GST up, income tax down: Both happened remember

Blah blah blah government is to blame for increasing GST and hurting families struggling to put food on the table.  This is coming out constantly.  It is a load of crud.

GST went up, and income taxes were cut by an amount that implied that pretty much EVERYONE had greater real disposable income following both changes (benefits and super were adjusted as well remember).  So don’t pull this line.

And also, all this talk about prices rising rapidly … well the CPI rose 0.8% in the quarter, almost all the result of a spike in petrol prices (on unrest in the Middle East and North Africa) and a spike in food prices (on the back of droughts and floods overseas).  Prices across a whole range on retail products actually fell during the quarter – such as clothing and footwear.

Also, lets not forget that both parties arbitrarily want the exchange rate lower – remember that a lower exchange rate increases the price of imported goods.  This is something that will make it harder for families to put food on the table and make it more difficult for mum and dad to pay for a new school uniform for the kids.  The high exchange rate (due to high food prices, when we sell a lot of food overseas) helps to take some of the gains from high export prices and pass them on to other households in society – don’t forget this, as politicians and exporters seem determined to hide this fact from the public.

If we genuinely think incomes are too low for the poorest households, increase the benefit/minimum income provided by government as a transfer to these households.  Stop this political bullsh*t that misinforms people regarding the true impact of other, completely unrelated, policy changes.

Note:  My apologises for the lack of updates from us at the moment – things are extremely busy.  There are a few posts I HAVE to write – hopefully I can write them over Easter and get them up afterwards.

A note: Migration and the GFC

There have been claims by the Labour party that rising departures from NZ are the fault of the National party, and that the increase during their tenure was due to the global financial crisis (GFC).  Now this is a little bit untrue in terms of the way it is framed, I’ll just quickly point that out and then have a little chat regarding why we might be seeing departures rise, and whether it is really a policy relevant issue in of itself.

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“Savings” problem doesn’t mean “investment” problem per see

One issue I have with the constant discussion on savings, current account deficits, and consumption in NZ is how people look at it – they keep thinking that we are “consuming” to much and have needed to “borrow”.  That is how we’ve been told to look at it – especially with all the talk of “spending too much on big screen TV’s”.

So all this leads to statements like this from John Key:

“We are rebalancing the economy away from debt-fuelled consumption and government spending and towards savings, investment and exports” (ht Rates Blog).  Sounds good, but I think it misrepresents the issue.

Lets think about real GDP shares, when thinking about shares of expenditure GDP we are saying that “this much of the nations production is in this category”.  Saying we need to rebalance is like saying that we need to adjust these shares – the consumption one down, the investment and export ones up.

However, what does the data on real GDP says (note the period of “rampant borrowing” was around 2002-2008 … also note that Stats provides this beautiful data for free, much appreciated):

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Asset sales

There has been a lot of commentary on asset sales around the place, so much so that I didn’t feel like I need to write anything.

Dim Post mentioned a lot of the people against asset sales and also Geoff Simmons recently wrote against them.  Furthermore, both Anti-Dismal (*, *, *, *, *) and Roger Kerr (*, *, *) wrote a series of insightful posts regarding the issue.

On the left there seems to be an inherent bias against any selling at all – selling is bad.  On the right there is an inherent bias against government ownership – government ownership is bad.

So, where do I fall on the issue?  I have to admit that I am relatively in the middle – I see it as a case by case issue.  There is nothing inherently wrong with privatisation, at all.  Furthermore, I agree that generally privately run firms will “meet the market” more efficiently – implying that they either/both provide the same outputs more cheaply, provide more outputs for the same cost, and/or provide higher value outputs.

At the same time there is no doubt that some assets have social values/external benefits that are not captured by private agents.  If the cost of indirect regulation (taxes and competition policy) is too high, it may be preferable for the government to run said agencies directly – I view it as direct regulation.

In New Zealand at the moment there is definite scope for opening up SOE’s to private sector investment – that is where we are sitting now.  However, even given this I cannot go as far as Roger Douglas and say that the price does not matter – in fact, price is THE issue that the government should use when deciding whether to sell assets.

