1998 || previous 1999 || next 1999

An English Social Dividend of $109 per week?    (12 July)
Dividing the Spoils of TVNZ    (10 July)
The Problem with Single Taxes    (5 June)
Pareto Optimality and NZ's Microeconomic Reforms    (5 June)
Benefits and Credit Cards    (3 June)
Australia's Messy GST    (2 June)

An English Social Dividend of $109 per week?    (12 July)

Yesterday, Bill English, New Zealand's new Treasurer, announced that a returning National government would cut income taxes from April 2000. (See Nats role out their tax cut promises, NZ Herald, 12 July.) The new tax rates would be 15% for the first $9,500 of annual income, 20% for the next $30,500, and 33% for all income over $40,000.

That is the equivalent of charging a flat rate of income tax of 33% and paying an annual social dividend or basic income of $5,675 (or $109 per week) to all persons who gross $40,000 or more in the year to March 2001. By way of contrast, all persons grossing more than $38,000 today get a basic income of $5,130 (or $99 per week). Thus, in the language of the right, everyone grossing over $40,000 will get an extra "hand-out" of $10 each week from April.

The tax cut proposal is, in effect, a plan to increase social dividends payable to middle and high income recipients. Persons grossing less than $9,500 will get no increase in their very small social dividends. (As an aside, I cannot help but wonder what is so special about the figure $9,500. At the very least, Mr English could have raised the threshold for the first tax step from $9,500 to $10,000. It would make the mental arithmetic a bit easier.)

The Treasurer has said that he is targeting middle-income New Zealanders. It's good that he recognises that many middle income recipients are under huge financial pressures. But so are low income New Zealanders. Further, he is off the mark by equating incomes of $35,000 to $50,000 with middle-income New Zealand. In fact, less than 15% of New Zealand adults will get the full $10 hand-out.

30% of New Zealand adults receive less than $9,500. They'll get no addition to their often miserly social dividends. Persons working fulltime on the minimum wage will get about $1 extra. The true middle income range is $15,000 to $30,000, not $35,000 plus.

The English social dividend will not help those New Zealanders who have contributed to the New Zealand economy by (i) working hard for low wages, (ii) being caregivers of children, (iii) contributing to the voluntary sectors, or (iv) being consigned to the unemployed and underemployed "reserve army of labour". All of these people have equity in New Zealand, and have as much right to social dividends as do persons receiving over $40,000 in salaries, interest, rent or company dividends.

Dividing the Spoils of TVNZ    (10 July)

Rodney Hide, finance spokesperson for Act, is reported to have said (in "Henare urges tax cut for poor as Government aims at middle incomes" by Vernon Small; NZ Herald, 10 July) that "cuts of 3c to the 33c rate were possible in each of the next three years if TVNZ was sold and the Government reduced its Budget provision for initiatives".

While this seems to put Act in opposition to National's major economic initiative for this election year (building a "knowledge economy"; see Five Steps Ahead), it is the comment about Television New Zealand that we should be most concerned about.

TVNZ is a publicly owned company that happens to pay the Government a rather large dividend. The only rationale for selling TVNZ is to invest the proceeds elsewhere so as to earn an even higher dividend. The repayment of any remaining government debt with an interest rate of over 10% and a maturity date after 2020 might qualify as a suitable investment. The government, however, has no such debt. So it seems sensible to not sell TVNZ.

There is another argument, however. That is, that TVNZ should be sold, and the proceeds of the sale paid in full to each individual owner of TVNZ, on the supposition that we make better investment decisions individually rather than collectively. This seems to be what Dr Hide has in mind.

Well, sort of. The trouble is that Hide's proposal appears to be to refund the owners of TVNZ via a tax cut, rather than by paying equal amounts to each owner as a capital sum. Indeed, any tax cut which involves just cutting the 33% tax rate returns nothing at all to anyone with an annual gross income of less than $38,000.

In short, Hide's proposal is to sell TVNZ and pay the proceeds to the top 15% of New Zealand's income earners (the median annual adult income is around $20,000), with the vast majority of the proceeds going to the top 5% of New Zealand's tax residents.

In short, what Hide proposes is unambiguous theft. For example, I will not receive $38,000 this financial year. If TVNZ is sold this year, and the first year's tax cuts are funded by the sale (with remaining year's cuts funded by "reduced initiatives"), according to Hide's plan I will be paid nothing for an asset of mine that was sold on my behalf. To have an asset forcibly sold and not to receive payment for that asset is theft.

