Wednesday, December 20, 2006

tax, demand and supply

Our Scroogy Minister of Finance, wallowing in a surplus that in terms of proportion of GDP really is now as big as Oil Rich Norway, has told us a tax cut would only come to $10 per week each, so we shouldn't be greedy.
"Norty, norty children", he sneered at us in his kindly way,"you'd only spend it"
And that is probably true.
We might spend it on all the things Cullen is privatising by the back door by requiring our schools, hospitals, doctors and others to make up for their chronic under-funding of operational spending in order to generate oversize "surplus'es". After petrol Government costs and charges have been the fastest growing element in the CPI basket. Instead the surplus money is cynically being held out of operational funding so the Labour Party can throw money at electorally embarassing developments.
All that aside however returning a year's school fees to the public might not be the best use of the available surplus. Instead Cullen is looking at reducing business tax - a tiny tiny amount. Here's a radical suggestion then. Why not cut business tax to 10% like they did in Ireland. Currently business tax brings in $9.54 billion or 17% of the total. At 39% it is hugely complex and fundamentally encourages people to invest in avoiding paying any. Cut it to 10% and suddenly Australian business will be rushing to set up in New Zealand. Moreover our businesses will be more competitive compared to Australia too.
Inflation basically comes down to a mismatch between demand for and supply of structurally unresponsive assets suh as land and labour. If there is an increase in demand beyond the availability of supply prices rise (eg after the Great Death in 1348). Within an economy an increase in prices for the same level of supply (eg labour) creates a demand for more money which eventually leads to a weaker currency. That is because essentially it takes more money to buy pretty much the same thing. The same can apply to goods and services. However this can be offset if an increase in demand is matched by an increase in supply. When this happens there will be an increase in demand for and a supply of money so there will also be growth.
Some commentators try to pretend that any form of stimulus is inherently inflationary. They mostly do so because they represent those interests who believe that the rich should get richer and the poor should stay poor. It is however perfectly possible for the rich AND the poor to get richer as happened, for example, in Germany after World War Two.
By reducing business taxes we would increase income to employers. We would also be increasing demand for labour. Given that there is a fixed pool of labour there would by necessity increased prices for labour. However because employers would have more income they could afford to pay more without needing more money in the system. So to reduce tax burdens on business is effectively to vote for a wage increase.
Now it is true that one has to look at this a bit carefully. In New Zealand most businesses are family businesses and they may simply spend a tax cut on much needed "market research" at a conference in Europe or a beach somewhere. However this will simply stimulate demand which will stimulate growth. Another issue is that many of these businesses are accountants who spend a lot of their clients money rorting inland revenue. While this is good for them and their clients it is fundamentally a self-imposed cost of business in New Zealand which nobody needs. So a bit of a collapse in demand for accounting services and tax lawyers would not necessarily be a bad thing.
When Ireland cut its corporate tax to 10% its tax take actually increased. Its industry flourished and people lost interest in blowing up the British and started to make money instead. New Zealand should do the same.
Before Australia does it to us.

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Tuesday, December 19, 2006

More in the breach than the observance

There is a fundamental wisdom embedded in Christianity which only really gets acknowledged at Christmas time. It has nothing to do with sacrificing sons, or redeeming the sins of humankind through corporal suffering or any of that other Greek gilding which was overlayed on the teaching of Yshu ben Yosef ("Jezus Christ"). It is that simple hand carved wisdom that caring for others is the only way the human enterprise is ever going to work. That personal means are irrelevant and that a giving heart is the only way to heaven.
There is nothing exclusive in this insight. Bhuddism and Islam certainly give this aspect of life due consideration. But there is a humility in the simplicity of the lessons of Yshu which give them a certain reasonance across the centuries. Yshu did not concern himself with rule or jurisprudence as Mahommed did. Nor did he try and provide a detailed path to enlightenment as Siddharta Guatama did. He basically talked to ordinary people in ordinary language and told them that despite the apparent success of the monumentally corrupt Roman Empire ( at that point ruled by the Paetorian general Sejanus in the name of the Emperor Trajan (who was too busy abusing children in Capri), that being nice to people mattered.
"Anyone with two ears had better listen" as he used to say.
It is this lack of complexity which is so important. And it is telling that in most Christian societies it is the commonplace miracle of birth which is celebrated as the largest Christian festival rather than the more tortured interpretation of Yshu's death. Indeed Easter/Ishtar has become more about bunny rabbits and chocolate eggs than crosses, nails and whippings. Chistmas is a festival of birth and childhood and a reminder of the greatest gift we ever get which is that of innocence.
The surprising thing is that after two millennia of apalling butchery by Christians of Christians (and others) that this emphasis, this lesson, still persists.
To call Christian nations "christian" is certainly a misnomer. As Neitzsche insisted christianity is a slave's religion, not a rulers one. As Shakespeare translated it "render unto Caesar, that which is Casesars". Christianity is not about nationhood, it is about a personal sense of letting go of the material to embrace our inner humanity. It is the opposite of 'market forces', 'profit maximising entrepreneurs' or rational self-interest. Thus we observe the sanctity of Christmas in a tortured combination of market excitement and customer exasperation, in order to deliver the illusion of an idea to children who live in a simple world of rational self-interest. It is, most certainly, a truly peculiar phenomenon.

