Matt Nolan

The overestimation of Pigovian taxes

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Over at Anti-dismal Paul Walker points at a paper on Pigovian taxes by John VC Nye from George Mason university. In this paper Dr Nye makes the following point:

A claim about the optimal Pigou tax is a joint claim about the size of the externality and about the optimality of observed outcomes, not just the externality. Measuring the size of the observed Pigovian externality – even if done perfectly — is not a reliable guide to the proper level of the Pigovian tax because in a world of efficient transfers we will still observe some externalities

Now this is very true – if we sit in the world of partial equilibrium analysis (which a lot of Pigovian analysis is based on) for too long we can forgot the fact that markets do not act independently, and this is bound to colour our view on the correct level of the Pigovian tax.  At some level this is a critque of Dr Mankiw’s Pigou Club.

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Matt Nolan

Fiscal responsibility in taxes

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With the actions of the finance minister and the RBNZ both contradicting what I have learned about sound economic management it is time for me to take to task some of the more aggressive issues I have avoided up until now.

Today, my aim is to discuss the (lack) fiscal responsibility associated with Dr Cullen’s nine years in charge of taxes.

Now, there are two ways people have stated that his tax policy is a success:

  1. Through Keynesian economic management,
  2. By increasing progressiveness.

However, if either of these were his goals – the means he has used to achieve them has not be satisfactory. Let me explain.

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Matt Nolan

Kiwisaver and savings types

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So far we have described that there is some belief that we have some problems in our capital market, this has lead to the statement that we have a “savings problem” and to solve it the government introduced Kiwisaver – which may not even increase national savings (infact it might reduce it). These articles have put us at a point now where we can ask – even if Kiwisaver does not increase national savings, could it do any good.

As mentioned in this post, our “savings problem” may not stem from insufficient savings per see, but from distributional issues surrounding our savings. As Dismal Soyanz suggests, other government policies (or insitutionalised rules of thumb) may have created a situation where savers have a bias towards relatively “unproductive” forms of investment, such as housing – furthermore, households underestimate the risk of certain assets and overestimate the risk of others. These are all behavioural biases that may exist in reality – as a result of the bounded rationality of individuals.

As a result, the purpose of Kiwisaver may be to shift the composition of New Zealand’s savings – not increase the level. Now if this is what Kiwisaver is meant to achieve we have to ask about two things – firstly, is there a better alternative. I can’t think of too many alternatives off the top of my head, so I’m going to cover this by asking, how does Kiwisaver compare to a straight income tax, where some % of the money is put aside?

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Matt Nolan

Interesting critiques from LAANTA

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Over at the excellent LAANTA blog, Terence has written a couple of posts discussing issues I have raised here.

The first post covers our discussions on Utilitarianism. Fundamentally I think we have reached a point where our only disagreement stems from value judgments (specifically what we view as the fundamental measure of value, something I plan to write about separately another time) – which implies that his post is a good place for us to leave it.

The second post argues that goods and services taxes are infact regressive, contrary to my own musings. This is something I will discuss in this post.

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Matt Nolan

What is this savings problem?

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So far we have discussed Kiwisaver and national savings in fairly loose terms. We know that (part of) the purpose of Kiwisaver was to increase national savings and that our interest in national savings stems from the fact that we want New Zealand to have more productive capital.

So before we can discuss the myriad of burning questions surrounding these issues – and more broadly surrounding New Zealand’s productivity (such as if Kiwisaver achieves the greater capital goal even if it theoretically doesn’t increase savings) we need to ask, what is the savings problem?

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Matt Nolan

Should the government reward effort?

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Recent posts by two of the most prominent New Zealand left wing blogs (the Standard and New Z Blog) lament the fact that the wage people are paid does not necessarily relate to the effort they put into their work. As a policy solution to this inequitable result of the free market both blogs suggest that the government provides tax cuts that give the poor more.

However, no matter how sympathetic I am to the idea that effort and reward aren’t correlated in a way that most people would view as “fair”, I don’t think that adding further progressivity to the tax scale is the appropriate mechanism with which to achieve this social goal.  Furthermore, I don’t think the trade-off between production in society and the achievement of our “equity” goals is appropriately mentioned in these posts.
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