It's interesting to note the context of Hide's comments. His part, Act, and Tau Henare's party (Mauri Pacific) are each possible coalition partners of National; ie if National gets enough votes to consider forming a government. It's like a simple game: Rodney Hide is playing Sheriff of Nottingham to Tau Henare's Robin Hood (bearing in mind that Robin Hood sought to restore to poor people what was theirs of right).

(We might note that, if Maori vote for Labour or Alliance on their party vote, and Mauri Pacific candidates on their electorate vote, then they would serve to elect a centre-left government while also minimising the influence of Act on the centre-right bloc.)
 

PS. See also my Flat Tax letter published in the NZ Listener.

The Problem with Single Taxes    (5 June)

In economics, like medicine, critics overstate their cases by advocating a panacea that can replace everything that bothers them and much more as well. Indeed, the purist supporters of Universal Basic Income fit such a category.

The latest panacea that I have come across is an energy tax called Unitax, advocated by a British Professor of Energy Studies (Malcolm Slessor) in the British Social Credit magazine, The Social Creditor. (For details, my source is the June 1999 newsletter of the New Zealand Anti Economist League.) Apparently Slessor believes that the Unitax, while rewarding conservation practices, can raise enough revenue to replace income tax.

Slessor falls for essentially the same fallacy as Henry George and his followers did in the late 19th century. George (Progress and Poverty, 1879) advocated a single tax based on the socialisation of land rent. George's New Zealand followers wanted to impose such a land tax both to raise public revenue in lieu of other taxes, and as a vehicle to break up the large estates of the emerging colonial gentry. In practice, the two goals were incompatible, and George's tax - as a single tax - was not politically viable. It could never hope to raise enough revenue to replace all other forms of taxation, and it would only work as a revenue tax if the hated estates were buttressed rather than subdivided.

In 1999, there are still many single taxers among us, many aligned in some way to the Green movement. They are, in one way or another, disciples of Henry George. They still believe that "resource rentals", "energy taxes" or the like can both deter anti-environmental activity and raise enough revenue to replace income tax, despite the much greater revenue requirements of the modern state than those of the state in George's time.

Taxes that are designed to modify behaviour - eg to stop pollution or conserve natural resources - can only raise significant amounts of revenue if they fail to stop the unwanted behaviour. Such taxes are potentially useful, but they cost their advocates (and the Green movement by association) much political credibility when they are oversold as revenue cash cows.

Pareto Optimality and NZ's Microeconomic Reforms    (5 June)

In a piece called "Pareto Poverty Trap" in the newsletter of the Anti Economist League, Peter Willes and Guy Routh are quoted (from their 1984 book Economics in Disarray) as saying: "A Pareto-optimum is said to obtain when nothing more can be given to the hungry, the cold, the ragged and the homeless without incommoding the glutton, the miser, the usurer and the paly-boy".

The purpose of New Zealand's post-1984 microeconomic reforms was to move the New Zealand economy towards (if not into) a state of economic efficiency, otherwise known as Pareto optimality. The idea is that a national economy is efficient when resources are employed to maximise output and utility for a given income distribution. In an efficient economy, you cannot give to someone without taking from someone else.

Under the Pareto rule, it is accepted that an alternative economy with an alternative distribution of income may be equally as efficient as any efficient status quo. But there is no economic reason to move from an efficient status quo to an alternative more equitable status quo. Thus the Pareto-optimum criterion is biased in favour of the status quo.

How come then, New Zealand's reforms were allowed to take place in the full knowledge that they would be accompanied by significant redistributive effects; by a significant growth of inequality?

In a way, the Pareto-optimum concept is a piece of economic rationalist sleight of hand. In the real world, a national (or global, or local) economy is never at a state of perfect efficiency. Hence, it is always possible to justify a policy designed to move an economy towards a state of efficiency.

In a non-efficient economy, you can theoretically create efficiencies in which nobody loses. However, a policy to move from a non-efficient state to an efficient state does not require that nobody loses. There are many theoretically efficient states, some of which can theoretically be achieved with nobody losing. However, the rationalist rule of public-policy making does not exclude the possibility of pursuing one of the other theoretically efficient states.

Thus, the rules are: (i) you cannot justify a policy that takes you from one efficient state to another because some people lose, (ii) you can justify any policy that takes you from an inefficient state to an efficient state, even if somebody loses.

Yes, it is sleight of hand. The good news is that it can be turned on its head. Given that the microeconomic reforms have failed to deliver us the promised Pareto efficiency, a left-leaning government can adopt the same principle to justify a policy that leads to a significant decrease in inequality, so long as it can also argue that the policy is leading towards a state of Pareto efficiency.

