Cursed policy wishes

Economically Speaking: Be careful what you wish for in elections. It can be hard to wish it away.

Our executive director at the New Zealand Initiative, Oliver Hartwich, has always had a strange antique monkey’s paw on his desk. I never thought much of it – perhaps a bit creepy but maybe it’s normal for Germans.

But, not long ago, I swear that one of the fingers on that paw curled inward.

And so I naturally started worrying about tax policy.

You see, that finger curled not long after Oliver had been fervently wishing, again, that the election turn away from personalities and sideshows to focus on policy.

That paw’s curled finger looked ominous.

And then election policy announcements started getting a little strange.

National promised billions toward roading projects that had no discernible business case. Spreading the spending over the next decade might give them time to backfill the necessary documentation. But if there is no business case for the roads, mightn’t we be better off with a cut in petrol excise? Or, maybe, pilot a proper congestion charging system to get better use out of the roads we already have?

Expensive subsidy
Meanwhile, Labour promised tuition-free tertiary study, compounding the error it made in 2005 with zero-percent loans. That policy did little to improve real tertiary accessibility – the main barriers to tertiary access come much earlier. But it does provide an expensive subsidy to students who will disproportionately go on to higher earnings.

As taxpayers pick up more than 80% of the cost of a university education, the additional spending might not be substantial. But universities already chafe under fee maxima that prevent them from more extensively differentiating their offerings; removing tuition fees will not help.

But the particularly disappointing policy moves came from New Zealand First. Winston Peters announced on Twitter that he would break the GST by exempting basic essential grocery items.

I suppose we all need to be careful what we wish for. May you live in interesting policy times can be a curse rather than a blessing. And interesting policy moves around GST seem particularly risky.

Last year, the Tax Foundation, an American think tank, ranked New Zealand’s tax system second best in the world, behind only Estonia. The introduction to the 2016 report highlighted the improvements in New Zealand’s 2010 tax reforms, noting the system was already competitive.

The foundation’s report particularly praised the GST for its broad base. Where other countries carve politically sensitive areas out of their consumption taxes and create distortions, New Zealand maintains a clean broad-based system.

Exempting basic food items from GST makes a mess of the whole thing. You immediately need experts to decide what’s in and what’s out. It sounds simple in principle because everybody thinks that they could tell what should count as basic groceries – and what shouldn’t.

But border cases immediately pop up. If fresh fruit and vegetables are exempted, why not frozen? Frozen food is as nutritious and is much cheaper out-of-season – it’s then even more basic than fresh food. But what about canned fruit and vegetables? How much syrup is needed before a basic canned fruit becomes a taxable luxurious dessert? And who gets to decide?

It doesn’t take long for the whole system to descend into madness. In Australia, an expert Italian bread-decider had to be flown in to help decide whether a mini-ciabatta counted as untaxed bread or as a taxable cracker. The UK enjoyed years of tax litigation over whether a Marks & Spencer tea cake was taxable. And the state of Wisconsin in the US produced a 1437-word memo defining precisely which ice-cream cakes, or slices thereof, counted as taxable – and which were not.

Impractical policy
The problem with the policy is not just its impracticability. Even if you could easily establish bright-line rules that clearly showed which kinds of foods were taxable and which were not, it is still a bad way of providing “much-needed relief to thousands of low income New Zealanders,” as Mr Peters put it on Twitter.

If equity concerns make you want to make household budgets go further for those on lower incomes, it is better to simply give money to those on lower incomes than to start exempting things like fresh fruit and vegetables from GST. Why? GST exemptions are poorly targeted. Richer households like mine spend a lot on fresh fruit and vegetables; poorer households spend less on everything, including fresh fruit and vegetables.

Removing GST from things on which I spend a lot of money, in order to help poorer households that spend less on them, is far less straightforward than simply giving money to poorer households.

But the scariest part of the whole thing is that Oliver doesn’t really have a cursed monkey’s paw. I made that part up. More accurately – I stole it from an old folk tale.

A couple asked the paw for £200; their son was killed in an industrial accident and the company paid them £200 compensation. They then wished their son’s return but thought better of it on hearing something shambling in the darkness towards their door. Their last wish sent it away.

Politics itself is the cursed paw. Voters wish for things they think they want, politicians promise to deliver and what comes out at the end is often as horrifying as that unseen thing that shambled in darkness.

Be careful what you wish for in elections. It can be hard to wish it away.

Dr Eric Crampton is chief economist with The New Zealand Initiative

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