Posts Tagged ‘Tax’

A2 Economics – The Laffer Curve

May 24, 2017 Leave a comment

New to the A2 syllabus last year was the 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?

Trump’s tax cuts likely to have limited impact on growth

May 14, 2017 Leave a comment

Donald Trump has indicated that the US economy needs a big tax cut to stimulate some growth and aggregate demand –  C+I+G+(X-M). His rationale is that with consumers having greater income they will spend consume more (C) and businesses keeping more of their profits will invest more (I). He is even so confident that the tax cuts won’t put a dent in the overall tax revenue of the government. However economists are suggesting that the US economy is already growing as fast as it can and in order to improve its growth rate it needs to investment in productivity.

D Pull Inflation.jpegNevertheless, US tax cuts in the 1980’s under Ronald Reagan proved to be very effective in stimulating aggregate demand but the economic environment then was different to that of today. The 1980’s was an era of stagflation with the US experiencing 10% unemployment and inflation reaching 15%. Since the GFC in 2007 growth has been positive and unlike the 1980’s unemployment has been falling  – from 10% in Oct 2009 to 4.4% in April 20178. Tax cuts are all very well when you have high unemployment but with the rate falling to under 5% companies may find it difficult to respond to the greater demand for goods and services by taking on workers to increase supply. Tax cuts would then lead to an increase in inflationary pressure (see graph) which is turn would prompt the US Fed to increase interest rates.

ProductivityTrump’s plan would also increase the Federal deficit and borrowing from the government. This would put upward pressure on interest rates for the private sector which reduces the potential for further growth. As noted earlier the area that needs to be addressed is productivity, with a shift of the LRAS curve to the right – see graph.

Categories: Growth, Inflation, Interest Rates Tags: ,

USA could learn from the New Zealand tax system

April 15, 2017 Leave a comment

Former US President Ronald Reagan said that the US tax system was “complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers”. Paul Solman of PBS News, looks at the US tax system in the video below and compares it to other countries. Even Paul Ryan, Speaker of the House states that the USA has the worst tax code in the industrialised world, bar none. T.R.Reid, author, “A Fine Mess” suggests that New Zealand is a model of good tax policy. “They have done what all the economists think is right, to get a tax code that is simple, fair and efficient”. He mentions the BBLR – broaden the base, lower the rates. You broaden the base by making everything taxable – health insurance, car park, pension contribution. By contrast Americans spend about six billion hours a year collecting the data and filling out the forms. They spend $10 billion to H&R Block and other preparers and, on top of that, $2 billion in tax preparation software, which still takes hours of work. Furthermore there are more than 400 additions to the tax code every year, and most of them are giveaways to one or two taxpayers. Of the 35 richest countries, in total tax burden, U.S. ranks 33rd. And in return, the US government spends less as a percentage of GDP than other governments.

What makes a good tax?

A new part of the AS Level Economics syllabus is Canons of Taxation. Adam Smith’s contribution to this part of economic theory is still regarded as classic. His enunciation of the canons of taxation has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:—

  1. Canon of Equality. Equality here does not mean that all tax-payers should pay an equal amount. Equality here means equality or justice. It means that the broadest shoulders must bear the heaviest burden.
  2. Canon of Certainty. The individual should know exactly what, when and how he is to pay a tax. Otherwise, it causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax.
  3. Canon of Convenience. Obviously, there is no sense in fixing a time and method of payment which are not suitable. Land revenue in India is realized after the harvest has been collected. This is the time when the cultivators can conveniently pay.
  4. Canon of Economy. This means that the cost of collection should be as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people’s pockets but bring little into the State’s pocket. It is not a wise tax.

