Wishing for the New Zealand tax code

It's easy to forget just how excellent the NZ tax system is relative to those in other countries. But we are the envy of the world. Two datapoints for this week:

Tim Harford wishes UK VAT reform would move to a system like New Zealand's, where everything attracts GST: we tax food. After listing the absurdities of the UK system, where Jaffa Cakes are tax advantaged over "chocolate digestives" and whether a sausage roll is taxed depends on whether it's been heated. Harford asks what should be done, then answers his own question:

The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.

Harford wants the VAT to apply to everything, not just to sausage rolls.

Other than the tax-free threshold, that sounds an awful lot like the New Zealand system, where GST applies comprehensively and where, in 2010, the National government reduced tax rates across the board while increasing the GST.

Item the second: Frances Woolley makes the case for taxing food in Canada. The only place where I'd quibble with Frances's analysis is here, and it's only a minor quibble. Frances writes:

When the case for taxing basic groceries is presented in these simple terms, the assumptions underlying the argument become apparent. The equation of choice with happiness rules out any paternalist arguments for exempting basic groceries from taxation. For example, at present soft drinks are subject to sales tax, but milk is not. A tax on milk would be expected to decrease milk consumption and increase soft drink consumption, all else being equal. Those who would argue for taxing basic groceries would respond in one of two ways: first, that we should respect people's choices whatever they are; second, so many of the basic goods exempted from sales tax at present are teeth rotting, IQ-lowering sugary junk anyways that the paternalist argument has little force.

All of this is true. But the current equilibrium also involves a government-enforced dairy cartel that forces up the price of milk relative to soft drinks. Abolish the dairy cartel while imposing GST equally across all food items and the price of milk would drop, not rise. Especially for a GST as low as Canada's, and a dairy cartel as noxious as Canada's.

Again, Frances wishes that Canada had a system that looked a lot more like New Zealand's.

It would be awfully nice if Labour and the Greens here stopped trying to score populist points by hacking on one of the world's best consumption taxes. Labour, in office, recognized the GST's advantages and refrained from wrecking it for a decade. Too much populist nonsense in Opposition might force their hand in a future government.

Do visit the GST tag for Seamus's excellent prior posts.

Minimum wages and living wages

Tim Harford argues that debates over the minimum wage are a sideshow relative to the larger problem: that some workers' output is insufficient to justify a living wage.

But if a young adult cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help. He, the institutions which trained him and the society in which he lives, have far bigger problems

Harford's certainly right that the longer term solution to low pay is productivity increases; you can't mandate paying people more than their marginal product as firms will simply shift to more capital-intensive processes or to solutions through offshore outsourcing of labour-intensive components.

But not all wages need to be living wages. The 16 year old living at home working part time while going to school doesn't need one; and, his marginal product probably isn't enough to finance a real living. But the kid is learning valuable skills about workplace culture, showing up on time, dealing with customers - things that will help him be more productive in future. Note further that the minimum wage only counts pecuniary benefits; health insurance that comes bundled with many, but not all, US jobs is an increasing proportion of the overall salary package.

At least, as Harford notes, the UK Low Pay Commission, which advises on minimum wages, has let youth minimum wages stay relatively low. Workers aged 21+ are on a minimum wage of £6.08; workers aged 18-20 on £4.98; 16-17 year olds on £3.68; and, there's also an apprentice rate of £2.60.

Here in New Zealand, National's making it a bit to get younger folks onto the lower New Entrants' Wage; otherwise you have to pay the 16 year old, on his first day of work, no less than you'd pay any other minimum wage worker: $13/hour, (US $10.30 or £6.73).* Our youth unemployment rate isn't pretty, at least partially as consequence of the prior Labour government's decision to bring 16 and 17 year olds up to the adult minimum wage.

We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

And I worry Harford packs a bit into "market power" here when explaining Card & Krueger's results on minimum wages and employment in New Jersey:

If employers have market power in the labour market then they might actually offer a lower wage than the balance of competitive supply and demand would produce. Some workers would rather keep looking or sign up for welfare payments, and so employment is lower at this level. Introduce a minimum wage and both wages and employment increase, while profits fall.

Imagine a remote mining town with one big employer who pays the same basic wage to everybody. If you can't pay the new guy more than your existing workers, then you have incentive to abstain from hiring somebody whose output would cover his salary but wouldn't cover the amount you'd have to pay in salary increases to all your other workers. So increases in minimum wages can increase employment and wages in places with monopsonistic employers and low labour market mobility. But in low-skilled retail in suburban New Jersey where there's no way that hiring an additional student to stock shelves at the 7-11 forces you to push up your other workers' wages? Any retailer who's stuck with a labour shortage at current wage rates and the chance to hire an additional worker for a wage less than the worker's marginal product but above prevailing rates has incentive to defect from any cartel of employers. And remember that the theoretical argument works by having people enter the workforce in pursuit of the new higher minimum wage who were outside of the workforce previously; if we start with unemployment - people in the workforce who cannot get jobs at the prevailing wage - the theory can't really apply. I'm not sure that many of our current problems come from too many folks voluntarily sitting outside the labour force because prevailing wages are too low.

* At last report, median hourly earnings were $20.38 (average $24.78). Our minimum wage is 63% of the median wage or 52% of the average; at these levels, we expect reasonable disemployment effects, especially among youths.