note, did you see the new Saez paper on inheritance tax. Looks interesting, only been able to spot the abstract on my phone while briefly in Hamilton though.