Ladies and Gentlemen... the Greens' would-be Finance Minister

Russel Norman, recently ruled out as Finance Minister in any Labour-Green coalition by Labour, tweets from the Finance Committee:

Sitting in Finance Cttee listening to Treasury officials describe tax as a 'burden'. Right wing political ideology runs deep in Treasury!
— Russel Norman (@RusselNorman) September 17, 2013

Tax is price we pay to live in a civilised society. If Treasury thinks it's a 'burden', perhaps they'd suggest abolition of public health.
— Russel Norman (@RusselNorman) September 17, 2013

Taxes are a bad, public services are a good. Saying the first doesn't mean denying the second.

More importantly, economists use the word 'burden' in a particular way. A few useful notes about Principles-level (maybe intermediate) economics for someone who thinks himself qualified to be finance minister:

• 'Burden' measures the total cost of a tax. The 'excess burden' is the amount by which the cost of a tax exceeds the amount collected. Treasury tends to reckon that excess burden is around 20%: it costs us about $1.20 to raise $1.00 in tax. The $1.00 raised is a transfer from the public to the government; the $0.20 is pure loss due to distortions in economic activity consequent to increases in our current mix of taxes.
• Tax incidence theory is important: it tells us who bears the burden of any particular tax. Suppose we wanted to add another 5% compulsory Kiwisaver contribution. The 'burden' of the tax would fall on both workers and on employers with the precise mix depending on how employers and employees change their labour demand and labour supply with changes in wages: it doesn't much matter whether we say that employers have to pay it or whether employees have to pay it. Regardless of statutory incidence, economic incidence - the burden - will remain the same. Meteria Turei understood this when she said that the accommodation supplement paid to tenants is largely a subsidy for landlords. Alas, public understanding of such things is imperfect, allowing for shenanigans where measures imposing burdens on one group are framed as costing somebody else instead.
• If a genie appeared able to provide public health services, for free, this would be a good thing, right? It's impossible, but it would be good. The services paid for by taxes are good, the taxes are bad. We need to be sure that the value delivered by services are greater than the burden imposed by the tax. At current measures of excess burden, a project must return at least $1.20 for every dollar in spending. 

Russel Norman suggests only "right wing" economists talk about tax burden. Here is a JSTOR search on "tax burden". There are 61 pages of search results with 100 results per page. Item number 177 on a date-sorted list is famous Right Wing Economist John Maynard Keynes discussing the Colwyn Report on Natinoal Debt and Taxation. Item 398 is rabid right-winger Nicholas Kaldor's call for wage subsidies to reduce unemployment (1936).

Burden is just the term used by economists to describe the cost of the tax and to help sort out the difference between statutory and economic incidence. Like "While X writes the cheque to IRD, the burden of the tax falls on Y and Z." That's it. It's the standard term used in the main texts to describe this thing. Richard Musgrave (centre, maybe centre-left) uses it. James Buchanan (right) uses it. Pick a random public finance text, you'll find "tax burden" or "excess burden" somewhere in it.

Update: egads, it gets worse. Lance Wiggs tries explaining that it's just a word we use. Russel Norman replies:

@lancewiggs Taxes do change behaviour. To call it a burden or distortionary does buy in to general equilibrium model w all its problems
— Russel Norman (@RusselNorman) September 18, 2013

Update 2: this is way too funny. A Twitter correspondent points me to two press releases by Russel Norman.

First:

"It's not fair to expect income-earning New Zealanders to carry a disproportionate share of the tax burden while some of New Zealand's wealthiest individuals pay none," said Green Party Co-Leader Russel Norman.

Second:

Unlike the National Government that has chosen to shift the tax burden on to the lowest paid New Zealanders, our tax changes would focus on those not currently paying their fair share.

Internet sales taxes: NZ edition

Should consumers buying online goods from overseas pay GST on their purchases? The Press reports that IRD is examining options.

