Danish Fat Tax in the scraps

After a year in operation the Danish government recently announced that it was to abolish its tax on saturated fats. The idea behind the Fat Tax was to increased the price of unhealthy foods and therefore reduce consumption and improve the health of the population. However in practical terms the tax was a nightmare to administer as it not only targeted chips, burgers, hot dogs etc but also high-end food including gourmet cheeses. According to some critics this was to the worst example of the nanny state. The Economist reported some of the problems:

* Bakers were concerned with fat content in their cakes.
* Pig farmers said their famous bacon would cost more than imports.
* Independent butchers complained that supermarkets could keep their meat prices down as they could spread the cost of the tax across other goods.
* The tax applied on meat was imposed by carcass not per cut, which meant higher prices for lean sirloin steak as well as fatty burgers.
* Before the tax was imposed there was significant hoarding especially in margarine, butter and cooking oil

However there was also a surge in cross border shopping and a study estimated that 48% of Danes had done shopping in Germany and Sweden – sugary drinks, beer, butter etc were no doubt high on the shopping list.

Lower taxes don’t necessarily help those on higher incomes

Robert Frank, author of the Economic Naturalist and The Darwin Economy, wrote a piece in the New York Times on the influence money has on determining the outcome of political decisions. Wealthy donors to political causes will want to make sure that policies implemented by the authorities will mean lower taxes for them and less regulation for their businesses. As their income goes up this will only increase the monetary contribution they can give to demand greater favours.

This invariably leads to greater inequality and eventually may become so acute that even those politicians who have large funding from the corporate sector won’t succeed against opponents who seek major reforms. However, lower tax rates can have both positive and negative impacts on wealthy donors:

Positive - lower taxes mean greater disposable income and more consumption in the private sector.
Negative – budget deficits and the reduced quality and quantity of public services e.g. roads, schools, hospitals etc.

Those on higher incomes have been insulated from the declining quality of public sector goods and services by being able to pay for the equivalent in the private sector – schools, hospitals etc. But with a declining middle class it might be harder to recruit productive workers in addition to a reduction in demand for goods and services. Furthermore there are consequences of poor public goods/services that cut across the inequality of income and affect everyone:

* poor roads, bridges and general infrastructure
* electricity shortages/ blackouts (remember ENRON in California)
* effects of reduced investment in nuclear power that could be detrimental to safety

Scenario – 2 Societies with differing degrees of government and private spending

Frank asks which country would be happier? As improvements to cars are quite costly above a certain value and can be viewed as only minor, most people think that the BMW drivers are better off, not to mention safer. Furthermore the BMW drivers are less likely to feel deprived as societies don’t often mingle.

Frank concludes by saying:

So if regulation promotes a safer, cleaner environment whose benefits exceed those broadly shared costs, everyone – even the business owner – is ahead in the long run.

US inequality on the increase

I like this graphic from The Economist as not only does it display the significant increase in inequality but also the changes in economic systems that were prevalent during the time period. Notice after 1930 the drop in the income levels of the top 10% and 1% earners. This can be partly explained by a return to a more dominant role of government. However after 1980 we see the impact of Reagan and Thatcher and the policy of less government and deregulation. This was especially evident with the repeal of the Glass Steagal Act in the US and Big Bang in the City of London.

Some key statistics from The Economist:

The top 10% of American earners brought in 46% of the nation’s salary income in 2007.
2007 – 2009 the inflation-adjusted income of the bottom 99% dropped by 11.6
2007 – 2009 the inflation-adjusted income of the top 1% dropped by 36.3%

However since 2009:
Top 1% of earners income has increased by 11.6% – bailout packages and bonuses?
The other 99% of earners income has increased by just 0.2%.

Obama intends to tackle this problem with increasing the top marginal tax rate to 39.6% of the late 1990’s. Between 1932 and 1944 the tax rate on top incomes rose from 25% to 94%. I think there is little chance of that happening especially with the impending election.

Do higher tax rates slow economic growth?

Here is another clip from PBS and Paul Solman “Making Sense of Financial News”. Here he asks do higher tax rates slow economic growth? Some interesting historical observations:

1. High taxes on the rich prolonged the Great Depression, but how do you explain the postwar boom when the top marginal rate remained in the 90s? And when Kennedy cut the top rate, growth was very subdued.

