Stephen Williamson on Marginal Taxation

Karl Smith's avatarModeled Behavior

He says a lot. I’ll try to address piece by piece.

Next, some people have shown interest in this paper by Diamond and Saez. A key result that seemed to get these people excited is the calculation of a top optimal marginal tax rate (including all taxes) of 73%, relative to the current rate of 42.5%. There are two key assumptions that Diamond and Saez make to come up with the 73% optimal rate. First, we should not care about the welfare (at the margin) of the rich people. This argument is based solely on the notion that marginal utility of income is low for the top income-earners. Second, Diamond and Saez use a “behavioral elasticity” of tax revenue with respect to the tax rate of 0.25. To see how this matters, if you use their formula and an elasticity of one, you get an optimal top tax rate…

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The politics of ethnicity-based research in New Zealand

When Simon Chapple in 2000 wrote “Māori Socio-Economic Disparity”, which showed that disadvantage in New Zealand is more closely tied to age, marital status, education, skills, and geographic location than it is to ethnicity, broadly conceived, such as Māori ethnicity:

  • He was summoned before the Māori Affairs Committee of parliament to defend his paper! His chief executive at the Ministry of Social Policy went along with him to defend what he wrote while employed as a senior analyst at the Department of Labour. Staff at his new ministry launched a petition to have Simon fired.
  • The head of the Māori Affairs Ministry accused Simon of breaching the public service code of conduct.

Chapple also found that there are important differences in socio economic development by Māori self-identity. Those who identified only as Māori did worse than those that are identified as Māori and another ethnicity. Identifying only as Māori also correlated with living in rural New Zealand.

In terms of employment discrimination, employers would not know whether a Māori job applicant identified as only as Māori or also with another ethnicity, so discrimination is not a good explanation of Māori disadvantage because of this counterfactual. A major driver of Māori disadvantage, which is identifying on the Census form solely as Maori, is simply unknown to discriminating employers as a basis for discrimination in hiring and promotion.

There were editorials in the Dominion Post, which I cannot find online,  and in the New Zealand Herald. The latter said:

The Government is being prodded to recognise that Maori deprivation has more to do with socio-economic factors than ethnicity.

This was the conclusion of a report by the Labour Department’s senior research analyst, Simon Chapple. Helen Clark might well have had that finding partly in mind when she referred to a lot of water having gone under the bridge since the Government first formulated legislation.

Mr Chapple said, in essence, that place of residence, age, education and skills had more to do with poverty than race. In areas such as South Auckland, Northland and the central North Island, there were poor Maori, but there were also poor Pākehā and poor Pasifika.

The Minister attacked him and the paper as well for contradicting the Minister’s claim during the election campaign that everything got worse for Maori in the 1990s.

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Real equivalised median household income rose 47% from 1994 to 2010; for Māori, this rise was 68%; for Pasifika, 77% (Perry July 2014)

See Karen Baehler’s Ethnicity-based research and politics: snapshots from the United States and New Zealand for more information and a comparison with the similar response to Daniel Patrick Moynihan’s The Negro Family: A Case for National Action in 1965.

About a quarter of Negro families are headed by women. The divorce rate is about 2 1/2 times what it is [compared with whites],” Moynihan said. “The number of fatherless children keeps growing. And all these things keep getting worse, not better, over recent years.”

Moynihan, now retired from the United States Senate, was a senior official in LBJ’s Labor Department in 1965. He wrote his report on a typewriter over a few weeks and had the publications office in the basement of the Labor Department print 100 of them, marked “For Official Use Only.”

  • He warned about the breakdown of the African-American family where deprivation and disorganisation had formed their own vicious circle.
  • Many civil rights leaders had labelled Moynihan’s report a subtle form of racism because of its unflattering portrayal of the black family (Wilson 1987).
  • These accusations of racism helped make the breakdown of the family a taboo subject in social policy in the USA

see The Moynihan Report Revisited: Lessons and Reflections after Four Decades for a review by the best and the brightest in American economics and sociology on Daniel Patrick Moynihan’s prophetic warnings. Holzer says, for  example:

Moynihan was extremely insightful and even prescient in arguing that the employment situation of young black men was a “crisis . . . that would only grow worse.”

He understood that these trends involve both limits on labour market opportunities that these young men face as well as skill deficits of and behavioural responses by the young men themselves.

More children are growing-up without a working father living in the home and glean the awareness that work is a central expectation of adult life (Wilson 1987, 1996).

Single-parent households increased from 13 per cent of all Māori households in 1981 to 24.4 per cent in the 2006 Census. In the 2006 Census, 70 per cent of Māori single parent households were on a low income compared to 15 per cent of other Māori one family households (Kiro, Randow and Sporle 2010).

Most of the skill gaps that are present at the age of 18 – skill gaps which substantially explain gaps in adult earnings and employment in all groups – are also present at the age of five (Cunha and Heckman 2007). There is much evidence to show that disadvantaged children have lower levels of soft skills (non-cognitive skills): motivation, persistence, self-discipline, the ability to work with others, the ability to defer gratification and plan ahead, etc. (Heckman 2008). Most of the skills that are acquired at school build on these soft skills that are moulded and reinforced within whānau.

When I started working on labour economics in 2007 I found that the labour economics of Māori was very narrowly written and stayed well clear of the minefield that Simon braved about how ethnicity does not matter that much to Māori social disadvantage.