The status quo is that purchases from overseas do not attract GST where the cost of administering and collecting the tax exceeds the tax collected. So purchases of $400 or less are untaxed: the fixed cost of collecting the tax must then be about $60.

The New Zealand retailers hate that Kiwis like importing things from abroad, but it's hardly the GST-savings that are driving things. You can fairly easily save upwards of 50% by using UK bookseller BookDepository rather than Kiwi outlets; fixed costs here matter a lot more than the 15% GST difference.

Were there some costless technology for imposing GST on goods coming in at the border, then New Zealand should do it. The more we can rely on consumption taxes, the less we have to rely on income taxes. If collection technologies change, then the threshold too should change.

So there is nothing objectionable about IRD's continuing to keep an eye on the optimal GST collection threshold and on things that might reduce collection costs.

But I do hope that IRD is weighing the costs of collection falling on all parties, not just those falling on IRD. When a package is held at the border pending GST collection, it takes time and hassle to bill people, and packages get delayed. All of that is off-budget from IRD's perspective, but they're real costs too that should count in the calculus. And, they're particularly pernicious costs: the random-draw delays that can obtain if goods get held up waiting for GST collection can put people off online shopping from abroad entirely. That's likely what the Retailers Guild is hoping for.

I expect that having the credit card companies or foreign retailers act on IRD's behalf would prove rather intractable. I would also be a bit surprised if collection technologies have advanced sufficiently to make it worthwhile to collect at lower than a $400 threshold, but perhaps IRD will surprise me.

Internet sales taxes revisited

Mitchell Hall at PC Mag canvasses opinion on the proposed US internet sales tax.

The Marketplace Fairness Act isn't actually a new tax. It's not even compulsory. It simply allows—but does not require—states to collect sales tax on out-of-state purchases over the Internet. The bill is designed to address a loophole created by a 1992 (pre-ecommerce) court case called Quill Corp v. North Dakota. In it, the Supreme Court ruled that "Congress is now free to decide whether, when, and to what extent the states may burden interstate mail order concerns with a duty to collect use taxes." The upshot was that out-of-state retailers didn't have to collect state sales taxes unless they had a physical presence in the customer's state.
...

Current Heritage Foundation President, former South Carolina Republican Senator, and Tea Party leader Jim DeMint is predictably against the bill, but frames his argument in political terms. He declares in the Wall Street Journal opinion pages that America "was born from the idea of 'no taxation without representation'—that citizens should not be taxed by governments in which they have no political voice. Yet now lawmakers in Washington want to overturn that bedrock principle in order to extract more revenues from American consumers."

"The proposal before Congress would give a federal blessing for states to chase revenues far outside their borders," says DeMint. He cites the example of a customer buying a product in a store: does the cashier ask for the customer's home address? "Of course not," he answers. "The store simply charges the state and local sales taxes applicable for its physical location, no questions asked."

DeMint writes that the proposed law would hold online sellers to an entirely different standard than physical retailers. Websites would have to add taxes to a sale based on the shipping destination of the product, possibly a state in which neither the seller nor the buyer resides. "We would never ask mom-and-pop store owners to do such a thing," he argues.

I tend to figure that consumption taxes should be levied at the place the product is consumed. While DeMint is right that the proposal will fail to address distortions caused when people drive across state lines for shopping deals, the volumes there involved have to be smaller.

Libertarian-minded economist Eric Crampton from the University of Canterbury is also against the bill, albeit for different reasons. He conceded to PCMag that from a best-case standpoint, states with sales taxes that do not charge a tax on Internet purchases from out of state will distort consumers' decisions. Consequently, you'd want shoppers in a state to face the same sales tax regardless of where they're purchasing it from.

"But," Crampton argues, "we're not in a first-best world. Most importantly, it's not easy to collect these taxes. The transactions costs of collecting the tax arguably dwarf the revenue that would be collected or the inefficiency induced by having smaller purchases effectively tax-exempt."