2. Reagan in the 1980′s cut the top rate of income tax from 50 percent to 28 percent with the hope that you will stimulate growth and trickle down from the top all the way to the bottom of the income distribution. Did it happen – NO!

3. When Clinton increased taxes in the 1990′s growth rose significantly which goes against what Arthur Laffer talked about in the previous post. So the relationship between growth and tax levels is complicated.

Laffer Curve

PBS Economics correspondent Paul Solman explores the question of just how high U.S. tax rates should or shouldn’t be and examines the relationship between economic activity and tax rates. There is a good explanation of the Laffer Curve which is the relationship between economic activity and tax rates.

In between, a smooth curve representing Laffer’s pretty simple idea: Somewhere above zero percent and below 100 percent, there is a tax rate where government will collect the most revenue in any given year. Now, the Laffer Curve applies to everyone, but the top so-called marginal rate is only relevant to the rich. It’s now 35 percent on all taxable income in excess of about $380,000 a year. Does that 35 percent rate maximize total tax revenue for the government?

Tahrir Square Tax – rich should pay their dues.

An interesting tax that I came across on the BBC World Service radio. Hassan Heikal is Chief Executive Officer, EFG Hermes the largest investment bank in the Arab world and his tweet from Tahir Square was in the FT Opinion page. He states that the austerity measures proposed will just make matters worse and will lead to severe social unrest in Europe. We need to tax the higher incomes more in order to be able to pay off the debt. Here is part of his piece from the FT. You can read the full tweet by clicking below:
Hassan Heikal – tweet from Tahir Square

Cuts in governments’ budgets will lead to higher unemployment which is already a staggering 22 per cent in Spain, where one in every three young people is unemployed. Do you think your average 25-year-old Spaniard will stay at home watching Barcelona versus Real Madrid? Or will he ultimately take part in social unrest or, as I call it, a “social justice movement”?

So what could be done differently? I have a controversial solution. We should impose a one-off global wealth tax of ten to 20 per cent on individuals with a net worth in excess of $10m, with tax receipts going to their country of citizenship.

The aggregate wealth of those individuals – that is those with net worth in excess of $10m – is approximately $50,000bn. Paradoxically they – or I should say “we” – represent fewer than one in 10,000 of the world’s population.

The global proceeds of what I call the “Tahrir Square tax” would be, if levied at 10 per cent, approximately $5,000bn. Europe should receive $1,500bn, more than enough to deal with the European public debt crisis. It would bring down eurozone public debt, excluding that of Germany and France, to below 50 per cent of gross domestic product.

Great site for infographics

A hat tip to colleague Richard Wells for this site – Column Five Media – which has some outstanding infographics. I particularly like the following:

* Grenade or Aid – US Military Spending versus Foreign Aid
* America’s Most Bizzare Taxes – Jock Tax, Candy Tax, Crack Tax.
* The CPI Market Basket – How the CPI is calculated and its impact on individuals
* How Coffee Affects the Global Economy – Value of exports and imports of coffee as well as coffee production.
* Europe Trails the US in Productivity – productivity figures for both countries and why Europe is behind. See graphic below.

Tax by height?

In 1897 Irish philosopher and economist Francis Edgeworth set the utilitarian (happiness) foundations for highly progressive taxation. He pointed out that a utilitarian social planner will equalise the marginal utility of the population, but this requires equalising people’s disposable income (after tax). Edgeworth stated that those with greater than average productivity are fully taxed on the excess, and those endowed with lower average productivity are subsidised to bring them up to the average.

As specified in one study, the typical 6-foot American earned $5,525 more than a 5-foot-5-inch worker, after correcting for sex, age and weight. Research has identified that taller adults maintain jobs of higher standing and, on average, earn more than other workers. In developed countries, researchers have highlighted characteristics such as self-esteem, social superiority, and prejudice. Other studies have stated that on average, taller people earn more because they are more intelligent – an additional inch of height is associated with a one to two percentage
increase in earnings. If this is true height should be a useful indicator for determining an individual’s optimal tax liability. Therefore, a tall person of a given income should pay more in tax that a short person of the same income.

