Cunliffe, fairness, and tax

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:

As Dave/Caffeine Addict pointed out, the play Cunliffe is working through here is one of fairness, the same play that Labour used in the past (via Whale Oil).

In fact David Cunliffe is very clear on his rhetoric:

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:

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!).

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 ;)

  • Dan

    It seems like you’d have been better off awaiting some actual detail rather than anticipating what he might mean.

    “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”

    As an economist, you will no doubt be aware of the bill the government is running up as a result of cutting taxes in the higher brackets, but not making very serious spending cuts to balance them out.

    National know they’re dog tucker if WFF or interest free student loans are sacrificed to make their tax cuts affordable, and so they continue to borrow to fund their 2008 election bribe. Try my formulation of your conclusion:

    Tax cuts for the rich may be good politics, but when I see it being paid for by borrowing money that some other government is going to have to pay back later on (and how else will it be paid back, but with taxation? National are selling all the productive assets) I hear politicians that are 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”

    • http://tvhe.co.nz/ Matt Nolan

      “It seems like you’d have been better off awaiting some actual detail rather than anticipating what he might mean.”

      I don’t see why – I was able to cover off the principle pretty quickly, and I was able to point out that it is early days and hopefully people are consious of the full distributive impact of the things they suggest :)

      Tis better to be proactive about these things than always reactive right!

      “As an economist, you will no doubt be aware of the bill the government is running up as a result of cutting taxes in the higher brackets, but not making very serious spending cuts to balance them out.”

      The government budget is already nearly back in balance – the key concern is (and has been for the last 40 years) superannuation which will blow a hole in government finances over the next decade. I’m glad to see Labour as a whole suggesting lifting the retirement age, but even then I fear that may be too little too late – and in that context, being honest about tax increases would be a good thing, I agree.

      But if we try to bank on adding an additional tax bracket at the top end to do this, current estimates suggest it will raise very little revenue and be punitive – as I noted above. This makes this point a bit of a non-sequitur when applied to the argument I’m making above!

      • Dan

        Thanks for the comments.

        “But if we try to bank on adding an additional tax bracket at the top end
        to do this, current estimates suggest it will raise very little revenue
        and be punitive”

        I guess this is what I find premature – we don’t know if it will be an income tax bracket, or other measures. Personally, I’m hoping for ‘other measures’, because it has more potential to balance things more fairly.

        Fairness is missing anyway right now – Key gave the working and lower-middle brackets a much smaller tax cut than the ‘at least $50 a week’ he repeatedly mentioned in his ’08 campaign, and then followed the slap in the face with a kick in the shins, putting up their GST (after saying he wouldn’t). When there is already this unfairness, I am a little cynical about a lack of comment about it from economists despite its currently factual existence, but then wild speculation occurs as soon as the possibility of the better off getting their turn from the taxman.

        One other point I would pick up on:

        “The government budget is already nearly back in balance”

        That might be the case, but government debt is not addressed directly by this. A balanced budget isn’t going to pay back the very vast amount of money they’ve borrowed to fund their tax cuts over the last 5 years – only a significant change to revenue streams will achieve that. With productive assets being sold down, taxation is the only way we’re going to stop that debt hanging around like a bad smell and compounding. A balanced budget won’t change that. A significant surplus is the only remedy, and we won’t get it without some creative thinking on tax. That’s what I’m waiting to see from Cunliffe. If Labour don’t get tax revenues up, the debt burden of National’s tax cuts will keep us treading water well into the 2020s.

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

          Heya – all good, enjoy discussing things!

          “I guess this is what I find premature – we don’t know if it will be an income tax bracket, or other measures. Personally, I’m hoping for ‘other measures’, because it has more potential to balance things more fairly.”

          This is a fair point – I just wanted to make sure I had a post down discussing bracket changes with all the information, in case that turned out to be the case!

          I would add that there was another point in all this – indicating that the tax change wouldn’t do much within the current structure. If we want to view these things differently it is important to see how the whole structure of the tax system might need to be adjusted, and whether the tax-benefit system meets our views of fairness!