Categories: Uncategorized Tags: ,

Inequality: What can be done? review by Thomas Piketty in NYR

October 31, 2015 Leave a comment

Inequality what can be doneI recently read another piece from the New York Review of Books – a review by Thomas Piketty (‘Capital in the Twenty-first Century’ fame) of the new book ‘Inequality: What can be done?’ by Anthony Atkinson. He is innovative in his ideas and shows that alternatives still exist. He proposes the following:

  • Universal family benefits by progressive taxation policies
  • Guaranteed public sector jobs as a minimum wage for the unemployed
  • Democratisation of access to property via an innovative national savings system with guaranteed returns for depositors
  • Inheritance for all with a capital endowment at age18 financed by an estate tax

1908’s – UK and US income tax rate reductions

Atkinson does mention the reduction in income tax rates that were instigated by the Thatcher government. The top marginal rate was reduced to 40% – the rate was 83% when Thatcher’s conservative government first came to power in 1979. A conservative MP got quite excited by this and is reported to have said ‘he did not have enough zeroes on his calculator’ to measure the size of his tax cut that he helped to endorse. This break with a half-century of progressive tax policy in the UK was Thatcherism’s distinctive accomplishment. Across the Atlantic US President Ronald Reagan was also in a tax cutting mood and reduced the top marginal tax rate to 28%. Succeeding governments in the UK under Tony Blair (Labour) and in the US under Bill Clinton (Democrats) didn’t change the tax policy that was left by both the Conservatives and the Republicans respectively. This lowering of the top marginal income tax rates contributed to the increase in inequality since the 1980’s.

A more progressive tax rate

Atkinson proposes top rates of income tax in the UK of 55% for annual income above 100,000  and 65% for annual income above £200,000, as well as a hike in the cap on contributions to national insurance. This will allow for a significant expansion of the UK social security and income redistribution system – family benefits and unemployment benefits. According to Atkinson if these taxes were implemented the level of inequality would be reduced significantly.

New rights for those with fewest rights

Atkinson proposes include guaranteed minimum-wage public jobs for the unemployed, new rights for organized labour, public regulation of technological change, and democratisation of access to capital. Piketty alludes to two of Atkinson’s innovative suggestions:

  1. The establishment of a national savings program allowing each depositor to receive a guaranteed return on her capital. Given the drastic inequality of access to fair financial returns, particularly as a consequence of the scale of the investment with which one begins (a situation that has in all likelihood been aggravated by the financial deregulation of the last few decades), this proposal is particularly sound
  1. The establishment an “inheritance for all” program. This would take the form of a capital endowment assigned to each young citizen as he or she reached adulthood, at the age of eighteen. All such endowments would be financed by estate taxes and a more progressive tax structure. He calls for a far-reaching reform of the system of inheritance taxation, and especially for greater progressivity with regard to the larger estates. (He proposes an upper rate of 65 percent, as with the income tax.) These reforms would make it possible to finance a capital endowment on the order of £10,000 per young adult.

A Wealth Tax

He also proposes a progressive tax system on real estate and eventually on net wealth. Stamp duty, which is a tax on real estate transactions, would be implemented as follows:

  • 0% tax if property worth less than 125,000
  • 1% tax if property worth between £125,000 and £250,000
  • 3% tax if property between £250,000 and £500,000
  • 5% tax between one and two million pounds (a new rate introduced in 2011)
  • 7% tax on properties worth more than two million pounds (introduced in 2012)

Many have called into question the financing of the British welfare state (especially the National Health Service) through taxes. This was seen as an unacceptable form of competition by those countries where the cost of the welfare state rested on employers. A substantial proportion of the British left at the time saw in Europe and its obsession with “pure and perfect” competition a force that was hostile to social justice and the politics of equality.

Categories: Inequality, Unemployment Tags: , ,

Why increasing taxes in developing economies may help growth.

October 4, 2015 Leave a comment

In order to assist growth higher taxes may seem illogical as they take money out of the circular flow. However developing countries on average collect only 13% of GDP in tax compared to 34% in developed countries. Public investment can encourage private investment and it is estimated that an $1 of public investment increases private investment by $2. At the recent UN conference in Addis Ababa there is a desire to increase the tax take of LDC’s to 20% of GDP.

Why do developing countries not collect much tax?

