Johan Norberg on Tax Havens
07 May 2016 Leave a comment
in comparative institutional analysis, entrepreneurship, public economics Tags: bribery and corruption, tax havens
Does invested $1 in retrofitting saves $6 in health expenditure? @PhilTwyford @PeterDunneMP @AndrewLittleMP
05 May 2016 Leave a comment
in economics of regulation, energy economics, health economics, politics - New Zealand, public economics Tags: cost benefit analysis, economics of housing, economics of insulation, energy efficiency gap, The fatal conceit, The pretense to knowledge, valuation of life
Various bold claims have been made about the payoff from investing more in retrofitting insulation into housing. The government recently spent $600 million on such retrofitting of insulation.
https://twitter.com/PhilTwyford/status/728137160113557505
There is a private member’s bill before Parliament to introduce minimum standards for rental properties with regard to insulation and other matters. Little is by the Leader of the Opposition Andrew Little said for the consequences for rents of this additional expense to landlords.
Ian Harrison of Tail Risk Economics initially estimated that the $600 million invested in retrofitting of insulation will save barely half of that:
After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear.
The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.
After meeting with Ian, I read through the rather dull background documents behind a cost benefit analysis relied upon by the government to spend the $600 million dollars.
The most interesting part of the cost benefit analysis is most of the benefits come from fewer cardiovascular related hospitalisation of the elderly and not from respiratory diseases among children.
I found the error was far more fundamental than a incorrect transfer of a calculation between tables discussed in the first publication by Harrison. I had to read the background documents several times to understand what had been done wrong.
The cost benefit analysis for the Warm Up New Zealand Heat Smart Programme assumes that the number of elderly occupants of the newly insulated house increases by one each year and after 5 years, one of these dies but is replaced by a new elderly occupant.
We have modelled the probability of a vulnerable person avoiding mortality as a result of the intervention. The probability of this is (112.7/1000)*0.27= 0.03 (3%). We treat avoidance of mortality by treatment in each year as independent events.
The multi-year benefit calculated above would accrue based on the life years gained as a result of deaths avoided in year one.
However, we would expect these benefits to accrue in year two for different vulnerable individuals (aged 65 and over with a cardiovascular related hospitalisation in previous 18 months), and for different individuals again in every subsequent year that the treatment continues to have an effect, i.e. an on-going stream of benefits of $1,050.74 per year. This assumes a constant proportion of people aged 65+ who have recently been hospitalised with circulatory problems….( p.38).
In the first year of the new insulation, the first occupant benefits and the net present value is included in the benefit cost analysis calculation – the erroneous benefit cost analysis calculations which its authors still defend.
In the 2nd year, another elderly person moves into that same house and the same calculation is done for them. In the following year, yet another elderly person moves into the same house and the net present value calculation is repeated.
By the end of 5 years, there are 5 occupants in this house all benefiting from the same insulation investment. In the 6th year, the first elderly occupant dies to be replaced by a new elderly occupant who then gains from the insulation upgrade.
There was double counting of the number of people who benefited from the insulation as Iain Harrison explains
The analysis assumed that there was not one, but five occupants who had been hospitalised with a cardiovascular illness in the previous 18 months in each of the relevant insulated houses. There should have been only one such occupant.
The retrofitting of insulation was estimated to cost $600 million. Iain Harrison estimated the benefits to be $300 million, not $1.2 billion. That is a benefit cost ratio of 0.5.
Source: Iain Harrison, The mortality reduction benefits of insulation: the error identified.
Why is GST but not company tax incidence so easy to understand
28 Apr 2016 Leave a comment
in public economics Tags: company tax, rational irrationality, tax incidence, taxation and entrepreneurship, taxation and investment
The tax incidence of sales taxes is understood by everybody but who pays company tax is stubbornly misunderstood. The seller is sending the tax cheque to the taxman does not fool anyone regarding who ultimately pays sales taxes.
Everyone expects that sales tax increases such as of the GST or VAT will be passed on to buyers but sometimes a little bit is absorbed in terms of lower profits by sellers if it is more than the market can bear.
When it comes to company taxes, this intuitive understanding of the economics of the incidence of taxes completely disappears. There is a strong belief that only investors pay the company tax in the form of dividends.
The notion that investors may reduce their investment and therefore the amount of capital with which workers can work is stoutly denied as is the implications for lower than otherwise wages because of this.
The possibility that the entire company tax may show up as lower wages when capital is internationally mobile is just not even contemplated. This is despite foreign direct investment being welcomed on the grounds that more capital means higher wages for local workers.
Likewise, when a factory is re-located offshore, it is understood that that will harm wages. That understanding does not carry through to company tax incidence when the factory relocates offshore because of low company taxes rather than import competition.
Who will pay @johnkeypm’s great big new land tax?