I'll add in the caveats that I'd sent Mitchel for which there wasn't space in the final piece:

Were this implemented in the US, every internet vendor would effectively have to be remitting tax receipts to each of 50 states. That's fine for big guys like Amazon, but it would be murder for smaller online retailers.

Finally, inefficiencies caused by failure to administer an internet sales tax are clearly third or fourth order relative to the massive inefficiencies built into the American tax system. Comprehensive tax reform lowering rates but abolishing the home mortgage interest deduction and applying a fringe-benefits tax so that employer-provided health insurance would not be tax-preferred would be far more effective in fixing whatever ails the American tax system than chasing after internet sales taxes. Were the US to apply a federal VAT while reducing income taxes, that federal VAT should apply equally to online and offline transactions. But I'm really unconvinced that current internet sales tax proposals are worth the effort.

Josh Barro pointed to one way out of the mess: states willing to run a single less-crazy sales state tax code could implement internet sales taxes across that set of states. But allowing states to require retailers from other states to conform to their particular mess of tax codes...disaster. As Barro there wrote:

And one state’s picayune rules don’t necessarily conform to other states’ equally picayune rules. Both New York and New Jersey apply sales tax to candy but not to most other food, yet they have different definitions of what “candy” is. A Twix bar is taxable candy in New York, but in New Jersey it’s a non-taxable baked good. An online retailer has to keep up with this morass not in just one state, but in all of them.

More dauntingly, there are over 8,000 local sales taxing jurisdictions in the country, again with their own rates. New tax jurisdictions are created frequently and their boundaries do not necessarily conform to Zip or even Zip +4 boundaries. A few states, such as New York, even allow local jurisdictions to determine their own tax bases. One particularly relevant example for online retailers is that New York State does not charge sales tax on clothing and footwear under $110, but most counties in New York do – and sometimes a city has different sales tax rules than the county it is in.

I'd taken this as excellent reason for America's adopting New Zealand's tax code.

Back to Hall's piece:

Surprisingly, Kevin Hassett disagrees with Crampton and DeMint, telling PCMag that "the conservative tax people I know think the Senate bill is a pretty good idea." ...
Hassett explains that the current status of Internet sales taxes is crazy from an economic point of view because it disadvantages local businesses relative to non-resident vendors in a way that is highly distortionary.
Hassett also addresses the criticism that this tax will be a nightmare for small businesses to comply with, given the potentially thousands of different tax rates, laws, and jurisdictions to navigate. "All those jurisdictions are imponderable to a human brain but are pretty easy for even the simplest computer programmer," he points out. "If small retailers have to do that, there's probably an app for that that you can buy for a quarter…Put it this way, these are people who are savvy enough to set up an Internet business, but the argument is that we can't ask them to withhold sales tax because they can't figure out the computing end of that? That seems like a stretch to me."

I think Kevin Hassett somewhat understates the complexity induced by 8000+ potential ever-changing local sales tax jurisdictions that disagree on whether a Twix bar is candy, and of parsing 1,437-word memos on whether an ice-cream sandwich is or is not taxable in Wisconsin.

The problem isn't just knowing what tax rates are in place in which jurisdictions; it's figuring out which of your products wind up being subject to which taxes in which places. Easy enough for Twix bars: set up the spreadsheet that says where it's taxable. Suppose you stock some local producer's ice cream sandwich as one of your thousands of products and find out that whether it's taxable in some jurisdictions depends on how it conforms to memos like Wisconsin's. I just can't see a 25-cent app being able to tell whether that ice cream sandwich is taxable.

Hassett is right that it would be dead simple in a world where the different jurisdictions only varied in the rates they charged over categories that were identically defined. But that sure isn't America.

Update: Imagine that you're a state legislator and some big local producer comes in wanting protection from out-of-state products. Now it's illegal to prohibit the import of out-of-state products: Commerce Clause. But you could set up a special set of state tax codes around that product that are just such a darned mess to figure out (tax the 1,437-word memo as example) that nobody from out of state can figure out what tax to charge. And then sue the pants off anybody who fails to comply. Pretty soon, nobody ships that stuff to your state. Ta-dah.

