Series on tax: Part 3 – poll taxes, ability taxes, and fairness considerations

Over on Rates Blog they’ve popped up part three of the six part thing I’m writing about tax.  Over here, we’ve blogged on part 1 and part 2, and added a part 2b for kicks.

You’ll notice I’m doing sometime pretty specific when I’m loitering around the tax system.  I’m talking about the properties of a tax, and then given we don’t use specific types of tax I’m inferring that there may be some social preference involved such that we’ve chosen not to.  Given that, I’m trying to build up concepts of fairness (read vertical and horizontal equity if you will, but I do mean it a bit more broadly than that) from the way society had evolved.

This may not be the case, but it doesn’t have to be.  It is merely a mechanism I can use to tease out these sorts of principals to try and make them a visible part of the “trade-off” we are discussing.  This series isn’t about saying what tax system we “should” have – it is about describing what different types of tax are, albeit on quite a surface level.  As I stated in the first article, it is actually a lot more complicated (and a damned interesting issue) to figure out exactly how redistribution will work from a given policy!

Of course, if we were to describe the type of tax system we SHOULD have, we would want to actual make subjective judgments about value and potential “social preferences for fairness”.  We require these additional value judgments to actually make a conclusion 😉

Next time I’m talking about income, capital, land, and consumption taxes.  I hope you get ready for me to bring up elasticities again, as we’re going to need them 😉


Series on tax: Part 2b – let’s experiment with explanations

In the second part of my series on taxation I wrote about distortion and burden.  But I’m not sure whether my description about wedges and how people respond to prices was necessarily clear enough for a non-economist audience.  So I’m going to experiment with some other ways of articulating what I mean – ways that are equivalent, but for different people may be clearer.

Note:  I apologise in advance if this is a bit scattered – if you have questions or comments note them down in the comments, you’ll be doing me a favour 🙂

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Series on tax: Part 1 – why?

Huzzah, I am writing about tax on Rates Blog.  In Part 1 I ask “why do we tax“.

I get onto other issues later – in fact, this will be a five article series.  Here all I do is combine the idea of “government spending” and “paying for government spending”, and give a little wink to ideas such as equity and tax incidence.  They will play a more central role in the next article, when I discuss tax systems that seem ideal … but that we don’t use for often good reasons.

Let’s be careful judging savers

Although my article might not give that impression at first glance – that is actually where I am in agreement with Bob Jones here.  However, I’m also saying that the RBNZ governor isn’t wrong about bringing up the “savings issue”, and it is fair for us to discuss where marketand government failures are … including in the way housing is treated by the tax system:

The point is that the complaints of economists are not the product of us assuming stupidity, or telling people they are immoral. They are the concerns of a group who believes that there may be some policy relevant issues – for example the peculiar ways that the New Zealand tax system treats housing as an asset – which are hurting New Zealanders.

Far from showing the Reserve Bank governor is out of touch, as Jones suggests, his willingness to discuss this issue illustrates that he realises how important it is for future generations of New Zealanders.

I also get concerned, as does Bob Jones, that the push towards “save more” is really a moral push to tell people what to do with their income.  However, when economists are talking about savings issuse they are saying that our persistent large current account deficits, with a range of other factors that seem unusual in New Zealand, provides a situation that we should analyse.  Analysing it has led economists to note a number of issues where there is a trade-off – a trade-off policy makers and the public feel the wrong choice has been made about.

Given this, people want to change policy settings.  I’m not jumping into this debate in of itself – but I would note that there is nothing wrong with asking the question, and merely saying “I’ve done pretty sweet on property in the past” doesn’t invalidate that.

If we have a bank tax, make it a deposit levy

I argue the deposit levy point (as a form of insurance) here.

The only point I have to add is that some may say “why charge poor old depositors”.  I’d note here that we need to think about the “incidence of tax” – if it is true that depositors have no market power, then the entire burden of the tax will fall on banks and borrowers.

This is all part of a broader debate on deposit guarantees (here, here) – if we rule them out, we rule out the justification for a levy as well.  I’d add there is a big issue I haven’t touched – what is our ability to limit deposit insurance given concerns about “bank stability”, and what do we do when banks are just too big (think Ireland and Iceland).  My real desire is to see transparent, and credible, ex-ante policy … and to be honest about the trade-offs we are facing and accepting.

Either way, my focused has switched back to methodology issues as I’ve realised I need to intensify work on my NZAE paper this year (posts here and here) … in case they actually decide to accept the abstract I’ve just submitted.  As a result, when I next get a chance to sit down there are two posts I want to write about assumptions, and then I might start blogging some of the background material I’ve already written about for the paper.

However, knowing me I’ll just start ranting about whatever I see in the paper instead 😉

Practical experimentation at Microsoft

The Microsoft Bing team responsible for conducting controlled experiments have a paper out that canvasses some practical problems they’ve come across in the thousands of experiments that they’ve run. It’s an interesting read, even if the subject matter isn’t particularly fascinating for those outside the search business. A lot of the things they find sound really obvious in the general sense but would be tricky to pick up in practice.

The main points are:

  • Very few ‘good ideas’ are actually good ideas because we dont’ really understand the behaviour of people outside our social group, even if they’re our customers. About 10% of ideas that make it to experimentation actually turn out to be beneficial to the business.
  • The criteria used to judge success are not always obvious and there can be a trade-off between short-run and long-run success. For example, degrading the quality of internet search results increases market share because users have to spend more time on your page. In the long run that wouldn’t hold up but it could take many weeks to see the drop-off in the results.
  • Understanding your instruments is crucial to interpreting results. Some results are an artifact of the survey method and that can often be really hard to pick up. This is often the case for economists when we don’t read the details of survey methods. The best applied economists actually take advantage of the design details of particular surveys to conduct natural experiments.
  • Don’t extrapolate from trends in the immediate aftermath of shocks. When you watch data in real-time after a shock you’re often just seeing a trend towards the long-run mean that will shortly stabilise.

HT: Andrew Gelman