Can we extend our tax system to make it more suitable for a modern (post-neoliberal) nation?
The economists in the macroeconomic division writing Treasury’s 1984 Post Election Briefing got into a robust argument about the purpose of taxation. Their boss, notorious for his common sense, broke the impasse. The Briefing read ‘the purpose of taxation is to raise revenue for the government’.
That remains the preoccupation, with the side assumption that the aim should be to raises taxes with the minimum of distortion from the neoliberal objective of maximisation of GDP.
A very distant third is that the burden of taxation should be fair. I have been to seminars on taxation in which equity was not mentioned. For some reason – I leave you to decide why – the policy recommendations of such seminars always favour the rich, including those attending. It would be revolutionary for equity to be given a higher status in our tax policy discussions.
Clearly there is a need to ensure the existing taxation system is effective, efficient and even equitable. I imagine the recently established Taxation Working Group will put a lot of effort into trying to attain these goals. Difficulties arise, for instance, with the definition of income. Create a loophole and the tax accountants and lawyers gallop through it, probably distorting economic performance.
An obvious loophole is capital gains, an omission which distorts (i.e. wastes) capital as investors deploy their resources in low-productivity activities which are not taxed. For this reason I am an unashamed supporter of including real capital gains in the income tax base, as are a number of official reports, although more cautiously because it is such a political hot potato. (By ‘real’ I mean only the capital gains above inflation; similarly I would exempt the inflation component of interest from income tax.)
One of the reasons capital gains taxes are not favoured by incumbent governments is because they are unlikely to raise a lot of revenue but they will raise a lot of political opposition. Even so, economists like me support them because they will lead to better investment decisions. The housing market has been badly distorted by the lack of capital gains taxes on houses not occupied by their owners. (First home-owners do not generally make net capital gains, because they also make capital losses on their next purchase.)
Observe that another reason for taxes is creeping into the discussion; the purpose of improving the pattern of production and consumption. We already have some examples such as excise which aims to reduce the damage from the misuse of alcohol and the use of tobacco. An intermediate form is the levies on motor vehicle use which fund the transport network.
The principle that market prices do not always reflect social costs and that taxation can be used to eliminate the worst failures has long been held by economists. It is an anathema to neoliberals which may be why its application has so fallen out of favour. It would be good to see it return to the economic policy framework, but only where the implementation is practical and the outcome is effective. Here are some examples.
There is a popular demand for taxes on sugar – especially in soft drinks – to reduce obesity. Unfortunately the advocates do not make a convincing case that the measures would be practical or effective; they see the measure worked for tobacco consumption and ask why not sugar?, without understanding why it worked for smoking and the differences from sugar. Suppose we were to tax all sugar (including that which crosses the border in processed foods). Would the higher prices discourage sugar consumption, and by how much? My guess is the big change would be at the production level, with the amount of sugar reduced in foods. It looks as though the government is going to seek voluntary agreements for this goal instead.
I favour raising the price of the cheapest alcohol to reduce binge drinking. Some advocates propose price controls, which would increase the profits of the liquor industry, which does not seem to be a good idea. Instead, one might introduce a tax-clawback regime where lower priced alcohol would pay more excise tax. It is probably feasible but more complicated than the current regime. I suspect that a treasury would recommend to just bang up the excise rate on all alcohol.
Perhaps the place to pay the most attention to is the environmental area where too often prices are poor indicators of long-run social costs. Among the areas of interest are water, transport and carbon emissions.
I have long been an advocate for pricing of water (including discharges into it) to encourage using it less wastefully. However, the approach has to be comprehensive. A tax on some uses (say export water) and not others is half-baked. Unfortunately, imposing it on all uses including domestic use is likely to cause a political outcry (and there are complicated issues about Maori rights). At the very least there is a case for a levy on water to fund local authority efforts to clean up the polluting messes we are creating. The levy rate would vary by district and may be popular insofar as it would be low, tackle a troubling problem and reduce the pressures on local authority rates.
The government is talking about allowing the Auckland Council to impose levies on motorists to add a source of revenue to fund Auckland’s burgeoning transport needs including roading infrastructure and public transport. Fair enough, but it is a short-sighted measure typical of our short-term problem-solving approach rather than a long-term vision. Why not allow all local authorities to impose the levy if they choose, providing the revenue is used for transport purposes? My guess is that most local bodies would welcome the opportunity, even though the legislation would be permissive and they, rather than central government, would impose any tax.
One reason why the sort of thinking implicit in the previous two paragraphs is not popular in Wellington is because it would empower local authorities, giving them greater spending discretion, whereas central government prefers to keep them on a tight leash. I really do think we need greater decentralisation; Wellington suffers from policy and implementation constipation. Neoliberals want to decentralise to individuals; other see the need for communities to have more power over themselves – which means they need revenue (some of which has to be raised at their own discretion).
To be realistic, any mitigation New Zealand contributes towards emissions generating climate change will have negligible international effects. My view is that as a global citizen New Zealand has moral responsibilities to share in the global challenge; we should use taxes on carbon emissions to help the mitigation.
Moreover, I am increasingly aware that the foreshore is being eroded by rising sea levels, tsunamis and storm surges. Leaving dealing with them to the short-sighted private sector and cash-strapped local authorities seems to me to be – well – par for the course. Perhaps some of the revenue from the mitigation should be channelled into foreshore protection projects.
This column may seem like a to-do list but it has an underlying theme. We have got to get past the notion that the only purpose of taxation is for government revenue and add that it can be used to promote wider social wellbeing
I am not sure that the Taxation Working Group is well placed to lead this task. It is stacked with accountants and lawyers who should do a good job dealing with a host of technical problems in the existing system, rather than extending it. There is only one economist on it to take the wider view. (Mind you the National Government’s equivalent committee had mostly economists, who seem to have taken such a narrow neoliberal approach that there was not much vision there either.) It may be that if this government is to make any progress it will be in a series of decisions outside the review committee. I cannot tell you whether it has the vision to do it.
We need to keep saying that taxation is the price of citizenship; that it has a role towards increasing citizens’ welfare (even if its initial impact reduces our effective incomes). And that we need to ensure that those who wish to avail themselves of the privileges of citizenship make a fair contribution to the tax revenue.