Update 2: The Bill does go some way towards reducing complexity. Participating states must have their local tax authorities on a common base, even if rates can differ. But I can't see anything prohibiting things like Wisconsin's ice-cream sandwich tax complexity. They'll have to provide a database listing the rates and exemptions for things, but somebody from out of state still has to figure out just where his ice-cream sandwich sits. Caveat: I'm not a lawyer.

Exempting the elderly

New Zealand and Christchurch having been a bit depressing lately, other than last night's rather nice 77-44 vote in favour of allowing same sex marriages in addition to civil unions, it is sanity-enhancing to look a bit at lunacy elsewhere.

While New Zealand funds education from general taxation revenues and ensures that schools in needier areas receive enhanced funding, Manitoba, and much of North America, mainly funds its schools out of local property taxes. There are potentially good Tiebout reasons for doing this as some people prefer paying more in taxes for better schools, it also makes it harder for schools in poor areas to provide decent services.

From 2015, Manitoba seniors will be exempt from the education portion of the property tax bill. Says Finance Minister Stan Struthers, "These seniors who paid a lot of taxes over their working careers as they raised families, I think they deserve a break."

Let's leave to one side for now the obvious equity problem here that letting the relatively wealthy elderly off the hook for a bundle of services that they don't currently consume might well invite relatively poorer young people to request exemptions from the portion of their taxes that go to pay for government services never consumed by young people: the Canada Pension Plan, Medicare coverage for Altzheimers', government-funded old folks' homes, the Royal Canadian Air Farce... I'd be pretty surprised if net government funding didn't already strongly favour the wrinklies.

The bigger problem is the long-term fiscal outlook when the political incentive is to pull back from taxing the wealthy elderly. Now there are reasons why property taxes on the elderly can be politically unpalatable. Suppose that you've owned your house for 60 years, its value is bid up by a bunch of families coming in because of the local school, and you suddenly can't cover the property tax bill. This will be a problem for any land tax system, any capital gains tax system that taxes unrealised gains on the family home,* or systems supporting local education out of local levies on property values.** There are plenty of ways that the elderly homeowner could re-optimise: reverse mortgages could tap the equity, or the homeowner could sell to someone who values the local amenity and move somewhere else in town.

But if policy should be moving towards a tax base that can withstand a large proportion of taxable-income poor but asset-rich individuals with strong demand for government services, Manitoba's move isn't encouraging.

New Zealand at least has been making some moves in the right direction. We've been shifting the tax base from income to consumption. We don't tax capital gains, and for good reason. But whenever retirees cash out some of their portfolios to fund current consumption, they pay the 15% GST. I'd also expect that we'll be scheduling increases to the age of superannuation eligibility after the next election.

* Systems taxing only realised gains have other problems. And systems exempting the family home entirely have still other problems. Seamus has a rather lengthy series of posts on the topic, some of which are here indexed.

** Note also that we can also get big problems in rural school districts: townies are income rich but have less land wealth; farmers are land rich but will have incomes that fluctuate a lot year to year. If the school levy is a fixed proportion of the land value, the farmers bear a very large share of the school district's costs. I have no particular view as to what's fair here other than a generalised view that a progressive consumption tax would be rather better than all of this mess.

Tax all the things

New Zealand has one of the world's cleanest tax codes. It typically aims to avoid distortionary effects and to avoid collecting tax where the collection costs outweigh the taxes that would be collected. So we have GST on imported goods, but only where the total value of the import is high enough to make it worth IRD's time. And, we have a Fringe Benefits Tax to avoid giving employers undue incentive to provide in-kind benefits.

The FBT does result in some silliness where the administrative hassles imposed on firms for FBT blocks some value-enhancing deals between employer and employee, but the thing seems right in principle.

