Tax revenue estimates and positional goods

I’m a bit late to the party on tax revenue estimates where Matt Nolan at TVHE and Seamus Hogan at Offsetting Behaviour both weighed in on the Green’s proposed tax changes.

I would add that although estimating tax revenue is extremely difficult, the behavioural response isn’t that complicated for many people who would be affected by the top tax rate kicking in at an income of $140,000.

This level of income is likely to be received by mid-career professionals who have fixed levels of expenditure on positional goods like school fees, automobiles and mortgage repayments. Reducing their after-tax income doesn’t reduce the level of outgoing cash flow commitments many of these households have.

When you add in the desire to maintain relative status, reducing the after tax income of some people in this category could lead to an effect rarely considered by those on the right – people working harder and billing more hours in order to maintain the same level of after-tax income that they did before the top tax rate increased.

Given that the costs of setting up a contracting structure to benefit from a lower company tax rate of 27% include having to renegotiate your employment arrangements and get your employer to incur costs in order to monitor a different type of contractual relationship, I think the level of behavioural response on this level would be a bit lower than you may think.

Of course it’s all speculation. I would point out that the risk of such a proposal is that if the revenue stream doesn’t match what was expected, something else has to come off the table. Spending some time on Google Scholar will make you realise that the literature couldn’t be easily summarised into a sound bite for Morning Report.

 

Cornwall Park Leases

One of the things that Shamubeel Eaqub talks about in NZIER’s housing affordability paper is the importance of making renting in New Zealand a better substitute for owning.

The Cornwall Park situation is where 21 year rent reviews and the enormous increase in land values of the property owned by the trust has led to tenants getting massive increases in ground rent.

I don’t have much sympathy for people who entered into these sorts of property use arrangements and then, when the trust is exercising its rights, cry out to protect their “economic rent” of not paying the full cost of living in this area by attempting to stave off massive increases in ground rent.

I would have thought that a prudent property owner would have set aside some savings to offset the inevitable increase in ground rent over a 21 year period. What would a diversified portfolio have earned over that period of time with regular contributions?

The real question to ask is how many holidays and automobiles these people have taken during the inter-rent review period. I’d wager hardly any of these people have set money aside for future ground rent increases whilst they consumed the difference in cost elsewhere in their budgets.

I would argue that these sorts of arrangements are actually ideal for improving housing affordability. They are less valuable than freehold arrangements and come with more risk, but they shouldn’t be ignored as an option for improving the supply of housing.

A New Direction For My Blog

Blogging and working full-time is a difficult task. Over the past few years I have written a lot of content that has never made its way to my blog. I simply haven’t had the time to do the fact checking and analysis necessary to produce compelling content. I have ended up writing a lot of short posts when I’d rather be writing more detailed responses to things I’ve read that include more footnotes and awesome charts.

I don’t want to let working full-time turn into an excuse for not writing or writing throwaway blog posts that don’t add any value. We should write and we should publish what we write because without writing down our thoughts we can’t be too sure of what we’re really thinking on any issue. There is a difference between a sound bite and a paragraph, and that difference includes a more accessible way of tracking the changes in your thinking over longer periods of time.

When I think about how the way we consume content has changed over the past decade with blogs, social media, smartphones and less face to face communication, I wonder what we’re losing by not encouraging people to move beyond 140 characters. The problem with Twitter is that, just like all communication that doesn’t take place face to face, context and body language cues aren’t present.

The risk in this situation is that writing a throwaway comment that is misinterpreted by the hive mind and the wider context of what led to such a throwaway comment being made is lost. There are no second chances if a stray tweet is retweeted and misinterpreted by thousands of people. #SocialMediaFail is an ever present phenomenon in 2014 across all types of users let alone some of the political and economic actors who seem to clog up my own Twitter feed :)

Because it is easier to shut out voices we disagree with, I think we need to make a conscious effort to read the writers who outrage us or read the writers who challenge our deeply held beliefs. Skeptical enquiry has a lot of benefits, and I think that in “forcing” myself to read different viewpoints my own views of the world have softened somewhat over the past few years.

I was reading an article recently that explained how people who read fictional novels on a regular basis were more understanding of the perspective of people other than themselves. It might be bunkum – but I’m certainly aware of the bubble I live in. In fact, I’d say that a lot of things I read on Twitter and other websites make me a sad panda because so many people are unaware of the bubble they inhabit and how it can lead to saying really out of touch things.

I’d like to think observing all of this has lead to a greater awareness that there really are different perspectives out there and filtering them all out because we want to construct a bubble where no one ever challenges the way we see the world is a slippery slope towards sounding like an automaton.

The new direction I intend to take with this blog is a more regular writing schedule with a lot more content that is less related to the news cycle or what I’m reading and more linked to a broader story I’m interested in. That story is how my generation will fare in the new normal when the political process is broken.

Compare Study Options

Careers NZ has an excellent tool that draws on the reports produced by the Ministry of Education of what graduates earn in labour market incomes after completing their qualifications.

The tool is available on the Careers NZ website and enables you to compare different levels of study with median earnings for people who studied that qualification and obtained a job.

How much income inequality is driven by poor study choices at age 18? How much of a role do qualifications actually play as opposed to actual job performance? How can an academic talk about human capital when there clearly isn’t a return on investment for many young people? All interesting stuff, and more important to have serious debate about than humdrum political noise.

The Hive Mind And The Policy Panopticon

Did civilised political discussion ever exist? Today, in the networked age, anything that does not conform will be pounced on immediately by the hive mind and condemned.