The fire of truth: the importance of putting a price on error

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Why New Zealanders support MMP

Most people seem to give the same reason to me in conversations as to why they support the MMP voting system – Mixed Member Proportional representation.

The reason is profoundly democratic: their party vote always counts no matter where they live in the country or how safe or how marginal the local electorate might be.

Under first past the post, it didn’t matter who you voted for if you lived in a safe electorate because the local MP of whatever political party would always be elected.

What is underplayed in these conversations is how close all elections are in New Zealand, and how likely it is that your vote might be decisive rather than just one of millions.

Under MMP, the last seat in Parliament is a contest between several parties. If anyone just gets a couple of dozen more votes, they get another seat.

In the current parliament of 121, the National Party Government has 59 seats, with the ACT party one seat and the United Future Party one seat.

One more seat for ACT or one less seat for the National Party would have made a big difference to the election outcome. ACT was only 45 votes short of getting that second seat in the 2011 General Election.

Note: Under MMP, the New Zealand House of Representatives is a mix of MPs from single-member electorates
and those elected from a party list, and a Parliament in which a party’s share of the seats roughly mirrors its share of the overall nationwide party vote. There is a minimum party vote threshold to get into Parliament. The party votes of those parties with less than 5% of the party vote do not count unless they win a constituency seat.

The business community as an enemy of capitalism

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The best discussions on green interest group coalitions

Bootleggers, Baptists, and the Global Warming Battle By Bruce Yandle and Stuart Buck:

The theory’s name is meant to evoke 19th century laws banning alcohol sales.

  • Baptists supported Sunday closing laws for moral and religious reasons, while bootleggers were eager to stifle their legal competition.
  • Politicians were able to pose as acting in the interests of public morality, even while taking contributions from bootleggers.

Yandle and Buck argue that during the battle over the Kyoto Protocol, he “Baptist” environmental groups provided moral support while “bootlegger” corporations and nations worked in the background to seek economic advantages over their rivals.

BAPTISTS? THE POLITICAL ECONOMY OF POLITICAL ENVIRONMENTAL INTEREST GROUPS By Todd J. Zywicki who specifies three testable implications of a public interest model of the activities of environmental interest groups:

(1) a desire to base policy on the best-available science;

(2) a willingness to engage in deliberation and compromise to balance environmental protection against other compelling social and economic interests; and,

(3) a willingness to consider alternative regulatory strategies that can deliver environmental protection at lower-cost than traditional command-and-control regulation.

Zywicki concludes that It has been argued that environmental regulation can be best understood as the product of an unlikely alliance of “Baptists and Bootleggers” – public-interested environmental activist groups and private-interested firms and industries seeking to use regulation for competitive advantage.

The Far Left view of the welfare state

HT: Dan Mitchell

What do political parties do?

The purpose of political parties is to popularise ideas and then present a slate of pre-screened candidates committed to delivering on these ideas, to controlling each other to ensure they stay staunch, and have a defined and published world-view or ideology on what they will do when various contingencies arise. A market for assurances arises through political brand-name capital.

A conviction politician is one who has invested is so much brand-name capital that they know they are finished if they change their views. People vote for them because they know what they will get. When the brand is betrayed, voters punish this unfaithfulness severely – execute one, educate a thousand.

Schumpeter disputed that democracy was a process by which the electorate identified the common good, and that politicians carried this out:

• The people’s ignorance and superficiality meant that they were manipulated by politicians who set the agenda.

• Democracy is the mechanism for competition between leaders.

• Although periodic votes legitimise governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited.

Modern democracy is government subject to electoral checks. Citizens do have sufficient knowledge and sophistication to vote out leaders who are performing poorly or contrary to their wishes.

The power of the electorate to turn elected officials out of office at the next election gives elected officials an incentive to adopt policies that do not outrage public opinion and administer the policies with some minimum honesty and competence.

Political parties, by investing in brand names and ideologies  governments have betrayed their promises make it easier to vote out governments have betrayed their promises

The sound and the fury

It is a general popular error to suppose the loudest complainers for the public to be the most anxious for its welfare.  - Edmund Burke

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Forget income inequality, lets go after zoning restrictions…

 

via Managerial Econ: Forget income inequality, lets go after zoning restrictions….

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The art of politics

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In a democracy we resolve our differences by trying to persuade each other and elections

The-virtue-of-a

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The Devil’s Dictionary – definition of a revolution

In politics, an abrupt change in the form of misgovernment.

Specifically, in American history, the substitution of the rule of an Administration for that of a Ministry, whereby the welfare and happiness of the people were advanced a full half-inch.

Revolutions are usually accompanied by a considerable effusion of blood, but are accounted worth it — this appraisement being made by beneficiaries whose blood had not the mischance to be shed.

The French revolution is of incalculable value to the Socialist of to-day; when he pulls the string actuating its bones its gestures are inexpressibly terrifying to gory tyrants suspected of fomenting law and order.

Thatcher’s brilliant critique of socialism and how it is happy for the poor to be poor

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Household Incomes in NZ: trends in indicators of inequality and hardship 1982-2013

Real household income trends, 1982 to 2013 ($2013) before housing costs (BHC) and after housing costs (AHC)

real household income 1982-2013

Gini coefficient 1980 – 2015

gini coefficient 1980 2015

The tax and transfer system significantly reduces the inequality

The tax and transfer system significantly reduces the inequality

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the increases were 55% for Pakeha, 57% for Pasifika, and 64% for Māori since 1994.

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