Matt Nolan sifts through three political parties' policies to try and help him decide who to vote for

Today's Top 10 is a guest post from Matt Nolan.*

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

It is election season and I still have to figure out who I am going to vote for.  As a result, I thought I would put my investigation of the major party policies (National, Labour, and the Greens) into a Top 10!

The parties discuss their policies in the following places:  National, Labour, and the Greens.

There are a lot of policies there!  However, I’ve just picked 10 areas where I’d like to discuss the rationale, costs, and benefits associated with the policies.

I’m focusing on the major parties not because I think the minor parties are crazy (I don’t), but because the major parties made an attempt to cost their policies. 

Furthermore, the 10 policies I’ve chosen are just areas I’ve been thinking about – if you think I’ve missed an important area then you are right, but I have to cut off somewhere.

Furthermore, I’m discussing the issues with regards to how they may influence how I vote – in the comments you can try to persuade me otherwise.

1. The race to repay debt
All three major parties have been telling us how rapidly they are going to reduce government debt.  In a situation where many New Zealand households have had to tighten their belts and pay down debt this is great politics – but is this focus good policy?

To think about government debt we need to think, why would the government have some stock of debt?  Government revenue largely comes from taxes – taxes that can be paid now or in the future.  Government spending goes on things that benefit us now (consumption) and things that benefit us in the future (investment). 

By borrowing the government is saying that it will pay for some of its current expenditure on consumption and investment in the future, with future taxes.  When it comes to investment, it seems both fair and sensible that the government would want people who benefit from the investment in the future to pay some of the cost of using it – so borrowing, and maintaining, some stock of debt makes sense.

However, if the stock of debt is “too high” relative to this, it implies that future generations will bear a tax burden to pay for the interests of current generations.  This is the intergenerational equity issue of debt many people chat about!

Debt fluctuates over the economic cycle, and all the major parties have credible plans to keep debt at a reasonable level.  The arguments about who does it first are all beside the point – one or two years difference is inconsequential when we are discussing generational issues.

We should be honest though – it is great to see political parties doing costings and considering where the fair long-run level of debt is, even if the tax revenue estimates from political parties are too high.

As a result, with this issue I have no preference over any of the parties.

2. Setting the minimum wage
Both Labour and the Greens have come out in favour of sizable increases in the minimum wage.

The justification for the minimum wage is based on an asymmetry of power in the labour market – with an implied situation where group of workers in a position where they need to work to get the necessities of life being exploited by employers who are able to extract most of the surplus produced by these employees.

If this is the case, then a minimum wage won’t lead employers to cut employment but instead just gives employees greater power and reduces exploitation.

In a more general economy, where the labour market situation is more complicated, the costs associated with this transfer are:

1.       The potential for a loss of employment for some and the related lower output – especially over the long-run.

2.       The loss for those having resources shifted away from them (the flip side of the above benefit).

Recent debates in the US have given the impression that the minimum wage is solely about exploitation, and there would be close to no employment costs associated with increasing the minimum wage.

However, New Zealand is not the United States. Our flag is different, we have different accents, we have significantly less land mass, and New Zealand’s minimum wage is much higher relative to our average wage.

Source Timothy Taylor.

This matters as the higher the minimum wage gets, the less it becomes about exploitation and the more it becomes about pricing some people out of the labour market.  And my concern comes from the types of people that get priced out – it is those that are easy to substitute with machines/capital, those with mental and physical disabilities, those with low education levels, and those that are generally the least fortunate.  At some point increasing the minimum wage stops benefiting societies worst off and starts to hurt them – a balancing act we need to keep in mind.

In the New Zealand context, the Treasury work on the Living Wage indicated that take home income would not rise that much for the typical “two adult two children” household which is being used to justify a higher minimum wage.  The key reason for this is that income transfers from the government will be reduced (what economists call abatement) due to the higher level of market income associated with a higher minimum wage.  As a result, the key transfer is from employers to government – not from employers to employees!

I like the minimum wage debate, and I think government does have a role to help out where some groups have undue power over others.  However, it has to be a New Zealand focused debate based on New Zealand data – the US debate is not relevant here as, relative to average wages, our minimum wage is significantly higher.

As a result, in this issue I agree with current National party (and the fifth Labour government before them) policy – which is to do an independent analysis of the minimum wage each year, and to try to balance the trade-offs.

3. What to do with monetary policy
One part of the campaigning which has gone relatively quite is the plans by Labour and the Greens to changes monetary policy, with National keen to maintain the status quo.

