Bit of English

NZ Finance Minister Bill English is awesome. I love every last bit of this.

"With respect to so-called urban sprawl, I think that's a nonsense. If you're against urban sprawl and that means lower to middle income Kiwis can't buy a house and you can't build an apartment in the middle of Auckland for less than NZ$600,000, then that's too high a price to pay. And if it means driving up house prices in a way that wrecks the economy then that's too high a price to pay," he said.

"Funnily enough the people who are most worried about urban sprawl live in the middle of the city. They don't get to see it. How much time to they really spend out the end of the Western motorway or Botany? None actually. They think you should be able to walk to the countryside. Well...welcome to Gore. If you're really mad, that's where you should go. But they don't. They stay in Auckland Central," he said to laughter from the audience.

"What's actually happened is that the local authorities were keen for a denser city, but the inhabitants weren't, so they've jettisoned a fair bit of the densification aspect," he said.

"So if Auckland wants to grow now, it has to grow out because you don't want it to grow up. Now that's a fair choice, but please don't stop it from growing out as well, otherwise we'll get another few years of 15% house price growth and you get a real mess when it crashes," he said, adding the special housing areas agreed under the Housing Accord with the Auckland Council "do spread the city because the planning rules don't let you do anything else."

"We're indifferent as a government as to whether you grow up or out. But you said don't grow up, so we expect to help you grow out."

English said people making planning decisions in Auckland, Wellington and Christchurch needed to understand they were making decisions about New Zealand's largest asset class, where the decisions they make affect the whole economy, not just your neighbourhood.

"Of course there's tension there, but we are pretty determined to turn ourselves into an affordable housing market," he said.

"There's no obvious reason why little old New Zealand should be one of the most expensive housing markets in the developed world. It really puts pressure on our households. It's one of the reasons why we have interest free student loans, working for families, subsidised early childhood care and savings are low," he said.

High mortgage costs were a reason why the Government provided payments supplementing incomes costing billions, "and a lot of that is driven by planning decisions in this city."

When land use regulations are all messed up, everything else gets screwed up too.

Oz economist Leith van Onselen's right:

@EricCrampton @bernardchickey You are very lucky to have someone of the calibre of English. Runs rings around Australia's clowns.
— Leith van Onselen (@leithvo) February 27, 2014

But while he pines for sound people on the Australian right, I wish that the New Zealand left could match the Australians. Here's Australian Council of Trade Unions economist Matt Cowgill on housing in Australia:

There's a trade-off at play here, one that can't be wished away or ignored. With a growing population, you can't restrict rising density in established suburbs, prevent sprawl on the urban fringes, and prevent housing from being unaffordable. Pick two out of the three. The urge to preserve historic neighbourhoods, the desire the conserve all the green bits around our cities, and the wish to maintain affordable housing are all noble impulses with which I sympathise. But, again, we can't have them all.

Which is pretty much the same thing that Bill English said. Sound economics, left or right, is on the same page on this stuff. Stupid land use regs hurt poor people while benefiting middle and upper class homeowners.

Here in NZ, we're stuck with the Council of Trade Unions' Helen Kelly.

Bill English, in the speech linked above, talked about selling off some of the Housing New Zealand stock of housing so that they could better match social housing to locational needs. It makes no sense to have a Housing NZ house in an expensive part of town when selling it off could fund social housing for three families instead. Here's English:

"In housing and other areas we will continue recycling taxpayer assets to free up money for reinvestment in areas where there is genuine demand," he said.

Later in the questions and answer session with the audience, he expanded on the plans.

"We actually don't need to own all those houses to help those people who need help,"he said, referring to the Government's partnership with the likes of the Salvation Army, the New Zealand Housing Foundation and IHC's Idea Services.

English said the Goverment wanted to assess a family's need for housing in an area close to jobs and schools, which was difficult to do with its existing stock of 60,000 to 70,000 houses. "You've got to stick them in a house that's empty," he said.

"That will mean growing the non-Housing Corp social sector and redeveloping the Housing Corp assets."

English said there were big tracts of Auckland such as Mt Roskill and Tamaki where "there's endless potential for supplying medium housing to the Auckland housing market if we redevelop those areas."

"But our top priority is to meet the needs of the people in the houses first, and then redevelop what we don't need in order to supply the market better, and there could be a lot of that happen."

Here's how Helen Kelly responded.

Govt planning 2 sell off up to 1/3 of State Housing stock 2 private sector. Adding 2 the housing crisis. They wld sell their grandmothers.
— Helen Kelly (@helenkellyCTU) February 27, 2014

Pure partisan idiocy. Why oh Why is the NZ left so freaking dumb?

Progressivity

Finance Minister Bill English has noted that, since the top marginal tax rate on high income earners dropped to 33 percent, the proportion of total income taxes paid by top-earners has increased. Kiwiblog and The NBR have pointed to this as evidence of increased progressivity by those socialist National Party folks; some on Twitter have argued that English was disingenuous because he ignored the rise in the GST that accompanied the drop in income tax.

Recall that when National proposed reducing all income tax rates and increasing the GST, they were attacked on two fronts. They weren't just critiqued for increasing reliance on the GST, which hits the poor more than a progressive income tax.* They were specifically critiqued for the drop in the top marginal tax rate. "Tax cuts for the rich." Let's look back to the history.

Here's NZ Herald's Audrey Young:

Prime Minister John Key yesterday defended bigger tax cuts for the wealthy, arguing that they already paid a big portion of tax.