26 Apr 2016 Leave a comment
in politics - New Zealand, public economics Tags: housing affordability, land supply, land tax
A critical aspect of a land tax rarely addressed in public debate is its “economic incidence – or who actually bears the burden of the – tax as opposed to its statutory incidence, or who literally pays the tax.
John Key has floated a land tax as an option to deal with rising land prices in Auckland if a large number of buyers are foreign.
It is pretty standard public economics the elasticities of supply and demand essential to working out who actually pays tax rather than who sends the cheque.
More of the taxes paid by either the buyer or seller who is demand or supply is more inelastic; responds less to changes in price.
In the case of land, supply is looked upon as highly inelastic. Because of this lack of responsiveness of suppliers to changes in price, most to all of the tax is paid by sellers of land.
Since supply is fixed, the same amount of land is still available The owner now has a lower after-tax rental return of his land. As the Australian Treasury explains
As the capital value of the land is equal to the discounted present value of all the future expected rental returns, a lower rental return implies a one-off fall in the value of all land. Owners of land bear the incidence of the land value tax even if they sell their land in response to the tax.
This reduction in the rental value of land will mean future buyers will pay less for land. The price of land will fall in the future because returns are less after-tax.
The introduction of a land tax by John Key will mean the price of land might fall by the present value of the land tax. Zodrow explains
In principle, the economic incidence of all of these capitalization effects is on the owners of land and housing at the time of the imposition of the tax, when the effects are “capitalized” as one-time changes in the prices of these assets..
@BernieSanders nothing is free in Denmark
24 Apr 2016 Leave a comment
in applied welfare economics, fiscal policy, politics - USA, public economics Tags: 2016 presidential election, Denmark, growth of government, size of government, social insurance, taxation and labour supply, welfare state
Ten Word Answers
21 Apr 2016 Leave a comment
in economics of media and culture, Public Choice, public economics Tags: West Wing
Forget avoidance outrage: public’s real attitude to tax is revealed by their actions @JordNZ
21 Apr 2016 Leave a comment
in applied price theory, constitutional political economy, economic history, economics of media and culture, politics - Australia, politics - New Zealand, politics - USA, Public Choice, public economics Tags: British economy, British politics, expressive voting, growth of government, rational irrationality, revealed preference, size of government, voter demographics
Did the rise of welfare state cause more inequality in wealth?
18 Apr 2016 Leave a comment
in fiscal policy, labour economics, labour supply, macroeconomics, poverty and inequality, public economics Tags: growth of government, income inequality, measurement error, Ricardian theory of budget deficits, Social Security, top 1%, wealth inequality
Markus Poschke and Barış Kaymak have just put out a paper arguing that increased social spending is a major driver of wealth inequality:
Another important and often overlooked third factor is the rise in the generosity of government transfers since 1960, mostly due to the expansion of public pensions (social security) and the introduction of public health insurance for the elderly (Medicare).
Combined spending on these two programs accounted for almost 9% of US GDP in 2010, up from less than 3% in 1960…
These government programmes tend to curb the need to rely on personal savings for retirement, especially among low and middle-income households, and might thus explain why their share in total wealth has declined.
This makes a good to good degree of sense. I have previously argued that using the arguments of Edward Prescott that it is not wise for people on ordinary income to save for their retirement when they can go down to the local Social Security office and claim an old age pension.
51% of nonretirees doubt they will receive Social Security… on.gallup.com/1NcwzEa #GallupDaily http://t.co/ZhKnHYtr1X—
(@GallupNews) August 13, 2015
It is even less wise to save that for retirement if those savings reduce your eligibility for an old age pension. Far better just to invest in a nicer house and pass it on to your children. Poschke and Kaymak note that measures of private wealth inequality miss these claims to old age pensions:
… statistics on wealth inequality that do not capture households’ claims on the public sector are incomplete and overstate top wealth shares.
This is not a new argument. Back when the Ricardian theories of budget deficits came to prominence and before that in debates on theories of the public debt, the more Keynesian sides of those arguments did argue that people were irrational for not including their old age pension entitlements under social security schemes in their calculations of their wealth.
Some of their taxes were paying for their future old age pension and were another form of wealth rather than a tax. As such, taxpayers should regard this part of their taxes as investments and not cutting back their labour supply in response as they do to other taxes.
How much of the rise in wealth inequality is due to this failure to measure Social Security wealth as represented by old age pension entitlements? Their estimate is about 25%:
…technological factors play a dominant role not only for changes in income inequality, as is well known, but also for wealth inequality. As high-earning households save part of their additional income, their share of wealth also rises.
This channel accounts for about half of the total increase in wealth inequality. Tax cuts and the expansion of transfers each account for about half of the remainder…
While tax cuts encourage saving, larger transfers reduce saving incentives for retirement, in particular for low and middle income groups. This implies that these groups’ share of private wealth declines.