I found the prior strong focus on monetary policy to be surprising when, compared to the inconsistent and contradictory policy actions seen in many other countries, the Reserve Bank of New Zealand’s response to the Global Financial Crisis and collapse of New Zealand’s finance company sector was swift where necessary, and always appropriate. 

A series of unfortunate events (the Canterbury earthquakes, the US government nearly defaulting on its debt, further financial crises stemming from Europe in 2010 and 2011) continued to cause new problems for the RBNZ.  However, their actions helped to prevent the severe hardship being experienced offshore from taking place here.

There are two main strands of thought about how the RBNZ should change, which are intrinsically related:

- Give them more targets!

- Give them more tools!

In truth, the Bank can only “target” more things if it has more tools with which to target with – so Labour and the Greens are showing consistency when they stick both together.  Furthermore, both parties have spent time clarifying what they intend to do, which I appreciate.

However, I have to admit to having an unelected technocratic body determining certain policy settings in the country makes me uncomfortable – especially with regards to tools such as “variable KiwiSaver contributions” and targets such as “export volumes”.   Such tools are defacto taxes, and such targets have a very indirect relation to the wellbeing of society.

By giving the RBNZ more targets and tools we are increasingly passing on both responsibility and control to unelected technocrats instead of elected officials.  This either leads to a situation where the RBNZ gets “captured” by politicians (who know they will be held accountable during elections) or a situation where our central bank starts to look more and more like a central planner.

Flexible inflation target was purposefully limited in scope such that the central bank provides certainty about the future value of goods and services – but can also lean against swings in domestic demand.  Trying to co-opt the Bank into other areas makes little sense, and is indicative of lazy policy making.

Here I have a preference for the status quo with monetary policy, which I believe puts me in the National camp here.  However, I’m also a fan of an independent analysis of monetary policy – which may well tell us whether any of the Labour-Greens suggestions are good ones.

4. Capital gains:  To tax or not to tax
Capital gains taxes have become an especially contentious issue in recent years, but the calls for such a policy haven’t always been based with a clear outcome in mind.

A CGT is not a “silver bullet solution” to any ills that New Zealand may face, and the lack of a CGT is not the reason why house prices in New Zealand have risen.  Any pretence that these are the reasons for a CGT is just window dressing – a point made well in a series of posts on the excellent Offsetting Behaviour blog.

The real demand for a capital gains tax is likely to be based on a view of fairness around windfall income gains.  It is only in this context that excluding the family home may make sense, and many of the arguments people make most passionately about a CGT are based on a perception that lady luck providing capital owners a windfall wealth gain, which they realise by selling the asset, is in some way unfair.

A CGT of the form being suggested will reduce investment (depending on what is counted as capital gain, it could lower the expected return on assets), it will suffer from implementation issues, and the concept of “family home” will be shown to be incredibly flexible. 

Furthermore, if our justification is based on fairness how do we draw the boundary between windfall gains and the addition of value by an investor?  How we treat issues like this in the design of a CGT is very important and changes whether such a change is seen as fair and/or efficient.

My view is that a CGT is a policy worth investigating as long as the rationale for such a policy is made clear and transparent.  A report by NZIER from June discusses a number of the issues that need to be considered when determining whether announced CGT policies from our major parties are good policies. 

In this way, I’m not persuaded about the necessity of a CGT that excludes the family home, but I’ll leave my mind open to be persuaded.  I would need more details before picking the party whose policy I prefer.

5. Carbon tax, ETS, or relaxed ambivalence?
The Green’s have stated that now is the time to replace the Emissions Trading Scheme with a tax on carbon emissions.

In their ideal forms, an ETS and a carbon tax are very similar.  The key difference is that a carbon tax gives some certainty about the “price” of carbon while an ETS gives more certainty about the “quantity” of carbon.

However, the reason for the change isn’t centred on that issue.  It is about the current ETS, with its omissions and specific rules as compared to a broad-based carbon tax.  So what does this mean:

- Removing the implicit “subsidy” for farmers.

- Setting the tax based on the perceived “externality” associated with carbon emissions, rather than relying on a currently dysfunctional and uncertain trading market for emission permits.

- Making New Zealand action around climate change more transparent so that global trading partners are less likely to throw arbitrary “carbon penalties” on New Zealand exports.

I find the Greens argument pretty compelling here, and have long favoured a carbon tax.

