The Greens' tax and child poverty policy

I spoke briefly on Morning Report this morning on the topic of the Green's proposed policy to increase the income-tax rate to 40% for incomes over $140,000 and use the revenue raised to fight child poverty. Our brief pre-recorded interview covered a number of different aspects of the policy, of which they used my comment on the income-tax hike. The main points I made were as follows:

• On the expenditure side, it is a laudable goal to seek to reduce child policy, but I have a couple of concerns with the proposed mechanisms for achieving this:
• I would like to see more details on how replacing the In-Work Tax Credit with a general tax credit that doesn't require 20+ hours worked each week would affect the incentives to work. I take Susan St John's point (from the same Morning Report piece linked to above) that it is unfair to separate children in poor families into the deserving and undeserving poor based on the employment status of their parents, but the potential unintended consequences of creating new poverty traps needs to be acknowledged. 
• I wonder about the evidence base to backup the suggestion that problems with child poverty eliminated by providing parents with more income support. More income may well be a necessary condition, but I am mindful that we live in a country with a shockingly low immunisation rate for children from impoverished backgrounds even though immunisation is free. 
• To be fair, there are other aspects to the proposed policy than increased benefits (or reduced taxes) to poor families with children, and these may well be worthwhile, and I am not sure that the proposed income supplements wouldn't be effective; I just feel that this is a hugely difficult area that is not well understood. I would feel a lot more confident in these proposals if the proposal were to experiment with a few different things and to collect good data on effectiveness before committing a massive expenditure that will be hard to reverse if the policies turn out to be ineffective or counter-productive. 
• It is on the revenue side that I can't take the policy seriously at all:
• By all means seek to raise revenue by cracking down on tax avoidance, but this is a bit like trying to save money by eliminating inefficiency in the public service. In reality the revenue gains are probably small; realistic budgeting should assume gains of zero until the revenue actually materialises. After all, one of the reasons that it is possible for people to structure their affairs to avoid paying tax is that the tax system has complexities that have been put in place to achieve specific objectives; removing the complexities also implies abandoning those objectives. 
• But this is just a detail. The kicker for me is the proposal to increase the tax rate to 40%, only for incomes above $140,000. This smacks heavily of offering the other kid's bat--that is, asking people to feel good about alleviating child poverty without asking them to make any sacrifice themselves. Seriously, there is very little income earned above $140,000. Why not start the income threshold for the top rate at a much lower income level. That way, you would raise more revenue from the very rich (they pay tax on their first $140,000 of income, not just the incomes above that level), and you would be asking the comfortable middle class to contribute to the laudable goal of reducing child poverty as well. A politics that boasts that only 3% of tax payers will see their tax bill rise is a politics that assumes the average New Zealander doesn't care at all (other than rhetorically) about child poverty. Greens' co-leader, Metiria Turei was asked about this in a different segment of Morning Report this morning, but she evaded the question. 

Note: Matt at TVHE has posted on this policy as well and makes many of the same points and some others. In particular, his final bullet is spot on. 

The morality of corporate takings

In the comments on my post containing the open-letter to the Labour Party’s two Davids a couple of weeks ago, John Small and I got into a discussion about the morality of a government policy that would wipe value from a private company (in this case, suggested changes to the electricity market that would reduce the profits of privately owned electricity companies). John wasn’t sure why I raised the issue of morality; this is worth post on its own.

It is inevitable that changes in government policy will result in both winners and losers, just as changes in the non-governmental actions will. One of the starting points I argue in my Honours class in welfare economics is that, in terms of practical policy (as distinct from the conceptual benchmark of a mythical social planner) the world is, always has been, and always will be Pareto efficient, and so a rule that policy changes cannot impose costs on anyone is tantamount to a rule that policy changes can never occur. But I think we can suggest some guidelines for when government-imposed costs are justified. The key issues are whether the policy is imposing costs on individuals or corporate bodies, whether the policy is a direct appropriation of property or one the imposed costs are indirect, and whether the policy is designed to improve efficiency or serve some social objective. Let’s take each in turn.  

• Is the cost imposed directly on individuals or on corporations? Takings from individuals require a higher threshold of benefit than takings from corporations. I don’t here mean to that corporations are somehow separate from the individuals who own them, or that their owners have lesser rights than other citizens; this is simply recognising the fact that company owners have the opportunity to diversify risk in their shareholdings, and hence to diversify the implications of government policy changes. A policy that forced lower electricity prices might wipe value from electricity companies, but add value to electricity buying companies as well as final consumers. If such a policy were efficiency increasing, there is no reason for it to impose significant costs on any diversified shareholder.
• Is the policy one that appropriates resources directly or one that changes the value of current assets? A direct takings, such as when the government uses compulsory purchase to acquire land for a highway, is a more serious use of government power than one that imposes costs indirectly through revaluations of assets, simply because a direct takings has the potential to impose far greater costs to an individual if their personal valuation of the asset is greatly in excess of its market value.

Based on these two criteria, I have no problem on morality grounds with, say, the government’s forcing Telecom to give other companies access to its copper wire network, with the anti-trust actions against Microsoft, or with changes to patent law that would stop Apple from suing Samsung. In each case, the question for me would be simply whether such policies would promote long-run efficiency or not. (In the case of these three examples, I suspect the answer would be No, No, and Yes, but that is an empirical question.)  The issue becomes more when the policy is put in place to achieve social objectives.

• Is the policy one that is designed to improve efficiency or to bring about social redistribution? In my view, the hurdle has to set very high before one can justify a direct or indirect takings to fund redistribution. This is not to say that social redistribution is not warranted, but rather the moral case for redistribution should be grounded in a transparent and honest policy that seeks to share the burden broadly rather than hiding the costs. Financing redistribution through indirect takings smacks too much of offering the other kid’s bat for my taste.

This is the key question in the case of Labour’s proposed electricity reforms. If their proposal were based on a view that market power was keeping price above marginal cost so that reducing price would be efficiency enhancing, then the issue would be the technical one of whether there is market power and whether eliminating that market power through a single payer would cause more problems than it would solve. But the proposed policy is explicitly to set price below marginal cost in order to equate price to average cost. John argued from a utilitarian perspective that the redistributive benefit would likely exceed the efficiency cost. We can debate about how large the efficiency cost would be, and whether, if you had revenue available for redistribution, subsidising electricity prices would be the best way of using it. But if we want to have more redistribution, either with an electricity subsidy or with direct transfers, then we should finance that directly with broad-based tax increases. Let’s not get into the game of arguing for a policy to transfer resources from corporate owners to electricity consumers on the basis of “they must have known that regulation is very very common in this industry” and hence that the costs are ethically inconsequential.