Who is Ceteris Paribus? Sounds like a Roman general who came to a sticky end fighting Asterix in the backwoods of Gaul. Sadly not. That is as fun as this column gets.
Let me paint you a picture; you painting a fence for $300 a day. It isn’t much but it is honest work. Enough to pay the rent, Netflix and a few beers come Friday.
Now. The forecast for Saturday is for fine weather. A few of the lads are heading to the surf. The wetsuit is ready. The board is waxed. And at this moment the boss asks if you want to work Saturday? It is an extra $300 but the surf is calling. “No. Sorry.”
What if number was $600? The boss needs the fence painted by Monday but, well, you made a commitment to head to the beach and you need a break. “Still no. Sorry boss.”
“$900?” At some point you are going to ditch your mates and maybe that is the tipping point. Except; you don’t get $900. That is what the boss pays. You get $600 because a third goes to Nicola Willis. Metaphorically. And $600 isn’t enough to entice you to work the weekend. You head off surfing and a fence goes unpainted.
Now let’s paint a different picture. You are the boss. There is an engineering firm which can build paint guns that will make your staff more productive. You would make more profit, your costs would be reduced. You could offer lower prices and more customers may choose to get their fences painted.
But it is a gamble. You could spend $100,000 with the engineering firm and get nothing. Alternatively, business might pick up and you might make an extra $30,000 annually in profit. It is a risk, but you feel confident. $30,000 is enough of an incentive to make the investment.
Except you don’t get to keep that $30,000 profit. You pay $10,000 of that to Nicola Willis. Metaphorically. Leaving you with $20,000. And that is not enough of an inducement to risk $100,000.
The engineering firm does not get the work. Fences go unpainted. Staff who could get work remain unemployed. The unseen, uncompleted work, is known as the deadweight loss. The unseen cost of taxation.
And now let me introduce you to my friend, Ceteris Paribus. His name means “all things being equal”. Not very romantic; despite being Roman. If you propose to do something, you can assume ceteris paribus; that nothing else in the economy will change. It’s a rubric used to explain economic ideas to undergraduates.
So. If you look at the amount of wages paid in New Zealand, ($192 billion, I checked), and raise the rate of income tax by 1% you will receive $1.92b in extra revenue. If nothing else changes.
But things will change. People will respond to new circumstances. Some will work less, others will get creative and hide their income and a few will leave the country or retire early. Most will suck it up because they have no choice but enough will respond for the difference to matter.
If the change amounts to 1%; then total wages drop by $1.92b. You have a higher tax rate but on a lower amount of income. If income shrinks 4% for every 1% in the tax rate Treasury will actually collect less revenue. If the marginal tax rate is high enough this will happen.
The economic policies of Labour, Opportunity, the Greens and Te Pāti Māori all assume ceteris paribus. That taxes can increase and the lump of labour that is the workforce will not respond. That no investment decisions will be altered. They are wrong.
Labour is proposing to raise $1.3b annually with a capital gains tax to pay for free doctor visits. It is assuming patterns of property sales remain unchanged and GPs will be willing to see the influx of new patients at the same rate they currently receive.
Te Pāti Māori wants a 48% rate of income tax, along with a wealth tax and assume zero economic reaction by high income earners who make money by responding to incentives. The Opportunity Party anticipates no one will leave the country as a result of its land tax and the Greens are praying there isn’t anyone worth more than $10 million who will read their tax policy.
In each case these policies will cause the economy to constrict. Jobs will be lost. Firms will close. The productive will leave the country and capital will relocate offshore.
Now. I apologise. Beyond the opening banter this has been a dry lesson in economic theory; but don’t worry. If nothing changes we will be getting a change in government shortly and we can all enjoy seeing the above economic theory being applied. It will be exciting.....The full article is published HERE
Damien Grant is an Auckland business owner, a member of the Taxpayers’ Union and a regular opinion contributor for Stuff, writing from a libertarian perspective
What if number was $600? The boss needs the fence painted by Monday but, well, you made a commitment to head to the beach and you need a break. “Still no. Sorry boss.”
“$900?” At some point you are going to ditch your mates and maybe that is the tipping point. Except; you don’t get $900. That is what the boss pays. You get $600 because a third goes to Nicola Willis. Metaphorically. And $600 isn’t enough to entice you to work the weekend. You head off surfing and a fence goes unpainted.
Now let’s paint a different picture. You are the boss. There is an engineering firm which can build paint guns that will make your staff more productive. You would make more profit, your costs would be reduced. You could offer lower prices and more customers may choose to get their fences painted.
But it is a gamble. You could spend $100,000 with the engineering firm and get nothing. Alternatively, business might pick up and you might make an extra $30,000 annually in profit. It is a risk, but you feel confident. $30,000 is enough of an incentive to make the investment.
Except you don’t get to keep that $30,000 profit. You pay $10,000 of that to Nicola Willis. Metaphorically. Leaving you with $20,000. And that is not enough of an inducement to risk $100,000.
The engineering firm does not get the work. Fences go unpainted. Staff who could get work remain unemployed. The unseen, uncompleted work, is known as the deadweight loss. The unseen cost of taxation.
And now let me introduce you to my friend, Ceteris Paribus. His name means “all things being equal”. Not very romantic; despite being Roman. If you propose to do something, you can assume ceteris paribus; that nothing else in the economy will change. It’s a rubric used to explain economic ideas to undergraduates.
So. If you look at the amount of wages paid in New Zealand, ($192 billion, I checked), and raise the rate of income tax by 1% you will receive $1.92b in extra revenue. If nothing else changes.
But things will change. People will respond to new circumstances. Some will work less, others will get creative and hide their income and a few will leave the country or retire early. Most will suck it up because they have no choice but enough will respond for the difference to matter.
If the change amounts to 1%; then total wages drop by $1.92b. You have a higher tax rate but on a lower amount of income. If income shrinks 4% for every 1% in the tax rate Treasury will actually collect less revenue. If the marginal tax rate is high enough this will happen.
The economic policies of Labour, Opportunity, the Greens and Te Pāti Māori all assume ceteris paribus. That taxes can increase and the lump of labour that is the workforce will not respond. That no investment decisions will be altered. They are wrong.
Labour is proposing to raise $1.3b annually with a capital gains tax to pay for free doctor visits. It is assuming patterns of property sales remain unchanged and GPs will be willing to see the influx of new patients at the same rate they currently receive.
Te Pāti Māori wants a 48% rate of income tax, along with a wealth tax and assume zero economic reaction by high income earners who make money by responding to incentives. The Opportunity Party anticipates no one will leave the country as a result of its land tax and the Greens are praying there isn’t anyone worth more than $10 million who will read their tax policy.
In each case these policies will cause the economy to constrict. Jobs will be lost. Firms will close. The productive will leave the country and capital will relocate offshore.
Now. I apologise. Beyond the opening banter this has been a dry lesson in economic theory; but don’t worry. If nothing changes we will be getting a change in government shortly and we can all enjoy seeing the above economic theory being applied. It will be exciting.....The full article is published HERE
Damien Grant is an Auckland business owner, a member of the Taxpayers’ Union and a regular opinion contributor for Stuff, writing from a libertarian perspective
No comments:
Post a Comment
Thank you for joining the discussion. Breaking Views welcomes respectful contributions that enrich the debate. Please ensure your comments are not defamatory, derogatory or disruptive. We appreciate your cooperation.