New Zealand Budget 2008: Tax cut calculator 2

Posted on by

In a previous post we mentioned the Infometrics and Labour tax cut calculator.

Now NZIER have updated their tax cut calculator that compares Australia and New Zealand – the excel model can be found on their front page (or here in the future):

http://www.nzier.co.nz/

I also talked to Dr Nolan about the set of tax calculators that have been released and he asked me to remind everyone that the October 2008 cuts will only give you half of the total shown in the calculators – as they are in per annum terms but October-April is only six months long. So someone on 60,000 will get a $430 tax cut this financial year, and then a $860 cut over the 2009/10 financial year.

Furthermore, the level of wage growth assumed by the Labour and NZIER calculators both assume wage growth of about 3%pa – marginally slower than the current rate.

Update: David Farrar at Kiwiblog also mentions a Deloitte Tax Cut Calculator that was sent to him. I don’t know if excel has ever been this popular :)

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to Ma.gnoliaAdd to TechnoratiAdd to FurlAdd to Newsvine

Tax cuts and interest rates

Posted on by

Given my belief that these tax cuts, without corresponding cuts in (unproductive types of) government spending, will lead to greater inflationary outcomes I’ve decided it is important to argue the complete opposite case – namely that tax cuts will not impact on inflationary pressures and interest rates.

The common view I work off when stating that tax cuts increase inflationary pressure is that tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.

However, there is another popular view that has been raised by Stephen Kirchner of Institutional Economics. Specifically this view states that tax cuts have supply side effects on the economy (which increases the supply of goods in the economy and so reduce inflationary pressures) and some degree of Ricardian equivalence holds – such that any increase in budget surpluses will lead to borrowing from the private sector, as they expect tax cuts later. He makes these arguments here and here (I made a similar argument here).

Furthermore, tax cuts may reduce wage pressures – thereby leading to lower inflation. How? Say that the nominal wage is fixed and there are tax cuts – it this case the whole tax cut immediately goes to the employee. However, unless the employee has significant market power, the employer will be able to extract some of the surplus gained from tax cuts over time, by offering smaller wage increases.

Given these supply side arguments why am I still concerned about inflation?

Continue Reading →

New Zealand Budget 2008: Tax cut calculator

Posted on by

Chris Worthington at Infometrics Ltd just created a tax cut calculator, it can be found here:

http://www.infometrics.co.nz/taxcutcalculator.asp

Enter your personal income and see what the Budget will do to it in October 2008, April 2010, and April 2011 (as there is no tax cut in April 2009 – likely a result of inflation concerns). This calculator does not include any of the working for families business.

Update: A new tax calculator including working for families was released by Labour, it can be found here: (h.t. the Standard)

http://www.labour.org.nz/calculator/index.htm

Add to FacebookAdd to DiggAdd to Del.icio.usAdd to StumbleuponAdd to RedditAdd to BlinklistAdd to Ma.gnoliaAdd to TechnoratiAdd to FurlAdd to Newsvine

New Zealand Budget 2008: Tax cuts

Posted on by

Both Kiwiblog (more on budget) and the Standard (more) have already mentioned tax cuts – giving us two different views about their situability.

Instead of looking at this, I’m going to have a quick look at the Macro-economic concerns stemming from this tax policy. First lets ask Mr Market what he/she thinks:

Source NBNZ

That was a 70 basis point increase in our trade-weighted index of our dollar (update, as of 4.25pm the lift hit 100 basis points, if we keep going we might get back to where we were before the employment numbers came out :) ) – compared to the 40 basis point fall from the poor retail numbers and the 50 basis point fall from a reduction in employment. Damn!

Continue Reading →

GST rates and inflation: Why Mr Peters is actually wrong

Posted on by

At his rates blog and his blog on stuff Bernard Hickey often has a number of insightful things to say. Sadly this piece where he forces himself to agree with Winston Peters is not one of them.

Specifically he states:

In fact, a GST cut is the perfect tax cut right now. It is a deflationary tax cut targeted at the poorest and at those with the most squeezed disposable incomes.

This is a common misconception which results from the way us economists often teach people to think of inflation. For this error I apologise. However, fundamentally, a cut to GST rates is just as inflationary as a cut to personal income tax rates. As I’ve stated here:

inflation is the rate at which prices grow – not the price level

The inflation that economists are scared off is the rate at which the price level grows. Continue Reading →

Should the government reward effort?

Posted on by

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.
Continue Reading →