NZIER has criticised IRD's latest proposed extension of the FBT to employer-provided parking. The extension, as I read it, seems consistent with IRD's general philosophy: don't bother collecting a tax where the value at stake is small; apply FBT where a valuable consideration is provided to the employee in lieu of salary. So they will charge FBT on employer-provided parking downtown, where parking is expensive, but not out in the burbs, where it's cheap. The value of employer-provided parking has risen along with downtown land prices. But administrative costs here are going to be pretty high, and the new system will likely wind up distorting location choices near the tax/no-tax FBT parking zone boundaries. Whether the distortions caused by the tax will wind up being bigger than the distortions caused by failing to implement it isn't clear to me.

But I do like Bill Kaye-Blake's demand that IRD be consistent and tax all the things. Some employees might negotiate a parking spot instead of a raise, but what about a bigger office? Nicer coffee? A bigger desk? Plusher carpets? More attractive assistants?

The Government can’t stop there, either. From my office, I can see any number of buildings with stunning views of the Wellington harbour. The sun sparkling on the early-morning ripples, the picturesque hills — those views aren’t available to everyone. Some workers are clearly receiving much more of these benefits from their offices than others. It’s about time the Treasury sorted out some non-market valuation studies of the amenity value of offices and made sure that those perks are properly taxed.

In fact, it isn’t just the views and the sunshine. Some workers get more floor space, larger desks, nicer office coffee. What we really need is a ‘defined office package excess’ (DOPE) tax. The Government can set minimum standards for office workers, and any provision of amenities in excess of that minimum gets taxed. Once the process is in place for the Auckland and Wellington CBDs, it can be rolled out to other localities and other types of workplaces.

The most egregious evasion of taxes on benefits, though, is going to require collaborative intervention by economists and psychologists to tax properly. It is my understanding that some workers are receiving an additional benefit beyond their wages and salaries, cellphones, nice office surroundings, and the like. A tax system can be properly calibrated only if it contains a PFT — a Personal Fulfilment Tax.

I like where Bill's going with this, but he clearly hasn't gone far enough. What happens if, after you've negotiated your job and salary, the employer chisels on the non-pecuniary side by sticking you in an open plan shed for a few years before moving you into a much-smaller-than-expected office in another building? Or if the work conditions deteriorate substantially? Shouldn't the employer get a FBT credit for those kinds of things that they might then provide compensation to the employees and prevent their departure?

Recall that failing to tax fringe benefits induces inefficiency by encouraging employers to provide compensation in non-cash benefits rather than cash at the margin. Suppose that the employer could provide some benefit the employee values at $1.00 at a cost of $1.10. An employer should prefer providing cash. But, because of income tax, it otherwise costs the employer $1.33 $1.50 to provide $1.00 to the employee (more if you count GST), so the employer chooses the inefficient non-pecuniary benefit.*,**

Now, think about disamenities. Suppose there's some disamenity that would cost the employer $1.20 to avoid (say, installing a better air conditioning system) but that the bearing the disamenity only costs the employee $0.95: he would prefer the bundle of the disamenity and a $1 cash transfer. The best solution has no abatement and a higher salary. But, it costs the employer $1.33 $1.50 to provide the $1 cash transfer and so the employer inefficiently abates the disamenity because of the lack of FBT tax credits.

Some might think it perverse that an employer be awarded a tax credit for providing disamenities. But efficiency may well require it. If, that is, the administrative overhead isn't itself more distortionary.

* In the presence of FBT where there are hassle-costs imposed on the employer, we can get underprovision of some otherwise efficiently-provided amenities: the employer may fail to provide an amenity valued at $1 and costing the employer $0.90 if the additional FBT hassle costs total more than $0.10.

** $1.50 - 0.33*$1.50 = $1 ==> I made stupid math fails when the actual numbers don't really matter in a constructed example.

Tax maximisation, smoking, and the Stalin Gap

If my lifestyle and leisure choices lead me to remit less to the government in taxes than I would have under alternative scenarios, have I imposed an externality on the State?

