Greens announce greater income redistribution: What does it mean?

By Matt Nolan 19/08/2014

I have been remiss talking about this election – as I am a touch bogged down.  My apologies – I’ll try to write about things when I see them.

As a result, here is the Green’s plan to increase the level of income redistribution.  From the Stuff article:

  • 3 per cent – of taxpayers affected by the Greens new top income tax rate of 40 percent on every dollar earned above $140,000
  • $500m – the extra revenue raised every year from their new tax rate
  • $620 million  – raised from hiking the trust tax rate to 40 percent and limited tax avoidance through trusts
  • $60 – a week extra in a Childrens Credit, which would extend the In-Work TAx credit to parents currently ineligible
  • $2,200 – in a Parental Tax Credit over ten weeks for new born babies whose parents don’t get Paid Parental Leave.

The Greens are a left-wing party, and they are suggesting greater redistribution through the tax-benefit system, and less work testing for benefits.  That is consistent, good good.

Of course the costing are not perfect, but political party costings never are.  At least, on the face of it, they aren’t blatantly ridiculous.

Now as they are a political party they are keen to talk up the benefits, but I thought I should note a few countervailing factors here:

  • Revenue from the top tax rate.  Assuming no behavioural responses (eg changes in the type of job the person works in, changes in the way people are remunerated to “avoid” tax, no changes in where the income source is defined to come from) there is about $9bn of income sitting above this band.  Increasing the tax rate from 33% to 40% would then  net an extra $630m.  Take off the “offset” to deal with GST and company tax, and extra income comes in at ~ $528m.  So this looks like the method they used to calculate the revenue effect – which is perfectly admissible for a political party to do.  However, we have to keep in mind that this exaggerates both the short-run revenue impact (due to the issues we said were ignored above) and the long-run impact (due to the broader impact on capital accumulation/investment).  Treasury gives these caveats here.  If we look at recent research, a higher top tax rate (all other tax-benefit components equal) may give very little extra revenue!
  • Tax incidence:  Just a broad note that tax doesn’t always fall where you think it will – both due to the response of those buying and selling labour in the labour market, and the fact that firms can attempt to pass on tax to those who purchase products.  With the above paper suggesting that the elasticity of taxable income for high income earners is high in NZ, and with the most profitable firms likely to be producing goods and services where demand is relatively inelastic, a high top tax rate can easily (and inadvertently) fall on the very people we are attempting to reduce the tax burden on.  I fear economists are sick of repeating this point, as it often gets ignored or made fun of – but it is amazingly important if we are actually concerned about the livelihood of the most vulnerable in terms of access to goods and services.
  • Abatement rates:  If child payments are going up further, how are these payments going to be “abated” back through the tax system.  There is a significant portion of the tax system, say for sole parents, or families with two children, where the abatement of family benefits (in conjunction with other taxes) implies that household income stays nearly unchanged as gross income rises (the effective marginal tax rate is close to 100%).  How we deal with this strongly influences how costly a scheme is, and how much it actually influences the after-tax and transfer income of households – for a clearer example Labour’s suggestions about the minimum wage are likely to lead to close to no increase in take home pay for the groups they are “targeting” with it due to this strong abatement!
  • I would like to see details of how trust rules will be tightened – I am always suspicious of free-lunch money of this type.  Note that tightening tax rules and cutting out evasion is one of the key ways to reduce the elasticity of taxable income – so it is encouraging that they have tied this things together.
  • Extending childcare credits to those out of work:  There has been some analysis of WFF and its impact on labour supply (here and here) – overall it lowered hours of work, by reducing second earners involvement in the labour market.  But it did significantly increase sole parent engagement in the labour market.  Now my impression was both these outcomes were actually goals of the policy – so that is all well and good.  However, removing the work testing will reduce labour supply by sole parents – if that is part of the goal that is fine, but we sort of need to justify why NZ policy makers have suddenly changed their view on the benefits and costs of having sole parents integrated in the labour market.
  • Comments like this are a bit misleading “Kiwi kids growing up in poverty are three times more likely to be admitted to hospital, five times more likely to die of cot death, and 27 times more likely to get rheumatic fever, and die earlier than those who are better off.”:  This doesn’t tell us what the marginal impact of income transfers will be – as we need to know WHY this is occurring within a group.  Is it income adequacy – or is lack of income adequacy correlated with some other factor that drives these outcomes (education, cultural/social institutions?).  These questions are ugly – but if we are interested in dealing with certain outcomes we need to put some effort into understanding the outcome, rather than inferring that income transfers alone will solve it!  This is one of the bits that makes analysing and dealing with poverty so very difficult, and is why community organisations are such an incredibly important part of this.

I am not going to argue here about what child poverty is, how we should deal with it, which institutions matter, and which policies are effective – these are good areas for debate, but I’m not arguing a specific conclusion around them.  Instead I am just pointing out some of the shortcomings regarding the stated impact of the suggested policies that haven’t been raised, and which to be honest you wouldn’t expect any politician of any stripe to raise.