Tuesday, February 16, 2010

Tax changes – how to miss the point – even when you invented it

To the extent that there is virtue in the tax changes proposed by the National led government, which, according to the PM is to be instituted only if no one is left worse off by increasing consumption tax (GST) and reducing income tax, it lies in the improved efficiency benefits such changes would bring.

In general terms then the idea is (in the somewhat idealistic political imagination) that one can reduce income tax while increasing GST at such rates that one cancels the other out – with any remaining “inequalities” fixed by fiddling with the many benefit regimes.

Would this “revenue neutral” change be worthwhile? The logic has to be that, if it could be achieved (a matter for another day) and assuming the benefit fiddling was very minor, “yes” since it would increase efficiency through improving incentives to work (lower income tax) while making the business of consuming (and paying tax on consuming) more a matter of choice.

Other benefits we all share might flow from the fact that the lower are income taxes, the greater is the IRD success in collecting taxes and, in spite of the inverse applying with increased GST, its more readily enforceable nature allows net gains (gains through lower income tax – losses through increased GST avoidance) to be picked up.  Efficiency benefits flow too from reducing the activity of tax lawyers and accountants.

There are complications in the detail but the principle here is clear enough – and yet the debate has come nowhere near this…. in the media or, even more curiously, in the statements issued and advocacy generated by the champions of the reform itself.

A reasonable question is why? A possible answer is that at present the media and politicians are more focussed (boringly in my view) on the politics of all this than on the economics of the welfare changes we might gain (or lose for that matter).

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