Series on tax: Part seven – externalities

We are nearing the end of the tax articles – after this one there is only “inflation tax” left!  The current article is on the free lunch associated with externality taxes!

As I say at the end of the article, go here and read Eric Crampton talking about them.

My key point is that we’ve been criticising taxes for creating a “wedge” between the private and social value of a good … but what happens when that wedge exists in the first place!  What do you know, a tax can improve allocative efficiency!

However, we have to be careful not to get too seduced by this idea without thinking about it critically.  We may see a wedge when none exists, or we may exaggerate the size of the “wedge” by double counting all sorts of costs that are priced in.

Also, these types of policies can sometimes be closet ways for groups to impose their value judgements on others.  We need to make sure we are clear about this, and that the value judgments involved are transparent.  The sickening comments by some around smoking is indicative of this – I’ll be honest comparing smoking to polio makes me shiz my pants.  No matter how much you morally dislike smoking this is not cool.

If we can’t accept the heterogeniety of choice, and the fact that “pleasure” and “benefit” matter, we are going down a path I am uncomfortable with.

Article on Rates Blog on inequality

I didnt’ realise it was “inequality fortnight” when I wrote this - it was just an article I needed to do before carrying on the “tax series” (as the next article there is on progressive taxation).  So I’m sorry if you have suffered from inequality overload.

On that note, here is Geoff Bertram talking about the “pay gap” within organisations – where I think he is being reasonably disingenuous, an issue I might go into more detail on another time if you like!  David Farrar isn’t impressed, and I have sympathy for what David is saying (even though I wouldn’t go as far).  Even though I do like the idea of honours and pay being interchangeable.  Sadly I couldn’t find a clip of the Yes Prime Minister episode that has this … so here is the Yes Minister episode that touches on similar things.  Update:  Here is part of the scene.

Also here is a neat little breakdown of some inequality data across a series of countries by Xavier Marquez.  And here is some US stuff on income mobility – pretty danged useful information.

CIS Winter Policy magazine

Via Stephen Kirchner I see the latest issue of the CIS Policy magazine has a new issue – the Winter 2013 one.  I’ve contributed to this one, so I thought I’d point out that I’m blabbing on about exchange rates, inflation targets, and the neutrality of money – party times.

I didn’t realise Scott Sumner was contributing with a primer on new market monetarism, that is pretty cool.  Sounds like he is also going to be in Australia in a month’s time – any Aussie readers should definitely go along!

For me, all our debates about monetary policy boil down to our assumptions around the long-term neutrality of money – and the mechanism via which money is both non-neutral over one time horizon but neutral over another.  This is an old debate, and true difference between heterodox and mainstream is the view of long-term money neutrality (anti for heterodox, pro for mainstream).  When I heard John Quiggin at NZAE13, this was effectively the case he wanted to build – and when I’ve had comment discussions on the blog from MMT (modern monetary theorists) that has been my interpretation as well.

There is a lot of economic history, and then empirical work (through the 1980s and 1990s), out there discussing all this – that is one area where a load of blog ink could be spilled :)

My personal view?  LR neutrality will hold except in the rare case where a shock (where I’m thinking of a shock not just the innovation itself – but includes a policy error due to timing) is large enough to see the economy co-ordinate in a “inferior” equilibrium.  I’d note that NGDP targeting deals with these cases.  And yes, this sounds like Noah Smith’s view of Japan – but I swear this was the view I was taught at university, or at least how I ended up interpreting it ;)

Rant time: House sales to non-residents

The rant isn’t here – it is over on

I’d note that I’m relatively sensitive about the idea of prejudice and how social norms form against “groups”.  Policy that is formed in this sense has a massive institutional weakness – namely that it relies on using an “indirect signal” to try to transfer, a signal that can be misinterpreted.  As a result, when defending against those sorts of policies I become a bit more willing to show my hand and express directly how uncomfortable it makes me.

Essentially I make three arguments in the piece:

  1. A ‘bubble’ from foreign owners is a transfer to NZers – no problem!
  2. A medium term affordability issue does not stem from foreign owners – it has to stem from supply issues!
  3. Any normative/distributional concerns about the transfer of resource from current NZ owners to current (and future) NZ buyers is legitimate – but better to deal with it through the tax and benefit system and intergenerational equity, rather than stopping trade and banning non-residents from purchasing!

A broader point was that, if we want to use a “solution” we should actually have a problem in mind first … just making a “solution” and hunting for a problem is not a good form of analysis.  Although it is one we are all guilty of at times!

Update:  I’ve been told that a lot of people are complaining about being called xenophobic.  Well that is nice for them, the action of pushing for house sales to foreigners being banned is still xenophobic – these people have a fear of someone else trading with someone else who just doesn’t have a NZ passport.  They are willing to hurt both foreigners and the people who would trade with them, simply to allay this fear.  I’m not going to stop saying it just because it offends your sensibilities – I think the entire idea of these bans is morally wrong, why would I go back on this just because it makes you feel funny.

