Taxation options

Following up from my Age piece yesterday, Nick Gruen — who was also there — notes that I wasn’t asked to consider the proposed income tax cuts at all. So let me offer my view here: the big issue is whether these are fueling inflation. But even if they are, delaying them a year or so will do little to stem that. Household expenditure relates to permanent income increases and a delay would not change that much (unless of course, people decide that the tax cuts are never coming). The same is true of Nick’s proposal to put it all into super: little change in permanent income there.

My proposals — a hike in the GST (I was thinking to say 15%) and the introduction of green taxes — would be new and unexpected. They also hit consumption more directly and so, if that is the cause of inflation, then they are likely to be more effective. I must admit that I don’t think hiking the GST is politically viable at the moment unless, of course, the inflation concerns are really bad. Green taxes are another matter. I like to put those ideas out there. I did that a few weeks back on bank switching costs and look what happened then.

And on the issue of whether inflation is real, I’m no seer on macroeconomics but the micro part of me doesn’t think the government has any incentive to blow that out of proportion. They have a good run up until the next election and the only problem that might arise is if the economy goes off the rails. They have every incentive to keep it running there; in contrast, to the previous doomed Coalition government.

5 thoughts on “Taxation options”

  1. Joshua,

    Fair enough on permanent income, but if you’re liquidity constrained . . . you don’t have the option of smoothing in anticipation. By the same token temporary tightenings of monetary policy oughtn’t to have much effect on consumption – but they do on the liquidity constrained.

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  2. But Nick, that’s terrible. If it only works if it is liquidity constrained you are basically saying that the burden of fighting inflation should fall on those with low income!

    Monetary policy has that issue but is more widespread in that it impacts on the return to investment as well as a broader base of credit.

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  3. The promotion involved with the introduction of a green tax might also work to reduce overall consumer spending. The idea of “being green” is associated with consuming less.

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  4. I wonder if a green tax on non-green (dirty? brown?) goods would place the burden more heavily on low-income families than high-income families? Has there been any research into whether green(er) goods are usually more expensive than the dirty goods? If so, then I would imagine that when it comes to income elasticity, greener products are something of a luxury. In which case, could a green tax not place more pressure on low-income families who purchase cheap dirty goods? Hopefully not, as a green tax would be a great idea, and as suggested, this would be an opportune moment to implement one.

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