There is no point engaging in political advocacy because over time, only the people with the worst motives remain in the pool.

We shouldn’t be surprised at the welfare maximising behaviour of List MPs when it comes to free travel and spouting crazy talk like the RBNZ being owned by foreigners.

But we should be surprised at the fact some people still think that there is some sort of egalitarian playing field where everyone gets to contribute.

This was never the case, never will be, and it is a waste of resources to engage in advocacy to create some sort of twisted opinion or policy panopticon to simultaneously enable “direct democracy” and complete subservience to group think.

Non-partisan doesn’t mean what you think it means. In fact, it is an abuse of the English language to say that encouraging voting by young people is a “non-partisan” activity.

Licensed Occupations And Income Inequality

One of the features of the Journal of Economic Perspectives is the Recommended Reading section.

Aaron Edlin and Rebecca Haw have an article in the Penn Law Review entitled “Cartels by another name: Should licensed occupations face anti-trust scrutiny?

When only about five percent of American workers were subject to licensing
requirements during the 1950s, the anticompetitive effect of these state sanctioned
cartels was relatively small. Now, however, nearly a third of
American workers need a state license to perform their job legally, and this
trend toward licensing is continuing. The service sector—the most likely to
be covered by licensing—has grown enormously, with its share of nonfarm
employment growing from roughly 40% in 1950 to over 60% in 2007. Some
recent additions to the list of professions requiring licenses include locksmiths,
beekeepers,  auctioneers,  interior designers,  fortune tellers,
tour guides, and shampooers.

If you’re pressed for time, just reading the introduction will prove valuable. Licensing costs consumers a lot, and it’s not really clear if they benefit from better quality services or lower error rates.

When income inequality talk is all the rage, could licensing be functioning as a proxy for things like union membership or collective agreements? What I’m getting at is the idea that where a decline in union membership can be offset to some extent by expansion of licensing programs.

It should be noted that those in the bottom quintile are least likely to benefit from licensed occupations privileges – licensing boards seem unlikely to offer payment plans so could have a non-trivial impact on social mobility.

Minimum Wage To $16.25? Yeah Nah

One of Labour’s proposed policies, in the unlikely event they are able to form a government after the election, is to raise the minimum wage by $2 an hour to $16.25 an hour.

  1. The literature on the minimum wage is all over the place. It’s not as simple as a supply and demand story. A major reason is things like working for families. But there are many people who would lose jobs or shifts.
  2. There are long term social mobility implications – poor kids will have a higher opportunity cost of obtaining higher qualifications if they can find a job at that rate. So the very people you want to gain higher qualifications have to have very high future-time orientation to turn down $16.25 an hour for a student allowance.
  3. Hours actually worked matter – not all minimum wage earners work 40 hours a week. So the impact on “Hard Working Small Business Owners” is a lot less than some would have you believe. In fact, if a modest rise in the minimum wage affects your bottom line so badly, you should probably give up.
  4. The minimum wage is already in excess of the 2013 median hourly wage of $21.58 – making the minimum wage 75% of median hourly earnings is very high indeed. At $14.25 the minimum wage is already above 50% of the median hourly earnings at 66% so it’s likely there are already negative employment effects at play.

Just some quick thoughts. To achieve the objectives minimum wage / living wage proponents want to achieve – raising the incomes of the bottom quintile – could be far better achieved through a basic income or expansion of the independent earner tax credit.

If you’re looking for a more detailed overview of minimum wage literature including a lot of stuff on the youth minimum wage, check out the minimum wages tag at Eric Crampton’s blog.

Different Coffee Brands Are Just Price Discriminating

A service station cafe has been judged to have the best coffee in town – outbrewing specialist coffee chains.

Wild Bean Cafe, located in BP outlets, ranked highest overall for satisfaction and was deemed best tasting coffee in the latest Canstar Blue Customer satisfaction survey. It rated higher than coffee chains including Starbucks, the Coffee Club and Muffin Break.

However, the Herald on Sunday asked the country’s top barista, Hanna Teramoto from Espresso Workshop, to try five of the coffees, and her opinion was something else again.

Source: NZ Herald

There are many coffee shops in Wellington. But having sampled almost all of them, I’m not sure coffee quality trumps location in terms of where you get a morning coffee if that’s your thing. There are similarities to the analysis of wine – a lot of BS crowding out people who actually know what they’re talking about.

Picking Regional Winners

The government can’t pick winners. Some regions are seriously under-performing, but should the government “do something”?

Not necessarily, because “doing something” is often the beginning of the end for grass roots solutions to emerge in struggling areas.

Relative prices contain a lot of information and people will end up making choices that are in their best interests eventually.

A lot of the technology boosters haven’t got their heads around the fact that teleworking isn’t going to happen for a non-trivial proportion of the labour force.

The mirage of potential benefits that technology could bring to the regions is just that – a mirage.

I think we’re at the beginning of an even more aggressive urban consolidation. You can see in the media how people are being softened up for significantly higher levels of immigration without clear enunciation of the compensatory gains in raw after-tax dollar terms that will end up in their pocket.

It’s pretty basic labour economics stuff that most of the gains from migration accrue to the migrant themselves. My concern isn’t with immigration – it’s with how those “left behind” outside of Auckland and Wellington will be even more marginalised and ignored than they are now.

Let’s fix the problems we already have first. There are many of them in our own backyard. Step outside of the bubble you live in. Think about people instead of regression results. To paraphrase Thomas Sowell, ask, “And then what happens?” when people are trying to sell you one solution to an extremely complex problem. Cui bono?