Here's a Labour press release:

“The tax cuts are unfair; a third goes to the top five percent and fifteen percent goes to the top one percent. People in the middle and bottom will go backwards after inflation.

 “The upper income tax cuts are unaffordable.

 Here's Gordon Campbell:

As No Right Turn has calculated, the top 2% of earners will get 11.5% of the total income tax bounty, and that happens to be roughly the same amount as the government has had to borrow to finance the entire package. Literally, New Zealand is borrowing to provide tax cuts for its most wealthy citizens

I could go find more, but what's the point? Anybody who was paying attention knows that English and Key were critiqued not only for switching from income to consumption taxation but also for the substantial cut in the top marginal tax rate for folks on higher incomes. They saw it as a big giveaway to National's rich mates and reckoned it meant that the rich were paying much less income tax.

So it is hardly a swindle or disingenuous or dishonest for Bill English to point out that the richest tier of taxpayers are now, because of changes in the income tax system, paying a larger portion of aggregate income taxes.** While it is definitely true that the total tax burden matters far more than the income tax burden, where National previously was attacked specifically on the income tax part, it is eminently fair for them to point out that the fraction of net income taxes paid by rich households has gone up rather than down.

If I wanted to attack English's press release, here's where I'd instead be going.

1. We should be looking at a longer time series on proportion of income tax paid by top-earning individuals and top-earning households rather than just the comparison of pre-change and current figures. Top earners in the US took a much larger income hit from the financial crisis than did lower-income folks because a much larger part of their compensation bundle is tied to firm performance. They also then rebounded much more strongly post-crisis. You could easily get a big increase in the proportion of income tax paid by the wealthy in the current period as compared to the immediate post-crisis period simply via this effect. The base year then should have been set somewhere pre-crisis.
2. English, throughout, talks about the proportion of income taxes paid by high-earners. He doesn't say how much total income tax was paid by high-earners. It's possible that total income taxes dropped as part of the tax switch by enough that it's simultaneously true that high income earners pay more of it proportionately but pay less in income tax in an absolute sense. I do not know if this is true. It seems pretty unlikely, but it's possible. However, recall that progressivity isn't defined by how much a tax system hurts the rich, it's defined by the proportion of total taxes paid across different income cohorts. 
3. It would be better to accompany all of this with both the total tax paid by income decile across all forms of taxation, and with income-linked benefits including WFF. Gross and net tax both matter. A bar chart, by decile, with income, tax paid (all sources), and transfers received, would likely be best.
1. Further, it isn't immediately obvious why cash benefits like WFF count while in-kind benefits don't. Like tertiary education subsidies. 
4. The real scandal, to my mind, is the very high effective marginal tax rates faced even by those on zero net tax. The combination of abatement rates across some plausible combinations of benefits wind up resulting in effective marginal tax rates that utterly disincentivise work while resulting in no net tax paid - the worst of both worlds. Having a lot of households paying no tax at all can be fine if it's because you have a reasonable minimum earnings threshold or because you're running a clean negative income tax. But achieving it by taxing any earned income at close to 100% while handing over a benefit cheque isn't exactly something to be proud of.

Bottom line: I'm not sure that English has entirely proved his case against the critics of the 2010 tax cut, but I don't think he's wrong to put up evidence against that critique either.

* THIS DOES NOT MEAN THAT GST IS REGRESSIVE. GST is a flat tax; income tax is progressive. Net effects remain ambiguous.

** I haven't checked his numbers, but can't imagine that Treasury would have this wrong.

Thursday updates

Blogging has been light; I spent the last two days catching up with folks in Wellington and attending the National Drug Policy Summit run by the New Zealand Drug Foundation, about which I'll blog properly later. A few bits of interest in the meantime:

• Westpac notes that LVR limits can have short term effects on house price inflation, but only short-term effects.
  • Duh
  • There are sensible justifications for this kind of policy based on prudential regulation and avoiding any situations where banks take on too risky a loan portfolio and downside risk winds up being borne by the government. Justifications based on curbing house price increases don't make any sense to me, whether or not it's the RBNZ comms team or the Governor making them. In that sense, it's no damning of the policy that it only has transitory effects on house prices. But it still reinforces the NZ econ blogosphere's "it's just dumb trying to justify LVR on the basis of house prices being too high." consensus position.


• Scott Sumner praises Finance Minister Bill English. Agreed. Some credit could go to Minister English's truly excellent economics adviser as well. 


• The New Zealand Police have decided that despite GCSB's having acted illegally in the DotCom surveillance, they will not press charges because there was no intent to act illegally. But:

  Intent to break the law is not an element of the charge of illegally intercepting private communications.
  — Graeme Edgeler (@GraemeEdgeler) August 29, 2013

  The government, through the new GCSB and TICS legislation, is giving us an expansion of GCSB's scope with increased nominal oversight, but no expectation that GCSB would ever be prosecuted for doing anything that was in fact illegal. Lovely. Big slow clap here for everyone involved. Meanwhile, here's Ars Technica on some of this mess.


• The insurers here argue for something sensible, and something for which I've argued before: have EQC effectively cover a large excess in case of natural disasters, and otherwise stay out of the darned way.

So endeth the closing of the browser tabs, so closeth the day.

Update: note that Edgeler also argues that lack of intent to break the law could be a decent reason not to go ahead with prosecution in this kind of case and reminds us that criminal penalties are not the only form of accountability. That's all true; I hope that everyone who has illegally been spied upon knows that it has happened so that they can launch civil suits.