James Meanwell asks:

Eric, care to weigh in on a debate I'm having about this elsewhere? Specifically, does loss of tax revenue as a result of lower productivity (e.g. due to smoking, eating too much) count as an externality? I've argued that the government would have to be spending efficiently, which is unlikely, for the loss of revenue to count as an externality and so it probably doesn't (count). Not sure if that's right, but the notion (i.e. loss-of-revenue-due-to-lower-productivity-as-externality) seems odd to me.

I started replying to his comment, but reckoned it deserved its own post.

Let's start with the big picture and work down to details.

Consider two people, alike in relevant ways at age 10 and equal in earnings potential, but with different utility functions. So they make different choices.

Mr. A decides that the rat race isn't for him and decides instead to take a part-time job at 20 hours per week instead of 40. Were he to have worked a full time job, his earnings would have doubled and, because of progressive taxation, his tax payments would have more than doubled. But he's not on welfare; he just can transform relatively little income into a fair bit of happiness because he really likes leisure.

Mr. B does not enjoy sitting idle; he consumes his leisure by smoking while working a full-time job. Associated health issues reduce his productivity and, as consequence, he earns a quarter less than he otherwise would; his tax payments are then perhaps a third lower than they otherwise could have been. Other sources have a lower wage penalty for smoking; we'll stick with a big one for present purposes.

If Mr. B's lower tax payments because of his choice to smoke are of policy consequence, then so too are Mr. A's lower tax payments because of his choices. Indeed, we could say that Mr. A is far worse than Mr. B: while Mr. B pays, in New Zealand, about three times as much in tobacco excise as he'll cost the public health system and is so kind as to die before costing the superannuation system very much, Mr A pays zero tax on his leisure and will earn two-thirds of the national average wage in his retirement despite having contributed relatively little to the superannuation system.

If we need to use policy to nudge Mr. B into smoking less, because of reduced tax earnings, then we also need to nudge Mr. A into working harder. And when nudges don't work in tobacco and start becoming shoves, we need to start shoving Mr. A as well.

Mancur Olson argued that Stalinist Russia had the world's most effective extractive tax regime. Workers were effectively compelled to work by near complete inframarginal taxation combined with very low taxation at the margin. If Stalin had had the ability to solve the Socialist Calculation Problem, he could have done slightly better, leaving each worker with an individualised menu of two choices: starvation, or a personalised bundle of very hard work and some goods leaving the worker epsilon better off than under starvation. I suppose that we could consider any deviation from that level of work as a harm imposed on the state. But it's only Stalin who'd really want to push there.

The Okun Gap is the difference between potential and realised GDP due to excess unemployment. I'll call the Stalin Gap the difference between an individual's potential maximal tax payments and his actual tax payments based on his choice to consume leisure over labour - partially because he would choose some leisure even in the absence of taxes, partially because too high of income tax rates yields substitution to leisure.

Most of us could earn more, and consequently submit higher tax payments, by choosing more labour and less leisure. But we'd be less happy.

So that's the big picture: the world in which the smoker's lower income tax payments (ignoring his much much higher excise tax payments) are sufficient basis for taking away his leisure is one where we want to penalize people for taking holidays or failing to work as many hours as they otherwise could: closing the Stalin Gap. Unless we say that leisure via time off relaxing is, by assumption, good, while leisure via smoking is bad - but that remains question-begging.

Smaller picture: is this even an externality?


Short answer: likely, but likely very small, and that small portion mostly because of how the tax system treats poor people.

All right. An individual chooses between smoking, leisure and labour. In a world with private health care and no taxation, the individual optimally balances health harms from smoking against enjoyment of smoking - he earns less because he smokes, but that's just part of the full cost of tobacco that he enters into his optimisation. All you behavioural guys who want to complain about whether he can be rational or informed on this can shut up for the moment - we're trying to figure out whether he's imposing an externality on the government once we move to a tax regime, so the behavioural stuff is entirely beside the point.

