Deadweight costs and ACC

By Eric Crampton 28/04/2015

This week’s Initiative column at takes on deadweight costs and ACC. A snippet:

Andrew Little is right to be worried about the deadweight costs of this tax. The extra 0.33 percent that workers and firms pay in ACC levies would be better left in employer and employee pockets.

The Infometrics analysis uses standard Treasury methods where raising a dollar in tax is assumed to cost the country $0.20 over and above the value of the raised dollar: $0.20 in ‘deadweight’ costs, as economists put it. These are not primarily the administrative costs of collecting taxes but rather the costs the economy faces when a payroll tax makes employees more expensive for employers and makes employment less rewarding for employees.

An extra 0.33% in payroll tax will not be a make-or-break issue for most employees or employers, but would be enough to kill just under 600 jobs in a country with just under 2.4 million employed persons. As Little warns, excess taxation by ACC “costs jobs and growth and holds New Zealand back.”

But while we are considering changes to ACC to avoid the 0.33 percent excess tax, we could perhaps consider more ambitious changes. In particular, does New Zealand really need strongly prescriptive workplace safety rules if ACC premiums are set correctly? ACC offers reasonable discounts and penalty rates based on firms’ claims histories, with additional discounts for complying with best practice standards in safety.

The New Zealand Initiative’s Dr Bryce Wilkinson provided back-of-the-envelope indicative calculations thatthe additional costs of more stringent scaffolding regulations alone could be of the order of $180 million. If ACC has its levies set correctly, construction companies (and others) would already have strong incentive to provide a safe work environment, and could tailor their safety practices to reduce accidents by whatever method is most cost-effective in their particular situations rather than having to comply with standards that might not always be fit for purpose.

If Little could ensure that ACC gets its pricing right, and uses that mechanism to help ensure worker safety rather than prescriptive standards, the benefits to the economy could be much greater than the savings from reducing the average ACC levy from 2.16 percent to 1.83 percent.

0 Responses to “Deadweight costs and ACC”

  • “In particular, does New Zealand really need strongly prescriptive workplace safety rules if ACC premiums are set correctly?”

    In short, yes, especially when there is so much opportunity for company principals to avoid real liability eg, by winding up a limited liability entity.

    Given the long and illustrious history of default by companies in the construction sector, its realistic to manage them (and other small and large businesses) tightly.

    There is a very strong incentive to not incur costs in a business. Where the costs are conditional on what is perceived to be an unlikely event its human to discount the real likelihood and cost of the event, especially when any personal liability can easily be avoided.

  • That doesn’t necessarily hold. In that state of the world, you charge tons for insurance for new building companies and especially where the principals have been involved in prior failed ones, then quickly drop their levies as they prove to be safer, no? In that case, well-established firms with strong safety record get some advantage over new entrants; it would be incumbent on the new entrants to demonstrate to their insurer that they are committed to safety.

  • That would be great Eric, but the reality is that the injured person is left out of your figuring – while a deregistered and wound up company’s directors argue their way through court, a real injured person is left hanging.

    It is VERY difficult to prove meaningful commitment to safety before the event. It is also easy to fake. Believe me.

    At an intellectual level I agree with you – the costs should fall where they lie and poor performing businesses (in any sphere) should bear the cost. Unfortunately there are significant unintended consequences in all of these ime.