Why do I say this?  I have already said that I believe that, in the absence of external benefits, the private sector is more than likely to run the organisation more efficiently.  However, just because the evidence says this happens on average, and just because I have a value judgment that individuals are more responsive to incentives than government, isn’t sufficient to justify policy when we have prices available!

Effectively, a private purchaser will be willing to pay up to their reservation price for an asset.  This reservation price will be based on the dividend yield they expect to get from the asset, and the relevant opportunity cost of investment.

At the same time the government know that, if it keeps hold of the asset, it expects to make some dividend yield from said asset through time.  As a result, the government can price the asset – they can say they would not accept a bid below the discounted expected return from holding the asset.

If the government sticks to its guns, and a private sector agent is willing to pay MORE than this then we know that – ex ante – the private agent will be able to run the business more efficiently/add more value.  This implies that the government SHOULD NOT sell for less than their discounted expected return (not the should, so I’m being all prescriptive 😉 ).

In essence, pricing the assets (including relevant external benefits) and then seeing what price people are willing to pay gives us information regarding what can be run more efficiently in house – and more efficiently in the private sector.

Looking backwards and saying “this business is paying dividends overseas, wahhh” or “this business ended up making more than what we sold it for, wahhh” is a rubbish argument against privatisation  – but so is saying “the private sector is better, so give it the assets for free, wahh” is a poor way of justifying privatisation.

At the moment, the type of debate we are hearing in public sounds like the above quotes – and as a result the two sides appear to be talking past each other, making the debate feel more like ideology than reasoned analysis.

If we sat down and just explained the dividend example to people in society, I do not think they would be averse to a government stock take.  The tough questions will then be “how do we value external benefits” and “what is the expected dividend yield” rather than is selling blanket good or bad.

Update:  Anti-Dismal points out that there are other factors that need to be taken into consideration beyond the starting point of comparing dividend streams – that is why this is very much a case-by-case issue.

Update 2:  I somehow missed this piece by Eric Crampton (even though I did check the site while writing the post).

Beware the tax-free threshold

Judging by the fact that the “tax-free threshold” has reappeared as a policy prescription, I can tell it is election year.

I am against tax-free thresholds.  This has been discussed various times before, but the most detailed exposition of my feelings came out three years ago – during the previous election year.

If I had to summarise I would say:

  • A tax-free threshold implies that, for the same level of government spending, effective marginal tax rates must be higher for anyone earning more than the threshold amount (assuming pro-rata increases) – which implies that there is likely to be a greater efficiency cost for the same level of government spending.  [Think of it in this simplified way:  if we don’t tax the first $5,000 of someones income, but need them to pay the same amount of tax on their income, then we need to charge a higher average amount on all their income about $5,000 – if this tax was flat, this would also imply a higher marginal rate]
  • A tax-free threshold is an indirect form of redistribution – so for that level of “spending” the gains in terms of equity are more than likely to be lower than targeted spending.
  • The benefit of the tax-free threshold is that it avoids “churn” in the tax system (if the tax-free threshold replaces some benefit spending).  BUT, there is a countervailing cost from the greater level of progressivity – namely greater compliance costs and tax avoidance associated with another tax bracket.

In net terms, an increase in the progressivity of the tax system (an efficiency cost) combined with the fact that any redistribution will be poorly targeted (a relative equity cost for the same level of efficiency) appears (to me) to be far more important than the benefit of “reducing churn”.

A clear and transparent flat tax system that raises revenue, combined with benefit spending that targets social goals, is (in my view) the best way to ensure that our society achieves its preferred equity-efficiency trade-off at the lowest cost.  A zero tax threshold moves us away from this – and so just doesn’t feel right to me.

UpdateKiwiblog (David Farrar) is also in favour of a tax-free threshold, because of the “reduction in churn”.

Again, remember that the tax-free threshold isn’t just for those who “receive benefits” – it is for all income earners.  As a result, effective marginal tax rates HAVE to rise to keep revenue constant, reducing labour supply.  This implies that there is a direct efficiency cost – which all parties seem keen to ignore.

Update 2: More points here.  And NZIER also agrees.  Clean sweep of economists are against, yet both people on the left and the right are for it – fascinating … I am going to have to post more on the issue I suspect.