Some optimal level of smoking will be found above. What happens when we add taxation and government? The smoker will bear fewer of the wage costs of smoking because the government takes a portion of his earnings and so he should optimally smoke more. But again, the same is true of the individual's choice to consume other forms of leisure in the presence of income taxation. Recall that in economics, we don't care about externalities because of pecuniary effects like "the government gets less in tax". We care about them rather because they distort choices: people move from taxed labour to untaxed leisure in the presence of income taxation. The incremental increase in smoking when the returns to labour drop under a taxation regime can be viewed as a distortion. But, again, think of anything that helps increase the marginal utility of leisure. In a world with taxes and government, people choose more days off playing cheap but excellent video games relative to the zero-tax world. What then is the productivity cost of video games? Or of any other kind of leisure? It's hard for me to see any productivity externality of smoking that is different in kind from any other labour-leisure distortion generated by taxation. And it would take some number crunching to show that the technological portion of any effect* here isn't already over-internalised by current levels of tobacco excise.

Gordon Tullock reminded us in 1998 that government produces externalities as well as solving some externality problems. The vast bulk of reduced income taxation accruing to government due to smoking could only be remedied by imposing harms on smokers that are larger than the potential gains to government. Now, if you want to assume that smokers are irrational and hurting themselves by their choice to smoke, you can do that, but you don't really need the effects on income taxation to make the case.

Recall that smoking is concentrated among poorer cohorts and that marginal tax rates, though not average tax rates, are very high for the poor. If the deadweight costs of high marginal tax rates are making poor people smoke more than they otherwise would because the personal income losses are low, they're probably also screwing up a whole lot of other choices that are of greater consequence as well. If you're going to worry about it, start by trying to fix the tax schedule and abatement rates for the various income-contingent benefits so that the effective marginal tax rates facing poor families are not insanely high.

The Ministry for Social Development noted that 35% of beneficiaries (people receiving benefits other than just Working for Families, NZ's EITC) in paid work in 2008 enjoyed effective marginal tax rates higher than 75%, with some non-beneficiary low income families enduring abatement of the minimum family tax credit facing EMTRs over 100%. MSD concluded dryly, "Work incentives are very low for such families".

Effective marginal tax rates in excess of 75% are very likely to induce all sorts of very real distortions in behaviour; I expect the decision to smoke incrementally more because of reduced returns to wages is pretty trivial in this mess.



* Again, we don't care about externalities that are pecuniary. Imagine that the smoker smokes exactly as much under a tax regime as under a no-tax regime. The government earns less than it would were the smoker a non-smoker, but this is purely pecuniary: the gain to the government by forcing him to quit would be overmatched by the losses experienced by the smoker. The only portion that can matter for welfare is the excess smoking induced by the lower return to labour under the tax regime. And that's unlikely to be large relative to the amount of smoking that's invariant to income tax rates.

Dept of improbable headlines: Winston Peters is right

Well, he can't be wrong all the time, can he?

He [Peters] told the committee that new levies on cigarettes would "thump the pockets" of poor Maori.

"I wonder how many Maori are behind you on this issue?" he asked Maori Party vice-president Ken Mair, whose party was pushing the tax rises.

I've no particular reason to argue with the official estimates on the number of people killed by tobacco use, but Winston's right about the burden of the tax. As I'd summarised from the O'Dea report:

The O'Dea report said that even a 50% increase in tobacco prices would see 36,990 non-quitting Decile 1 households each spend an extra $928 per year while an estimated 4,110 quitting Decile 1 households would save $2,981; the poorest cohort then winds up spending a net extra $22 million in tobacco excise while decile 10 households spend a net extra $31 million.

O'Dea goes on to argue that because poorer people might then be less likely to take up smoking, the longer term effect could wind up being progressive. But it's pretty obvious that there would be rather strong negative effects on those households that continue to smoke.