I see that there is a battle for the leadership of the Labour party, as a non-partisan economics blogger I have no direct interest in this. But I was interested in some of the comments that appeared when David Cunliffe announced he was throwing his hat in the ring.
This quote by “The Ruminator” on twitter sums up the tone of where David is going nicely:
— The Ruminator (@RuminatorNZ) August 26, 2013
In fact David Cunliffe is very clear on his rhetoric:
Together, under a Labour Party that I lead, Labour will always remain true to fairness, equality, opportunity and community.
— David Cunliffe (@DavidCunliffeMP) August 26, 2013
This is the sort of thing people want to hear from a political party – I mean ALL political parties are true to a series of moral principles around these vague terms, the point of elections is pick the group of people who share our moral judgments (and these work imperfectly – which is why economists add to this by stressing caution in action). This is a completely and totally vacuous statement, one that is held by every political party – but it is the direction and the language that matter. In this context this offers a vision and a way to “describe” policies to the public. In that way this makes complete sense.
Furthermore I think the direction is a sensible one – we also need to recognise trade-offs – but I appreciate where Cunliffe is coming from here
Enough amateur political science from me though. Back to economics – so what did I pick up on in this sense?
Principles of fairness, equality, opportunity, and institutional/community engagement all come from some premise based on an expected outcome on a series of individuals. In that way, we need to carefully discern the impact on individuals (both in terms of their own choices, and the choices of those around them) within given policy settings. We have some “principle” of fairness, but we need to ask ourselves what trade-offs exists, and in what ways as a society are we willing to face these trade-offs – recognising the way individuals are making their own choices given the social structure around them.
In this way I wish to tie together the strings on what Cunliffe is starting to suggest and the Fifth Labour government which came in on a similar vein of feeling. Here is a tweet from Duncan Garner:
To Cunliffe: Will you raise taxes on the rich? Cunliffe: You bet.
— Duncan Garner (@Garner_Live) August 26, 2013
Remember when Cullen said he would get the “rich pricks”. This is the same sort of thought process, and gives the same general policy prescription – it appears to be mainly based on punitive measures, and potentially views that we are in a “zero sum” game where all that matters is how we move things around. To me this feels as if it is based on the underlying ideas of folk economics.
However, if we are going to actually ensure we meet our principles of fairness, and if we want the actions of society to be informed to help meet this, we need to think a bit more carefully. I appreciate the idea that current progressivity may be seen as too low, and in that context we can meet the issue head on!
The kicker in the NZ context is we’ve already had a situation where we introduced, then removed, a higher tax bracket within the same “institutional structure”. This allowed us to get an idea of the elasticity of taxable income in New Zealand relative to the high income bracket – as seen in this neat Treasury paper. The high measured elasticities implies that these taxes are likely to cause significant changes in behaviour, and raise far less revenue than we expect otherwise.
Now this is due to a mix of labour supply responses (a small part) and tax avoidance. This leads to the conclusion, cut avoidance! In a fun twitter exchange that was suggested by another economist here (note the brief language is because we are trying to work in a character limit, with others included!).
— Chye-Ching Huang (@dashching) August 13, 2013
So indeed, if we are going to introduce a top tax bracket we NEED to then take into account other institutional elements. Note here avoidance is largely not “just not paying tax”/evasion, it is reclassifying tax, it is putting it in trusts, it is pushing more expenditure through the business – to get rid of this you have to change the tax system MASSIVELY.
And as soon as you do this (such as by increasing tax on capital) the sooner you get the “long-term” negative impacts of the tax. Capital and human capital accumulation will be impinged, in the long-run, by their rate of return being lowered.
If we think small changes in the ROI (return on investment) will matter for these things, then the tax fits this bill! If we are going to talk about how important investment and education are and that we should incentivise, then changing the tax system to ping the returns on both these things more contradicts that. We can’t have “massive gains” by subsidising it and “small losses” by taxing it – let us at least try to be consistent
However, the most concerning point for me is thinking about who we hit when we put these taxes in place. Just because you levy the the earned income of someone you don’t like doesn’t mean they’ll end up paying it, if they can just change the price they make someone else pay them, or change the amount they pay someone else! Ignoring this seems like a recipe for government to introduce unfairness, arbitrariness, and pain.
Bah, what would you suggest then!
Ask ourselves, what is unfair, what are the issues where people are missing out on opportunity. Then target those, tell society you will get in there and fight for them through the way government spends.
On the tax side be a bit more honest about our lack of knowledge around who ends up bearing the burden. Have a relatively flat tax system where tax is difficult to avoid, and have your redistribution (fairness considerations) based on what the government produces and where it directly transfers funds.
Taxing “rich pricks” may be good politics, but when I hear it I hear politicians that is more interested in marketing themselves than in truly fighting injustice and poverty in society. I hear empty rhetoric rather than a true push to get buy-in to help societies worst off through the most effective means at our disposal