Utopia, you are standing in it!

Things are pretty grim when your ideas for fixing child poverty by throwing a lot more money at the problem are easily outclassed by the Greens in terms of economic rationale, fiscal sense and political practicality.

Source: Greens launch billion dollar plan to reduce child poverty | Green Party of Aotearoa New Zealand.

But that is the case for Gareth Morgan’s proposals for a universal basic income for New Zealand. His proposal for a universal basic income funded by comprehensive capital tax make much less sense than those of the Greens for giving the in work family tax credit for those do not work but are on a welfare benefit.

The Greens have a far superior proposal for reducing child poverty and a far better chance of getting it implemented in parliament. Their proposal is simply to introduce a parental tax credit and give the in work tax credit to those currently on the benefit to increase their incomes.

Gareth Morgan’s solution to child poverty is to give billions of dollars to adults not in poverty and leave those who are in poverty worse off under the universal basic income. It is obvious which of these is more likely to attract political support and provoke resistance from taxpayers and political parties willing to court those are opposed to great big new taxes.

One of the economic reforms in the 1980s and 1990s that saved the welfare state was more efficient taxes and more efficient government spending. The targeting of government social spending reduce  growth in the overall tax burden and therefore the political resistance it provoked.

Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidised, shifts in political power among taxed groups, and shifts in political power among subsidised groups. Sam Peltzman argues that:

governments grow where groups which share a common interest in that growth and can perceive and articulate that interest become more numerous.

The median voter in all countries was alive to the power of incentives and to not killing the goose that laid the golden egg. After 1980, the taxed, regulated and subsidised groups had an increased incentive to converge on new lower cost modes of redistribution.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden of taxes on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.

Gary Becker and Casey Mulligan in Deadweight Costs and the Size of Government (NBER Working Paper Number No. 6789) concluded that flatter and broader taxes encourage bigger government. This is because taxpayers offer less resistance to increases in flat tax rates than to more onerous and less efficient forms of taxation. Any decline in the resistance of taxpayers to taxes leads to larger governments since an endless number of groups lobby to divide up the large revenue base.

An inefficient tax system or spending program  from the standpoint of optimal tax theory can improve taxpayer welfare this so-called inefficient system creates additional political pressure for suppressing the growth of government. Inefficient taxes do not raise much revenue and therefore do not support a large sized government.

A switch to more efficient taxes through tax reforms allows governments to raise the same amount or larger amount of revenue for the same level of political resistance from taxpayers. This is because less revenue and output is wasted by discouraging labour supply, investment, savings and investment in capital with high marginal rates of tax on narrower tax basis.

The rising deadweight losses of taxes, transfers and regulation all limit the political value of inefficient redistributive policies. Tax and regulatory policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.

Long live the Slopegraph. Long live Edward Tufte. tinyurl.com/naeh7rc http://t.co/C8Lgnupxz9—
Amity Shlaes (@AmityShlaes) May 16, 2015

Everyone can gain from converging on more efficient modes redistribution. The tax burden is less than otherwise. Government spending is more than a wise because taxes are raised with less deadweight social costs.

An improvement in the efficiency of either taxes or spending reduces political pressure from taxed and regulated groups for suppressing the growth of government and thereby increases total tax revenue and spending because there is less political opposition. Improvements in the efficiency of taxes, regulation and in spending reduce political pressure from the taxed and regulated groups in society.

The post-1980 reforms of Thatcher, Reagan, Clinton, Hawke and Keating, Lange and Douglas and others saved the modern welfare state. Their moves towards more efficient taxes and better targeted social spending  did reduce growth in government spending but also prevented even larger cuts to  social spending since 1980 at the behest of the increasingly restive taxpayer.

Social spending growth did temper after 1980 but the level of spending was larger than otherwise because of the extra revenue raised through more efficient taxes – more efficient taxes which provoked less political opposition.

More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups while still supporting extensive but more tempered social spending.

Governments everywhere hit a brick wall in terms of their ability to raise further tax revenues. Political parties of the Left and Right recognised this new reality. Gareth Morgan has not when he proposes a great big new tax to fund his universal basic income.

Billions of extra dollars in revenue must be raised and political resistance provoked to his proposed comprehensive capital tax to fund a universal basic income for those who are not poor. Child poverty is not reduced  by a universal basic income because single parents and the children receive no more income support from government than before.

Which has more political legs? The Greens’ proposal to raise taxes by $1 billion to fight child poverty or the proposal by Gareth Morgan to raise taxes by 10 times that and have less impact on child poverty?

The current and future governments of New Zealand have enough on their plate to work out how to fund  a universal old age pension and health spending without giving away billions of dollars to the non-poor through an universal basic income.