Should deadweight loss die?

Over on VoxEu Charles Manski makes the case that deadweight loss is merely anti-tax rhetoric, and it should be thrown out of economic discourse!

I actually agree with what he is saying regarding analysis – that economists need to, where possible, look at tax and spending decisions simultaneously.  This implies that when we cost-benefit government projects, the implied cost of taxation needs to be explicitly taken into account.  I don’t think you’ll find anyone who disagrees.

But I don’t think DWL should go.  Read more

Subsidising mini-skirts

Shamubeel asked yesterday why the Government is asked to fix every perceived problem. As inspiration for his forthcoming post I present the latest initiative from a city councillor in Essex:

A council is considering urging taxi firms to provide cheaper cab fares for women who wear revealing clothes.
Brentwood Borough Council is considering the bizarre move in a bid to stop women wearing short skirts or low-cut tops becoming a target for sex attackers.
The council is considering discounted taxi prices so that ‘provocatively dressed’ women can be driven back home and have less of a problem getting a ride.

I have a feeling that he hasn’t really thought through the incentives it would provide.

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! The Illinois social security card office members haev been discussing this at great length. They cover a lot of ground and yet the issue will remain uncertain for a while.

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.

First home buyer help – lets repeat others’ mistakes

National has announced policy to support first home buyers to take on more debt. It will have an entirely predictable outcome: higher house prices and higher debt. This will drastically increase the cost of the homes, which are as of now being sold. I recently took the assistance of a company to sell my house fast Arizona and not only did the house get sold remarkably soon, but the money was transferred to my bank account without any delay. So this policy which has just got introduced could make things for potential home buyers a little difficult.

The only good thing about this policy is that it is relatively small: $64m over four years. That’s $16m per year and assuming 90% gearing, $160m of house sales. That’s just under 0.5% of $36b of housing turnover in the year to July 2013.

To National’s credit they couch it in terms of a short term response and in the backdrop of other work to look at housing and land supply. But it is still a bad policy that inflames demand for housing even further, before they have tangible impact on increasing supply.

First home ownership subsidy/support policies have been tried in USA, Australia and UK. This led to a high amount of borrowing by those who could not afford it. It was also at the heart of the sub-prime crisis in the USA and the subsequent GFC. Read more

Series on tax: Part six – where progressivity fits in

I am continuing the series on tax over on Rates Blog with a piece on progressivity called “progressivity, how does that work?“.

The short answer … magnets:

The long answer?  You’ll have to go read the post.  However, I will give you this here:

In today’s article we discussed progressivity, and the complicated interrelationships between ideas of equity and efficiency.

Given these difficulties, it is important for policy makers and researchers to clearly communicate the trade-off that exist – so that an informed public can come to some conclusion about what they think is fair.

While the principles of tax we recently mentioned helped us to understand some of the interrelationships, the importance of elasticity in determining who actually pays a tax was made apparent here – just saying “I want that person to pay” doesn’t work when they can pass the buck on or shift away from paying tax altogether.

Furthermore, even if higher tax rates are able to redistribute income (in terms of the goods and services available to different income groups) the impact on people’s willingness to supply labour and the wedge between the private and social benefits of someone’s decision to work does imply there are efficiency costs from doing so.

In many ways it is an extension of this article – given that the reader is now assumed to have some idea about horizontal and vertical equity, poll taxes, factor taxes, and output taxes (which were the intervening articles).


Don’t forget that prices change!

Over on Kiwiblog David Farrar discusses how redistributive the tax system is, and how including average welfare households that earn $60k “effectively pay no tax”.

There are a few points to keep in mind when looking at this:

  1. The obvious one that you will always hear is that a tax and benefit system is supposed to be redistributive – this is the point.  So the question is how much redistribution we want, especially given that there is a cost in terms of “efficiency” (having private and social value align from market activities).
  2. Let us focus just on wages.  Comparing gross and net wages over the entire tax system doesn’t make sense – it is a appoximation for how “small” changes in tax will work, not large changes:  The key point here is that the gross wage is the “cost to the employer” while the net wage is the “renumeration for the employee” – the tax paid isn’t all “cost to the employee”, it is shared between the employer and employee based on the idea of tax incidence.  If the “tax” wasn’t there, this does not mean that the high wage household gets all that income – so saying it that way “exaggerates” their contribution to redistribution.  In truth, the tax paid by those wage earners is the contribution from that market transaction – which is a very different thing to think about!  Note:  I am saying wages would change if the tax system changed.
  3. On the note of market, redistribution works by changing relative demand for goods and services and endowments of individuals – in this way relative prices change.  If we are talking about contributions in terms of the goods and services we care about, and over the entire tax system in this way, we need to think about how goods and services prices change as well!

Yes our tax system is progressive – but framing it as “the top 5% of households pay 47% of tax” is a bit mischevious.  In fact, it would be closer (but not perfect) to say that market transactions that involve the top 5% of income earners contribute to 47% of the nominal value of tax revenue … a little less us vs them right 😉

I think Bill English is spot on saying:

“But people who call for even greater transfers to low income families, or who call for the top tax rate to be raised, need to be aware of how redistributive the tax and income support system really is,”

Indeed we should consider the starting point – to many people view increasing redistribution as always increasing social justice, when that is not the case.  However, Farrar’s point does not follow:

Income tax rates should be lowered

I’d prefer it if he fleshed out whether this means an increase in other taxes, or a cut in spending, as the normative implications are very different 🙂