Lyndon Hood - Hotter than Canterbury, Lower Hutt

Wednesday, June 14, 2006

New Hood: Lemonade Kids Feel Tax Squeeze

If I have to spend all of the next two-and-a-half years ripping off National Party advertising campaigns, well, you'll be sorry.

I got one of those postcards (link added - includes link to PDF original) in the mail at the weekend. I guess that means technically that I'm reached, but it's not something I'm gonna swallow whole, no matter how good it "tasts". After all, I don't want to be - ahaha - sold a lemon.

[Not precisely an 'update', but added after posting: some other parodies - here's Farrar's response to some that Jordan put up, and a pile on the Thorndon Bubble]

Incidentally, with the kids-selling-lemonade-on-the-lawn thing*, and the stroke-through-the-50¢ thing you might have thought someone had screwed up and got a stock photo from, shall we say, 'overseas'. But no. The magic of a Google image search for "girls selling lemonade" reveals that it's by Wellington photographer Mike Clare. It shows up on the first page of results even if you have SafeSearch turned off.

If you'd like to license it for yourself, get in touch with Photo New Zealand.

While you're at it, you can ask what's been 'shopped out of the background where those shadows are. If you have a suggestion, feel free to 'shop it back on in. You might win a prize.

Anyway, back to the pseudo-economics rhetorical questions.

It's like this: you know those infuriating people? The ones who make alarming innuendoes of the form, "What I want to know is ..." when they could find out whatever it is by typing the relevant keywords into Google? Who say "I have yet to see any convincing argument that X," when in accuracy they should say, "I clearly know nothing about the topic, haven't been paying attention and wouldn't know a convincing argument if it inducted its premises in my rectum"?

My turn now.

Tax Freedom Day

I have been trying to work out some way in which tax free day - or more generally, the ratio of state spending to GDP - can be, in itself, as a meaningful economic measure. Rather than just a gimmick to remind people that, all other things being equal, they'd prefer to pay less tax. And that uses the word Freedom! And is therefore Good!

I failed.

I was doing so badly I asked Farrar readers for help, and kind of got some. But the thing I remember from that discussion overall was the idea of a "state services like roads, police, various bits of health and education and so on are now free day".

Anyhow, here's my point:
...if the economy expands and the tax system stays the same, the proportion of tax to GDP goes up. More people have jobs, people move up tax brackets. Entities pay a greater proportion of their income in tax, but they still have a bunch more income left than they did before. Is that a bad thing?

Also the number is affected by taxpayer behaviour - if everybody saved their disposable income they would pay less tax (GST) than if they saved it (though the tax might be paid somewhere in the financial chain).

So while the exact number probably means something, I'm damned if I know what.
Judging by annotations on the graph Farrar displays at the top of his post, while government tax policy has some effect the weight of the changes are caused by something else.

And then there's the benefits of keeping rates the same rather than cutting or ramping them up to suit the economy - a stable environment and hedging against the downside of the cycle.

This doesn't prove anything about what we should do now, but then neither does the position of 'tax freedom day' in the year.

There might be a right proportion of taxation on an economy but it depends.

The Balance of Trade Deficit

We give more money to the world than they give to us. I realise other people have said this, but – what's the problem?

The whole point of these transactions is that, in exchange for the money, the person doing the paying gets stuff. We have the money to spend and we want the stuff more than the money. Everybody wins.

Now it might be better for our economy (and worse for theirs) if, faced with similar goods, we chose the ones from New Zealand rather than China or Australia. But that doesn't make it a crisis. In fact it seems like, rather than being a cause of suffering, a balance of payments deficit is a sign that you're doing well and people can afford consumer goods.

Probably there are macroeconomic issues about the value of the dollar (which we were trying to bring down anyway, right?) and inflation.

Surely there must be something.

Free Lunch Not Had

ZenTiger ("the sane one") somewhat recently proposed a scenario where the government aprroaches breaking even by giving this one guy a tax cut than by taxing him. David Farrar, zen master of the way of the marginal rate, decribed it as "a nice example". He was possibly not using 'nice' in the sense of 'scrupulously accurate'.

Now, Zen's numbers won't quite stand still for me, but its seems that for this effect to work on a macro level it would require everyone to buy liquor with their tax cuts. Ultimately the argument seems to use the way, the more consumer hands the money passes through, the more of it goes back to the government.

Critically, it seems to ignore the fact that, if the government takes the money, it then hands most of it on to someone who will likely spend it on stuff, and so on, so that side of things balances out. The government is probably more likely to put the money out of action by saving it, but less likely to trade it out of the economy for overseas consumer goods.

The government might be likened to the economy's heart, or perhaps a kind of distended kidney, through which all the lifeblood eventually passes. And which produces waste in an obvious way that other organs don't.

As I understand it, most of the 'bonus' from tax cuts are suppposed to come from things like investment, economic activity and compliance. Rather than what happens in Zentiger's economic koan. Much more debate on the Farrar thread, where PabloR says, "The only reason the Laffer Curve got any traction is because Reagan was a simple old fool. "

One another note, I worry the Sir Humphrey's may be mellowing. I visited the site the other day (rare enough in itself now; I took the chance when they changed domains to ween myself off) and I saw a thread where the commentator aspersed in post left a comment - and wasn't pointlessly baited, treated with contempt or mobbed. Confused the hell out of me.

* Is that really the front lawn they're on? Isn't that the road behind them? Are they expecting nanny parent to buy all their lemonade? back