Wednesday, December 21, 2005

Treasury Strikes Back! (well that clears things up)

To my intense excitement Treasury have finally responded to my request for references substantiating their claim that "there is a [rich]…body of international studies that can inform and support" the belief (held by Treasury) that reducing marginal tax rates will stimulate economic growth. Here's the important bit from their response:

You ask for the references relating to mention made on page 20 to recent ‘studies that have found that taxes on personal income, company income, payroll and property damage growth, while taxes on goods and services have a more muted effect on growth’. I appreciate your interest in our briefing, which is part of Treasury’s ongoing work in this area. I can confirm that the briefing as written provides as full a summary of this analysis as is possible at this time and that we intend to publish our review of the literature once it is ready, probably as part of our working paper series.

As I noted in my original post with the help of academic databases I was able to find a few studies making the low taxes high growth claim. The blogger Genius was able to find a few more. But nothing I read convinced me that cutting top tax rates inevitably leads to higher economic growth. Particularly, given that, when individual country’s histories are studied there are all sorts of examples of the opposite happening (low tax periods having low growth). Needless to say, Treasury’s response hasn’t done anything to help in this respect. I mean how hard would it be to list the names of a few papers in an email? After all, if you are confident enough to base a government policy recommendation on the papers, surely you’d be confident enough that they would stand up to the examinations of a mere blogger.

Oh well.


Genius said...

Hmmm looks like you got them. If I had done the paper I would be back to you in minutes with references defending my point - but they don't even seem to know where to look for somthin that would be robust.

I have seen a few articles that say tax is bad but they are almost all working papers rather like the treasury paper as opposed to proper academic papers (explaining why they are embarrassed to quote them). here is one they were probably aware of (found via kiwiblog)

It is interesting but I'm not convinced... There are also all sorts of ways of measuring these things. And mitigating factors and bias that really require academic articles and critique to examine them properly.

Also beyond the immediate debate of interest is the race to the bottom view where, lowering your tax rate provides a theoretical boost unless someone else does it too in which case both governments just end up with less money but nothing much different. I have always been a bit concerned about this one.

Terence said...

To be fair to treasury, it may just be beureaucratic caution rather than lack of confidence in the studies they refer to which prevents them from providing me with their refs. Even so this isn't much better. After all, as tax paying citizens of NZ, treasury are - in a sense - employed by us - and a little accountability wouldn't hurt.

Regarding the race to the bottom comment: that's only relevant to "brain drain" and corporate tax arguements (and treasury does make it with regards to corporate tax rates). There's as interesting academic debate to be had (in a globalising world) as to how real the effect really is (not to mention how much is is or isn't cancelled out by other facotrs like the "businesses prefer roads without potholes" factor).

Joe Hendren said...

Good on you for pulling them up on pretending an unsubstantiated assertion will suffice for a argument.

earlier this year I was looking through a lot of briefing and cabinet papers coming out of treasury and I was shocked how much of the analysis depended on unsubstaiated assertions (such as claiming NZ was seen to have an overly restrictive overseas investment regime - despite investors themselves pointing out the obvious fact that the NZ investment environment is already one of the most open in the world)

I have to laugh when I hear people claim treasury's advice is so 'robust' compared to other sources - yeah right - IMHO some of the things from treasury I read this year I would struggle to gain a passing grade of "C" if it was handed in as a university essay. Its concerning how much influence treasury have given that some of their work is so half baked and shoddy.