Friday, January 29, 2010

More is broken than just the tax system

Writing in today's NZ Herald, Susan St John succeeds in showing how complex and counter-productive the state's attempts to redistribute wealth have become. But because the writer believes in the notion of state responsibility for income equality she is merely hoping that the government can come up with a better design on the back of "an adequate and comprehensive review."

Perhaps, instead, it is time to examine the beliefs behind government-mandated redistribution - or put more crudely, robbing Peter to pay Paul.

There are two broad ways that wealth gets redistributed. Through taxation and transfers, or through work and shared profit. Over the past 40 years the trend has been towards the first method. State cash transfers have grown steadily. That growth has brought with it more and more complexity as more and more people want a piece of the pie. It is undeniable that whenever a new 'benefit' is introduced it isn't long before there are calls to extend it, either by generosity or by eligibility. A recent example is Paid Parental Leave. Not happy with the current status, lobbyists want 52 weeks instead of 14 and fathers to be paid as well. (Notice here that the prime lobbyist, the Families Commission, is also, after a fashion, a recipient of cash transfers.)

So why is it that government continues to increase the rate of transfer - from the frugal 19th century beginnings of welfare through to the recent Working For Families - yet inequality, according to St John, keeps growing? It is now apparently at an unacceptable level.

The problem lies in the method. When people work for their income there is a return to both employer and employee. The sum of wealth is added to. When people do not work but receive income from the state, the sum of wealth is diminished. This means there is a very obvious limit on how much the state can transfer.

Add to this the disincentive factor. It is reflected in the vast number of people now receiving some form of welfare. If the state is offering cash, the need and desire to work is reduced.

Which is how we have arrived at the current "mess", to use Ms St Johns description. But the only question being asked is, how can the state keep giving people money and keep them working? Trying to solve that conundrum has resulted in the very complicated interface between the cash transfer and taxation system.

Somehow NZ has to pull back from the current pathway and fiddling with the tax system isn't the answer. Taking money off people just to give it back (and more) is patently silly and inefficient. Paying people benefits from a very young age thus locking them into the cash transfer system for years is socially and economically counter-productive.

There are better ways to organise a society. Better economic brains than mine have put up ideas worth exploring. Flat tax, tax-free income thresholds, negative income tax, private social security provision, individualised social security accounts, etc.

But underlying all of these ideas is a philosophy of minimal government intervention. If simplicity and equity are paramount we need less taxation, less taxation machinery, less churning and less transfer - not more.

7 comments:

Anonymous said...

The problem lies in the method.

The problem does not "lie in the method".
The problem is the aim - equality.

If you believe in freedom and private property, then the most important index of freedom and property is increasing inequality. This is a good thing!


There are better ways to organise a society.

Of course. A true republic (like the US for the first 100 years or so) or a constitutional monarchy (like the UK up until around 1900). Democracy, especially "redistributive democracy" - that is - communism - is not one of them.

After North Korea, NZ is the effectively one of the few communist states remaining in the world.

Flat tax - yes for a true flat tax, of say $20,000 per person per annum. No for a flat "percentage" tax - which is still progressive.

tax-free income thresholds, - yes if they are income thresholds ABOVE which one pays no tax (like our ACC levy). Absolutely not if they are thresholds BELOW which one pays no tax!

negative income tax - absolutely not! A benefit by another name is still a benefit!!


private social security provision, individualised social security accounts - only if completely voluntary, completely provided in the private sector, and receiving absolutely no subsidies, and if any "income" from such arrangements are taxed.

leftists - that is communists and socialists - believe in equality - of opportunity, of income, of outcomes.

we believe in personal responsibility, private property and consequentially in increasing inequality of opportunity, income, and outcome

it's called freedom.

Peter said...

It is possible for people to be equal in an abstract sense - eg moral value, or status before the law. Anything else however is a mirage because empirically humans are not equal - some are smarter, stronger, wiser, better at organising themselves - than others.

I don't believe in social darwinism. A good society does not allow its weakest members to fall by the wayside. However social democracy does not and cannot give us such a society.

New Zealand has made a good attempt at trying to create a caring society, but we have gone well beyond the point of diminishing returns. From here on out the costs - both economic and moral - will only increase, while the returns will be minimal. It's time to stop trying to legislate an artificial conception of equality into existence and try something else.

Anonymous said...

I don't believe in social darwinism.

I don't "believe" in social or genetic darwinism - or that the earth is round.

But genetic darwinism is a fact.
The earth is round.

Social darwinism is likewise a fact.

Peter said...

Evolution is a fact.

Genetic darwinism is a scientific theory which attempts to explain evolution.

Social darwinism is a moral theory which attempts to prescribe how society ought to operate.

muz said...

My parents generation gave me anecdotal evidence of the benefits of social welfare to be a safety net for those who for mostly unavoidable reverses fell into a poverty trap. I am referring to real, visible poverty, not the inability to access the trappings of life we have today.
The hardship of widowhood, as many as 5 families in my rural school of some 80 pupils had lost a father to accident, industrial illness or heart disease. and there were many who would today be referred to as being below the poverty line but no family starved, many parents smoked, some drank, everyone grew vegetables, most farmers gave meat to families in need and mostly we were all happy.
As a young man I saw what I believed was the very beneficial and fair welfare being accessed as a stopgap solution to genuine hardship and my idealistic view saw it as a solution. That it would morph into a fulltime lifestyle option never occurred to me as everyone was honest, had pride and regarded welfare as a helping hand didn't they, how bloody naive.
Now we have welfare as a lifestyle option, intergenerational, a comprehensive tool for unscrupulous politicians to entrap voters and by threat and bribe gain unswerving support at the ballot box. Saftey net my arse, its a bloody dungeon where the captives are kept helpless, hopeless and just comfortable enough to raise themselves up every three years and select the most generous gang back to power.

Anonymous said...

What doesnt kill you will make you stronger.

there will always be people looking for the easy way, the short cut, the path of lest resistance.

Forget them, just get on with it.

Dirk

Mo said...

A good society does not allow its weakest members to fall by the wayside.

society is under no an obligation to help those in need. If some want to voluntary help out or donate their time then thats up to them.

We are not our brother's keepers.