Using optimal-taxation formulas, Mankiw and Weinzierl (2007)* crunched the numbers and came up with a “tall tax” amounting to 7 percent of a tall person’s income. Short people would receive a 13 percent rebate. According to conventional utilitarian calculus, the optimal height levy is large. The optimal tax for white males in the US is divided into 3 height groups:
Small= 1.76cm
Medium = 1.77m – 1.84m
Tall = 1.85m

Taxing people by height is a rather unusual idea but it has been interesting to look into the research concerning optimal levels of taxation.

*The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution Gregory Mankiw & Matthew Weinzierl (2007)

Larry Summers: Tax-Cut Extension Averted Economic ‘Catastrophe’

Here is an interview with Larry Summers – outgoing director of President Obama’s National Economic Council. He has been a leading architect of economic policy of the Obama administration. He was also Treasury Secretary under the second Clinton Administration from 1999-2000.

Summers does say that the tax-extension is a compromise and that reductions in tax for the high income earners is not the best way to increase growth in the economy. But he argues that this will have a significant impact on the economy in 2 years time – he assumes the economy will be growing significantly. It is just under 10 minutes long but good viewing.

Obama compromises with Republicans on tax cuts but will it boost economy?

From the PBS Newshour in the US – although quite a long the interview with Paul Krugman (New York Times columnist and Princeton Professor) and Stephen Moore (The Wall Street Journal) it is worth a look. It concerns President Obama defending his decision to compromise with Republicans on tax-cut extensions for all, in order to extend unemployment benefits. Krugman states that “it is just going to be money handed over to people who are not going to spend it. It’s not actually going to boost the economy”. Moore on the other hand agreed with the tax cuts. “I think we needed to extend them for everyone, not just people who make less than $250,000 or a million. They’re wealth-producers who put Americans to work.”

NZ winegrowers want change to excise tax

This morning on Radio New Zealand Morning Report programme there was an interview with New Zealand Wine Growers Chief executive Philip Gregan concerning the Government’s intention to raise the tax from July 2011, which will cost wineries another $1.00 per case.

His worry is that the winegrowers will have to bear the whole tax themselves because they can’t pass it on to the retailers. There are 600 – 700 wineries in New Zealand, but only two major players in the retail sector, which are the supermarkets. Mr Gregan says that gives power to the retailers which are very reluctant to accept price increases so it becomes impossible to pass on the annual tax increases. He says the Government should tax the consumer directly at retail, rather than producer level. Furthermore, despite the excise tax on wine going up more than 60% since 1991, the increase in the cost price index for wine in the past 19 years is only about half the overall CPI increase.

Excise tax: a tax collected by Inland Revenue Department (IRD) which is usually on a specific good within the country. Excises are distinguished from customs duties, which are taxes on importation.

What is fair play?

A hat tip to Kanchan Bandyopadhyay for this piece entitled “Everybody wants fair play – shame we can’t agree what it is” by Tim Harford – Undercover Economist fame. It discusses what is fair with regard to the tax burden and the distribution of income. In the light of recent tax changes in NZ it is an interesting read. Harvard economist Robert Nozick, uses the famous “Wilt Chamberlain” thought experiment.

Imagine, said Nozick, a “fair” distribution of income. After the government somehow imposes that distribution, then imagine that a million people are willing to pay 25 cents each to see basketball games featuring Wilt Chamberlain, a star of the day. Each is now 25 cents poorer and Chamberlain is a quarter of a million dollars richer. Everyone has been made happier by this voluntary set of transactions. How, then, can we say that the original distribution was “fair” and the new distribution is “unfair”? Leaning on this logic, Nozick argued that fairness must be more a matter of fair processes rather than fair shares.

Click here for the full article.

Robin Hood Tax

With my A2 class we are looking at policies to help developing economies. Earlier in the year economist Jeff Sachs called for a tax on every deal conducted by the financial industry to curb the excessive power of Wall Street, and pay for the west’s unfulfilled promises to poor countries.

“Wall Street has had the most profitable year in its history. It made profits of $55bn (£37bn) in the midst of the biggest downturn since the Great Depression,” Sachs said. This was due to the 0% interest rate policy by the Fed Reserve and the bailouts paid by the taxpayer. Sachs is quite rightly disappointed with the G8 countries as they promised in 2005 to double the aid to Africa which would equate to $60bn – they are $20bn short. To put it in perspective the credit default swap (CDS) market was worth $62tn which is the output of the global economy. CDS – the buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. Below is a very good discussion of the Robin Hood Tax.