Banning non-residents from buying houses isn’t “brave policy to save the poor in New Zealand”.  It is weak and pathetic policy for those who are uninterested in the real poor and would prefer to pretend they are doing something by limiting people’s rights due to their nationality.  I can only rationalise the fact people are willing to try this by stating that they don’t really understand what they are saying – hence why I stated in the article that we need to define what the problem is and then we can show that for every “problem” there is a better “solution”.

If you find it difficult to actually think about these trade-offs, and to accept your inherent bias against other human beings, then STFU about policy.  If you want to actually discuss trade-offs and stay away from arbitrarily attacking non-New Zealanders, then I’m more than happy to chat and to investigate the data and research that is out there on these especially complicated issues.

Note I’m not even rallying against capital controls here, I realise in specific extreme situations they may have a place (although just doing it in housing for foreign buyers doesn’t really make sense) – but the debate out there isn’t about this, it is about whether non-residents can buy property without really discussing why (usually first home buyers blah blah blah).  And is often filled with commentary about “Asian buyers”.  A level of tacit racism that really needs to GTFO.

Oww, and if you want to know what kind of “vested interest group” I am, I own zero properties – I rent.  I live in Wellington.  I am 29.  I am male and white.  Enjoy.  I am in the group who is being “ripped off” by the fact I can’t just buy a cheap house … I’ve just learnt to actually think about others in the marketplace before I rant incoherently ;)

Series on tax: Part 5 – A primer on consumption tax

Yet more on tax – this is part 5. Here are the blog posts on part 1, part 2, part 2b, part 3, and part 4.

The promised “Part 4b” is still in the pipeline – it’ll appear at some point.

This time we discussed consumption taxes, and the fact that we may not like the idea of taxing consumption differently based on when it occurs.

I avoided talking about commodity taxation and then talking about the result where we don’t want to tax intermediate inputs.  I also avoided going too far into the debate around the Atkinson-Stiglitz paper (Saez here has a great piece(REPEC)).  I feel that when just describing the idea of income, poll, and consumption taxes adding these additional issues would add more confusion and less understanding.  I could have added a bit more at the point where I was talking about Ramsey taxation – especially the point that if people with different ability have different preferences we can use variable consumption taxation as a form of redistribution.  The idea of a progressive consumption tax is interesting.  However, the goal in this article was to make consumption tax relatable to forms of income tax – hopefully that got through :P

I’m saving a lot of these addition factors for when we introduce the talk on progressivity and the equity-efficiency trade-off for the next article.  Urg.  Let us see if I can manage it in one article!

I have avoided using the term “marginal tax rate”.  I don’t know how I’ve done this.  I suspect it will make an appearence in the next article ;)


Series on tax: Part 4 – A primer on income taxes

Over at Rates Blog they have popped up part 4 of the series on tax I’m popping together.  Here are the blog posts linking to part 1, part 2, part 2b, and part 3.  I would note this will at least be an eight part series, instead of six now, as I’ve split up this specific article.

Originally I wanted to talk about income tax, consumption tax, and ideas of progressivity and implementation all at once.  Now I realise it will have to be 3-4 articles on these issues.

The main trust of this piece was to ask “why is income tax distortionary when a poll tax is not”.  Given this idea, we can talk about the “relative efficiency” of types of income tax (namely labour and capital) and point out the idea of time – and how this impacts on the “accumulation” of capital, and thereby the “stock” of capital.

Personally, these things make more sense IMO, and are more closely related to our idea of “transfering goods and services” when we look at output taxes – specifically consumption taxes.  Next time, this is exactly what we do!  Originally I couldn’t bring myself to seperate the income and consumption articles … but at 3k words I sort of had to.  As a result, I’d suggest reading next fortnights article as an extension to this.

Also, I plan a “part 4b” for here.  I can imagine some people may get confused why I view the deadweight loss through the “price wedge” – when if we had perfectly inelastic demand we would “sell” just as much but the price would be higher.  Doesn’t this mean there is no deadweight loss, and that this tax is just like our poll tax?  Well no, but to explain this we need to actually dive into some of the economics they do in first year university.  We will look at indifference curves and budget constraints (we are comparing Marshallian and Hicksian demand) – we will introduce the tax, then assume an income transfer that brings our person to the same level of utility (compensating variation).   The reason we don’t see it in the single good case is that we are not considering the impact on income/wealth from the tax – and what “perfectly inelastic demand” means in terms of income and substitution effects (pro-tip – they must be canceling each other out to leave the quantity demanded at the higher price unchanged!).  Anyway, I’ll leave that to the post.