Note though that this is partly due to the fact that measures of private wealth inequality, like those compiled by Saez and Zucman, do not include claims to future government transfers, like social security, which constitute wealth for their owners.
@garethmorgannz is getting a little techie about debating optimal tax theory
17 Apr 2016 1 Comment
in politics - New Zealand, public economics Tags: optimal tax theory, taxation and entrepreneurship, taxation and investment, taxation and labour supply, taxation of capital
All I said was “optimal tax theory including that pioneered by Stiglitz and Merrlees, economists of impeccable left-wing credentials, show that taxes on the income from capital should be low because the deadweight social costs of taxes on capital are very high”.
@garethmorgannz gives optimal tax theory a pass once again @JordNZ
17 Apr 2016 Leave a comment
in applied price theory, entrepreneurship, fiscal policy, macroeconomics, politics - New Zealand, public economics Tags: company tax, Gareth Morgan, rational irrationality, taxation and entrepreneurship, taxation and investment, taxation and labour supply, taxation of capital income
The Morgan Foundation gave optimal tax theory a pass in yesterday’s publication about taxes on land and capital. Gareth Morgan is keen on a comprehensive capital tax.
Source: Taxing Wealth & Property – What Works? A Morgan Foundation Report.
This failure to refer to optimal tax theory is despite the Foundation’s strong commitment to evidence-based policy. Any discussion of tax policy that is evidence-based must refer optimal tax theory.
Source: Morgan Foundation, Public Policy Education.
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The scale of the #Panamapapers leak
16 Apr 2016 Leave a comment
in economics of crime, law and economics, property rights, public economics Tags: conspiracy theories, tax havens
Taxpayers Alliance mistaken about tax revenues as a stable % of GDP @the_tpa
12 Apr 2016 Leave a comment
in applied price theory, economic history, public economics Tags: British economy, British taxes, growth of government, Margaret Thatcher, size of government, taxation and entrepreneurship, taxation and investment, taxation and labour supply, Taxpayers Alliance
The British Taxpayers Alliance got carried away a bit when it said taxes as a share of British GDP have not varied much over the last 50 years or so. Margaret Thatcher would be turning in her grave.
A stable tax take is more the case in the USA. Federal tax receipts stay within the range of 18-20% of U.S. GDP as shown in the charts below and above.
There were large cuts in the top tax rates in the USA without any fall in tax revenues as a percentage of GDP because of base broadening.
Margaret Thatcher really did make a dent in taxes as a share of GDP in the 1980s. They fell by 5% of GDP but then went back up again in the 1990s as is shown in the Centre for Policy Studies chart below.
That 5% drop was a big variation as a share of GDP which is also shown in the Taxpayers Alliance chart if you look closely at the 1980s. That sharp drop in taxes as a share of British GDP is clearer in the Centre for Policy Studies chart because it magnifies the data.
There are also big changes in the British tax mix in the 1970s and 1980s. The large rise in tax in personal income in the 1970s as a percentage of GDP, also shown in both British charts above as well is the one below, coincided with the rise of the British disease and British economy becoming widely known as the sick man of Europe.
Source: OECD Stat.
The large decline in taxation in personal income under Thatchernomics was followed by an economic boom. The UK grew at above the trend annual real GDP growth to 1.9% for most of the period from the early 1980s to 2007 as shown in the detrended data in the chart below.
Source: Computed from OECD Stat Extract and The Conference Board. 2015. The Conference Board Total Economy Database™, May 2015,http://www.conference-board.org/data/economydatabase/.
In the above chart, a flat line is growth at the same rate as the USA for the 20th century, which was 1.9% for GDP per working age person on a purchasing power parity basis. The USA’s trend growth rate in the 20th century is taken as the trend rate of growth of the global technological frontier.
A falling line in the above chart is growth in real GDP per working age person, PPP at less than the trend rate of 1.9% per annum while a rising line is real growth in GDP per working age person in excess of the trend rate.
Top marginal tax rates and thresholds across the OECD
04 Apr 2016 Leave a comment
in public economics Tags: taxation and entrepreneurship, taxation and labour supply, taxation investment, top marginal tax rates
Australian taxes on income are not particularly high if you include social security
02 Apr 2016 Leave a comment
in politics - Australia, public economics Tags: Australia, old age pensions, retirement savings, taxation and labour supply
@JordNZ best way to talk yourself out of #UBI is listen to advocate list new taxes required
01 Apr 2016 Leave a comment
in economics, income redistribution, labour economics, labour supply, politics - New Zealand, poverty and inequality, Public Choice, public economics, welfare reform Tags: universal basic income
Utopia, you are standing in it! 
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