“I’m enjoying this series Matt.”

Cheers, that’s nice to hear. I’m trying to make something that will be clear for both us economists, and for non-economists, without being a violent misrepresentation. And without just assuming “these are the properties of a tax system we want” as a starting point like most tax things do. We’ll see how it goes 😛

“In terms of analysing the distributional impact of tax changes, I think
we’ve worked ourselves into a corner through having a complex web of
inter-related tax & welfare policies.”

We’ve pinned down the fact that our knowledge of changes can be pretty limited – which is why our analysis is often fairly partial eqm. On top of that, we can’t do real distributional analysis with CGE models for the most part, making this all very difficult. Of course, just like you, I have a preference for at least using the partial eqm logic rather than assuming arbitrary things as politicians and interest groups often do 😉

“For example, the change to building depreciation rules hasn’t been
discussed when it comes to supply side restrictions in the property
market.”

That is a very interesting one. I remember at the time there were a number of economists who liked it because they believed that it would more closely align incentives between owning and renting with fundamentals. However, I’m not really sure this is the point.

We should be looking at rental investment property as an investment – and simply ensuring it is treated in a way consistent with other investment vehicles.

In this context, reducing the depreciation rebate reduces the incentive to invest, which in turn will reduce the rental stock and increase rents.

These things are all well and good, I suspect that one of the issues is that we talk about housing affordability, but we never clearly define what it is 😉

“So for each individual tax policy there are enormous secondary effects
that no one talks about, but our basic model assumptions at least help
us tell a sensible story about what the real distribution “could be”!”

Amen. And this is one of the key reason economists favour flat and broad tax schedules, combined with targeted progressive transfers. There are still unintended consequences, but what we are doing is a bit “clearer”.

The hard thing is that I’ll say to people, “we believe this because we accept that is often insufficient information, or knowledge, to fiddle around with policies”. Then they will look at me blankly and say “but it’s easy”. I get this constantly, and I am sure people mean well, but I’m not sure they appreciate how prices work – and that is the real key to the complication.

“Non-economists want one story to explain *everything* and forget that for complex problems even Occam’s Razor hits a limit.”

This is true. Non-economists often don’t recognise the gap between core and peripheral assumptions as well. That is what I am writing in my NZAE paper this year – a paper that is turning out to have very little point 😛