  1. most of the population have no money
  2. most developing countries have a prevalent informal economy
  3. because of the rural nature of LDC’s the cost of tax collection is often higher than the benefits

The World Bank has suggested improving the tax agencies and tax revenue in Rwanda has increased by 6.5 time after automating the process, which reduced errors and opportunities for fraud. There would be much more tax revenue if LDC’s reduced tax emption and avoidance, including from foreign investors. It is estimated that exemptions have cost developing countries $1bn in lost revenue in 2011 whilst the cost of multinational companies deliberately avoiding tax exceeds $200bn a year.

How multinationals avoid paying tax

The most common way multinationals avoid taxes is through “transfer pricing”, in which their subsidiaries in tax havens buy goods cheaply from arms in more exacting countries, and then sell them on at a higher price, thereby shifting profits to the tax haven. The OECD is trying to combat such schemes by persuading tax authorities to require firms to disclose where they generate their profits and share the disclosures. A proposal from 137 developing-world NGOs goes further, calling for the formation of an international tax agency, although it is unlikely to prosper.

Blatant tax dodging.

This is a major problem as undeclared money transfers, false invoices etc cost developing countries more than $990 bn in 2012 which equates to almost 4% of a developing countries’ GDP.

Source: The Economist 11th July 2015

AS Revision – Indirect Taxes

September 28, 2015 1 comment

Currently at AGS doing a 3 day AS revision course. Used this graphic to explain indirect taxes. An indirect tax will have the following effects on the market:
Indirect Tax
• The supply curve shifts vertically upwards(effectively a shift to the left) by the amount of the tax(gf) per unit. The price increases but not by the full amount of the tax. This is because of the slopes of the demand and supply curves.
• The consumer surplus is reduced from acp to agb. The portion gbhp of the old consumer surplus is transferred to government in the form of tax.
• The producer surplus is reduced from pce to fde. The portion phdf of the old producer surplus is transferred to the government in the form of tax.
• The market is no longer able to reach equilibrium, and there is a loss of allocative efficiency resulting in the deadweight lost shown by the area bcd. This represents a loss of both consumer surplus bhc and the producer surplus hcd that is removed from the market. The deadweight loss also represents a loss of welfare to an individual or group where that loss is not offset by a welfare gain to some other individual or group.

Categories: Exam revision, Fiscal Policy Tags: ,

Petrol Tax in New Zealand

August 17, 2014 Leave a comment

The New Zealand Parliamentary Library “Monthly Economic Review” published a feature on taxes and levies on petrol.

Taxes and levies on a litre of petrol in New Zealand account for approximately 43 percent of the overall price.

July 2014 – Retail price = 223.9 cents per litre

A forecast $1,702 million is expected to be raised through the excise duty on petroleum in the year ended June 2015. This includes:

– $936 million in petroleum excise duty on domestic production
– $766 million on petroleum imports.

The following diagram shows the taxes and levies on a litre of petrol (including GST).

Petrol Tax NZ

Categories: Transport Tags: ,

Danish Fat Tax in the scraps

January 6, 2013 Leave a comment

Smor ButterAfter 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

November 6, 2012 Leave a comment

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

April 17, 2012 Leave a comment

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.

Categories: Inequality Tags: , , ,

Do higher tax rates slow economic growth?

January 27, 2012 Leave a comment

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.

Tahrir Square Tax – rich should pay their dues.

November 27, 2011 Leave a comment

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.

Categories: Fiscal Policy, Inequality Tags: ,

Great site for infographics

June 10, 2011 Leave a comment

Tax by height?

April 14, 2011 1 comment

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)

Categories: Behavioural Economics Tags: ,

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

January 17, 2011 1 comment

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?

December 8, 2010 Leave a comment

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

November 1, 2010 Leave a comment

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.

Categories: Supply & Demand Tags: ,

What is fair play?

October 10, 2010 Leave a comment

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.

Categories: Behavioural Economics Tags:

Robin Hood Tax

August 26, 2010 Leave a comment

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.

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