Labour’s policy is to keep the ETS, but to review it and incorporate improvements.  National seems relatively uninterested in changing the current ETS, likely due to a view that a follow up agreement to Kyoto is unlikely and foreign taxes on “high carbon countries” are unlikely.

Overall, in this area I find myself more in agreement with the Greens than anyone else by a fairly wide margin.

6. Public transport and roading: Infrastructure priorities
Transport related spending is an area I am wary about weighing into, given the near religious devotion towards “transportation projects” that exists – both from those who are public transport zealots, and those who are road zealots.

Many of the investment projects that we noted the government would borrow for at the start of this post are transportation projects.  These are projects that will have a long life, and are subject to both the whims of public demand and the risk of significant technological change.

The key arguments made by those who favour roading projects focuses on these key points:

- At present a vast majority of people use cars, and roading projects favour this majority

- Unlike many public transport projects (especially rail) technological change is less likely to create a substitute which leave the investment “sunk”.

However, those in favour of public transport can easily retort that car usage is only observed to be so high because it has been favoured in the past by public funding.  Furthermore, many public transport projects (eg cycleways, buses) are no less likely to become “sunk” than investment in roads themselves.

The quality and form of New Zealand’s infrastructure spending is a massive issue for government and one that we all need to form a view on – hopefully based on good quality cost-benefit analysis of given policies.

As an avid user of public transport, I find the concepts behind the Green party policies the most attractive here.  But I would prefer a large scale systematic investigation into government investment priorities before I can confidently say which party I prefer.

7. Income tax changes
All political parties are offering some forms of income tax cut – although it appears that only ACT is interested in offering an overall tax cut.

When considering tax cuts, we can’t consider the greater amount of money we’d claim from our paycheck if it wasn’t being taxed at the same rate.  We also need to consider what taxes are spent on, and the way the tax is partially taken into account when our boss sets our wage.

Ultimately, all parties except ACT appear to believe that a government of the current (forecast) size is either reasonable or too small.  This is fine, there are plenty of good arguments for both larger and smaller governments depending on your view of what is fair.

National’s suggestion of lower taxes in 2017 sounds less like real “tax cuts” and more like dealing with “fiscal drag”.  When we have a progressive tax system wage increases that match inflation will push some people into higher tax brackets – even though their real income is unchanged.  This is a tax increase by stealth, and to keep the tax system the same over time we should be adjusting these tax brackets upwards with inflation.

The Greens have suggested a tax-free threshold as the flipside of the carbon tax policy we discussed above.  A tax-free threshold acts like an annual flat payment for all people earning above that level of income.  This seems to be quite arbitrary.  If they are trying to transfer income to households based on the increase in consumer prices associated with a carbon tax, then they should just send out a cheque to households rather than to individuals who are in work.  If they want to use the revenue from a carbon tax to make the general tax system more progressive, then why use a tax-free threshold instead of simply adjusting rates?

The key difference between National and both Labour and the Greens regarding income taxes is the outlook for the top tax rate – with National wanting to leave it unchanged at 33%, Labour wanting to increase it to 36% (over $150,000pa) and the Greens wanting to increase it to 40% (over $140,000pa).

Whether a higher top tax rate would actually raise much revenue given current tax and trust laws is an open question, with estimates suggesting it may not.  This is part of the justification by both Labour and the Greens for introducing a new top tax rate, and the fact their tax revenue estimates are exaggerated as a result needs to be kept in mind when looking at their policy program. 

However, both Labour and the Greens have also pointed to tightening rules on trusts and other adjustments to the tax structure – changes which may help to increase revenue from the new tax bracket.  This is the right attitude towards tax policy, but outside of increasing the tax rate on trustee income I am uncertain exactly what they can do which hasn’t been implemented in recent years.  Closing “tax loopholes” is a common statement by political parties – but unless it is clear what those loopholes are, and why they are a loophole, we can’t really evaluate the claims.

While some may find this surprising, I’m very neutral between the parties tax policies here – as it is fundamentally about funding different “sizes of government”, rather than the design of income tax itself.  If I had to pick, I’d say I find the National and Labour income tax designs a bit more consistent, and believable, than the figures from the Greens.

8. Pick your corporate subsidies
One element I have been disappointed in from all political parties is the willingness to engage in corporate subsides.

A friend recently emailed me saying they heard a debate between a National party candidate and a Labour party candidate.  Supposedly, the National party candidate said “government cannot run businesses” to which the Labour party candidate replied “National governments can’t run businesses”.