          “Fairness is missing anyway right now – Key gave the working and
          lower-middle brackets a much smaller tax cut than the ‘at least $50 a week’ he
          repeatedly mentioned in his ’08”

          I would note here that, even with the GST increase, the tax changes made the
          tax system more progressive – but this is without looking at “spending” which
          will have to be lower than it otherwise would be.

          Also, Treasury has moved towards a living standards framework, with poverty
          and inequality measurement and focus, over recent years – this issue has gained credence under a National government, and so I think saying fairness is ignored may overstate the case.

          I am not saying they are doing enough, or that I agree with their policies,
          just noting the other side! I have been critical of things from both parties here :)

          “That might be the case, but government debt is not addressed directly by
          this. A balanced budget isn’t going to pay back the very vast amount of money
          they’ve borrowed to fund their tax cuts over the last 5 years”

          The stock of government debt isn’t too bad – and the main stream of government revenue is really taxation from the private sector.

          Also, if they are selling assets at above market value, they can then use the proceeds of these sales to pay down the stock of debt further if that was appropriate. Or they could use it to invest in other assets.

          • Dan

            It will indeed be interesting to see what Cunliffe has up his sleeve. Populist noises aside, I think he has some innovative tax policies up his sleeve which will be progressive, but taking the opportunity to target what the state currently misses out on with its focus on income tax. I’d like to see things diversify from that.

  • Stuart Munro

    The ‘tax avoidance stratum’ now pay less than half the tax that their parents generation did, and yet their complaints are everyday more vocal.
    Your flat tax system is manifestly unfair as lower incomes have few to no avoidance options. Roosevelt pushed tax up the 95% for top brackets – there’s quite a bit of scope beyond these flat tax neo-liberal nirvana-like promises that Krugman’s evidence states never deliver promised growth increments.
    If nothing else, in spite of draconian austerity measures, selling assets right left and centre, and faking the currency up to about twice its purchasing power, Bill English is still borrowing $300 million a week. Simple prudence would be to reverse tax cuts to a break even point before any further analysis.

    • http://tvhe.co.nz/ Matt Nolan

      “Your flat tax system is manifestly unfair as lower incomes have few to no avoidance options.”

      When we think about how “avoidance” works in NZ, this suggests the complete opposite few – a flat tax system with targeted progressive transfers is MORE fair because it limits avoidance.

      When you have a progressive system with differential tax treatment for different classes of income, it is easier for high income individuals to cut their tax burden.

      “If nothing else, in spite of draconian austerity measures, selling assets right left and centre, and faking the currency up to about twice its purchasing power, Bill English is still borrowing $300 million a week. Simple prudence would be to reverse tax cuts to a break even point before any further analysis.”

      I’m sorry, but this seems very contradictory and in many ways unrealistic to me. For example:

      1) Draconian austerity measures: This is the closest – the government may be increasing spending at a slower rate than you feel is appropriate. It isn’t cutting spending though, so this seems over-wrought.
      2) Selling assets left and centre: They are partially floating power companies at ABOVE market value … this implies a capital gain to society if for some reason investors are willing to take on this capital loss (which they did weirdly).

      3) Faking the currency up to twice its purchasing power: This is genuinely meaningless. The government can “boost” the value of the dollar above fundamentals by increasing government consumption, but this is the opposite of what you are saying in the first part.
      4) Simple prudence would be to reverse tax cuts to a break even point: You say austerity is savage then suggest increasing austerity! And lets not forget that the removal of the top tax rate only had a tiny tiny impact on government revenue from what is mentioned above.

      Look, I am not a fan of any of the parties – but at least when we are talking over here on TVHE can we try to avoid talking about the actual party politic too much, and think about the underlying consistency, and impact, associated with policy statements. Neither side are “bad guys”, but for society to properly express what they desire we need to make sure the policy prescriptions politicians make involve clear trade-offs :)

  • Alfred Duncan

    Loved this one Matt: “We can’t have “massive gains” by subsidising it and “small losses” by taxing it”
    Brilliant!

    • http://tvhe.co.nz/ Matt Nolan

      Cheers, consistency across policies is something I’m pretty keen on – and something I might try to keep more of an eye on this election season!

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