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Tuesday, December 12, 2006

Qui Custos ipse custodis: Who shall watch the watchers?

There are times I despair at journalists in this country. Yesterday the Government announced a completely new energy strategy. This energy strategy will determine how we power our economy's future. It will determine our industrial competitiveness, our industrial resiliance and ultimately our wealth for the future. So what do the media focus on?
Electric cars.
The strategy includes major tweaks to the RMA ( subtext: it doesn't work), a completely new discount rate ( subtext: we are prepared to accept a less than economic ROI for stuff we like), and a whole bunch of expert groups (subtext: we don't know what we're talking about). But the media focus on electric cars.
Worse they then find a bunch of American inventors who have come to NZ and "discovered" the water powered car and are seeking investment funds. No understanding of basic physics. All the gullibility of a child in kindergarten. Where do they get these people from?
The media in any country are the consciousness of that country. The media reflects back to the culture what it thinks. Or in our case doesn't think.
New Zealand is a thin country. It absorbs ideas very quickly. But it doesn't digest them very well. It has little capability for critical analysis (other than a basic Scottish mean-spiritedness) and flees from robust discourse. The result is an intellectual environment better suited to sheep than anything else.
It would be nice to think that the internet might change this, but alas the freedom of choice is, as the band Devo sand about in the 80's, just confuses people. This leads to everyone believing media which are frankly no more credible than many bloggers - just better promoted.

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Monday, December 11, 2006

Back to the Future

Energy and Climate Change Minister David Parker today announced the Government would be investigating various forms of emissions trading regimes. For some of us there, I'm sure there was something of a sinking feeling in the pits of our stomachs.
Ten years ago then environment Minister Simon Upton was busily releasing the same sort of discussion papers. In ten years our civil service has burned gallons of jet fuel attending international conferences, written screeds of text and now, at the 11th hour in the Kyoto countdown the Government announces it will study emissions trading.
HELLOO! Is there anyone awake in there?
Because we have not had emissions trading or any other form of carbon market our forest planting has diminished and our generators have already invested heavily in combined cycle gas fired generation. We have spent ten years sitting on our collective hands. Seven of them under a Labour Government.
Its lucky Government's don't offer any particular service level in return for our taxes. I'd be asking for my money back.

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Friday, December 8, 2006

Simple Solution to House Price Inflation

All over the English speaking world house price inflation is out of control. New Zealand is no different. House prices are said to be "cooling" when the "only" increase 12% per annum! Investors in any other capital market should do so well!
House price inflation is rather more pernicious than other forms of inflation because it denies one generation the opportunity to save while the older generation pockets tidy capital gains. Of course the younger generation will eventually inherit the earth but if all they inherit is a bunch of credit card debts, they may not be too excited about it.
House price inflation is also a form of inter-class war. Because house price inflation is not included in the CPI as calculated by Statistics ( because it is partially made up by interest rates which in turn are based on CPI) the average worker's wages are not adjusted to take account of these price hikes. The result is the rich get relatively richer and the poor stay poor.
So what could we do about it? Some suggest a capital gains tax. To some extent IRD already has one on houses which are bought by landlords and run at a loss. There is some merit in using the tax system to encourage investment in businesses given banks are positively incentivised through their balance sheet requirements to invest in property (equities are only counted as half their value). However to my mind this will not b sufficient to prick the speculative bubble.
It seems to me the best course of action is to cut the source of capital off at the root. Most of the new capital in the New Zealand property market comes from the US. An investment property in NZ is a good deal. Relatively cheap and tax free. So why not simply require land owners to be New Zealand residents?
By limiting property ownership to New Zealand residents or companies majority owned by New Zealanders we would effectively be limiting the size of the property capital bubble to the capital reserve of New Zealanders. Recycling our own wealth rather than living on foreigners savings masquerading as local capital. Not only would this sharply reduce the silly growth in property prices now it will also prevent the enormous shock which will come when those foreign investors find something else and pull out by themselves.
Better a little pain now than a major depression later.

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