Whether this story is true or not, it reflects a dangerous and growing perception that government – and by that I mean taxpayers – are liable for taking on risk.  Furthermore, it implies transferring income from households to firms/capital owners – a transfer that hardly seems equitable.

Examples of this are:

- National’s obsession with publicly funded irrigation schemes.

- Labour’s tax breaks for forestry and manufacturing.

- The Greens with their “investment bank”, subsides for ICT, subsides for digital manufacturing, and subsides for solar power.

Like a school kid that has played a little too much Sim City, politicians get ideas in their head that we should be doing something – and if they just tax us and throw money at the people doing it, then that would somehow do “good things” based on whatever arbitrary measure they feel like making graphs of at the time.

Creating a strong legal framework that supports households and firms, dealing with market failures, and helping in the face of major coordination issues are all valid areas for government.  Stepping across the line to make us pay our tax money to capital owners and for the vanity schemes of politicians isn’t.

If I had to pick a party on this basis it would be National, as they seem to have the lowest spending on corporate subsides – although I find publicly funded irrigation schemes particularly egregious.  Quite why our left wing parties have decided to increase income transfers from households to capitalists is beyond me.

Disappointingly, the scope of the economic managerialism from the Greens in this is a deal breaker for me – implying that I’m stuck choosing between Labour and National again on election day. 

Such corporate welfare is insidious, hurting many people just a little bit to feed the public perception of government power and competence.  Such spending gets hidden behind claims of “jobs” and “transformational change” and makes for important sounding conversation at dinner parties – while the bill for such waste is picked up by the rest of us.

9. Taxing land
From a cursory reading of what the main political parties are saying no-one is suggesting the introduction of a land tax (and corresponding cut in other taxes), but this doesn’t stop economists talking.

On the face of it a land tax has a lot of positive attributes.

- Land is immobile – it can’t be shifted anywhere to avoid the tax.

- We keep reasonable data on the value of land

- We know a land tax can be administered (through the example of local council rates)

However, in the New Zealand context there are two key factors that suggest such a tax doesn’t belong on political party platforms quite yet.

- The concept of land ownership is inherently tied into the idea of indigenous land rights.  Given treaty obligations the idea of whether the crown can levy a land tax, and who should receive the revenue from the tax, is not clean cut.

- A land tax doesn’t impact upon land use ... until it does.  In some regions, local body rates are sufficiently high that people are unwilling to use the land for anything.  In a country that is relatively “land rich” (per person) a land tax is more likely to lead to some land not being used, making the tax less attractive.

Note that I did not mention New Zealand’s high reliance on agriculture and the fact that such a tax would fall predominantly on agricultural sectors.  There may be a question of fairness here, but this is the way with all taxes. 

10. A guaranteed minimum income
In what would be a broadly unpopular move, a political party could come out in support of the idea of a guaranteed minimum income for all New Zealand citizens paid by general taxation.

This would essentially take the current benefit system and change the following:

1. Remove work requirements

2. Remove the “abatement” of benefits/payments

3. Remove targeting for specific need (eg disabilities)

In other words it is National Superannuation for everyone – not just those over 65.

We may think targeting based on need shouldn’t be removed – in which case the minimum income scheme would become very expensive, pushing up the average tax rate from its current level.

The combination of no work requirements and higher tax rates make this type of policy change unlikely, and would likely be perceived as unfair by most.

However, in a world of growing automation I find the idea of a guaranteed minimum income to be relatively appealing.  By offering everyone a minimum “citizens income” people know that they have a certain reservation life standard in the bag.  As a result, people will be more willing to take on risky entrepreneurial ventures, they will have a stronger bargaining hand in the labour market, and if people highly value non-work activities they can opt out of the labour market.

Yes if the minimum income (and corresponding taxes) was too high the measured economy would disappear.  Yes, it does imply that some people will not “contribute” by working.  Yes, we need to think about what children will be paid.  Yes, it may require changes to migration and citizenship rules (a genuine concern).  And yes, it would require a sizable change in other regulations (when people can receive a minimum income, the minimum wage is unnecessary).

But it is a conversation worth having just so we can get an idea about the types of principles of fairness people in New Zealand care about. 

If you are interested here is a nifty piece from VOX.com. 

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* Matt Nolan is an economist at Infometrics, and an author at the blog TVHE. He specialises in looking at the household sector, and household economic data, but will offer an opinion on pretty much anything related to business and the social sciences.