That's actually an easy task, because the massive transaction costs implicit in the rationalist model (in short the management costs) represent a huge and transparent source of inefficiency. Almost any shift away from the managerial model can be easily presented as a shift towards economic efficiency. The distributive consequences can be presented to the rich as an (unfortunate to them) side-effect of an efficiency drive.

Let's do it, Labour and the Alliance! We might start by thinking of introducing a fair system of social dividends that gives all New Zealanders an equal return on the tangible and intangible assets that came into being as a result of past social investment.
 

See also "Pareto Efficiency is a Double Standard" (23 April 1998)

Benefits and Credit Cards    (3 June)

On the television news last night I saw an item about a middle-aged Waikato woman who relied on a benefit for income. She had a $2,000 plus credit card balance, which she could not meet the payments on. Wanting to clear the debt, she offered to sell a kidney.

While the news item went on to discuss the ethics of the trade in body parts, it ignored the wider issue of how beneficiaries, whose incomes are set at such a low level that servicing or repaying credit cards is impossible, might resolve their credit card dilemmas.

There is an underlying belief amongst social policymakers that beneficiaries are unbankable, and will therefore not have credit cards, hire purchase etc. That view is predicated on the false belief that most beneficiaries have been beneficiaries for are long time, and that they represent a different class of people to "independent" workers. In reality of course, most beneficiaries were employed not so long ago, and did qualify for credit cards while they were employed. Furthermore, most beneficiaries will be employed again sooner rather than later. Beneficiaries are "between jobs" and have every right to have credit facilities with their banks.

Even beneficiaries who don't have credit cards are likely to have private debt. There are plenty of loan sharks around who will charge them an "arm and a leg" (if not a kidney) for credit. And, most important, credit flows within extended families and between close friends are ubiquitous.

The nature of the welfare poverty trap almost forces beneficiaries to borrow to meet unplanned expenses. Additional income makes hardly any difference. Typically, a beneficiary will get to keep just 9% of earnings in excess of $80 per week. Borrowed money, on the other hand, comes whole (except for a small percentage deduction where a bank charges repayment insurance or up front fees), and does not have to be declared to WINZ.

There are special benefit provisions that may ease the lot of beneficiaries with additional financial commitments. Furthermore, it is difficult to argue that allowances should be paid to indebted beneficiaries when those who keep out of debt do not qualify.

What we do need is a public awareness that the poverty trap is even more complex and more individualised than is usually acknowledged. In addition, communities have to resolve these problems by providing informal financial support. Communities can help their overstretched members as part of the gift economy, often with a tacit but unenforceable obligation for some kind of non-cash contribution to the community on the part of the person who was helped.

In fact, the woman wanting to sell her kidney had received offers to pay off her credit card. She rejected these offers because of an overdeveloped sense of individual responsibility. For me, her response was part of the problem; part of a wider tragedy. We have so overwhelmingly bought into the atomistic culture of strictly individual responsibility and accountability, that too many of us reject the quite appropriate community solutions that present themselves.
 

See also It's a problem of income, not budgeting skills, Peter Calder NZ Herald 3 June.

Australia's Messy GST    (2 June)

Australia will adopt GST (goods and services tax; aka value-added tax) next year, adopting a "messy" formula (NZ Herald, 1 June) so as to exempt fresh and other "basic" food items. The issue is one that can be used to suggest that democracy is economically inefficient, given that the formula is a result of a political compromise in the Australian senate.

While we in New Zealand have GST in its pure form, many other countries have exemptions. I am sure that Australians are capable of modelling their GST on Canada's rather than on ours.

Nevertheless, there is an argument for maximum simplicity. There are significant transactions costs involved and many of those are passed on to small businesses. Even left-leaning pro-tax people who have come to work on their own accounts are able to see that these "compliance costs" are a burden that bears disproportionately on small businesses and the self-employed.

I cannot argue with GST. As indirect taxes go it is fair and comprehensive. I do believe that we need a consumption tax, which is what GST is. The main controversy, in Australia now and in New Zealand in 1986, was about the packages as a whole, which have always given cuts in income tax that disproportionately benefit those on the highest incomes.

There is a simple solution to Australia's problem. New Zealand already adopts it. We subsidise GP visits. Indeed we subsidise doctor's visits for under-6 year-olds 100%.

The solution is for Australia to have a simple all-encompassing GST. To offset that, certain basic foods (and probably other basic items as well) should be subsidised. It's easy enough to set the subsidy at the appropriate percentage to make the final price approximately the same as it would have been if GST had not been charged on those items.

© 1999 Keith Rankin

Rankin File