Friday, March 19, 2010

This Mess We're In (with apologies to Polly Jean)

This (Gummint discovers that taxing property won't raise the dosh needed for tax cuts) all neatly illustrates the unfortunate corner that most western democracies have knowingly painted themselves into.

In handing out entitlements, perqs and goodies, in an implicit intent to buy their recipients’ votes, they have triggered the ‘endowment effect’.

Simply put, this means that you may not miss something you never had, but you’ll fight tooth and nail to preserve something you Do have, no matter how dodgy or corrupt the process of acquiring it was.

This ‘ratchet’ has now jacked most people’s hopes of continued income up, way, way past the point of sustainability. That is, we’re running out of Other People’s Money (the taxes paid by actual tax-producing enterprises and people).

I frankly don’t see any easy way out of this sort of boondoggle. The political way is blocked by the ‘entitled’, who will simply vote for the More Goodies Party if given the chance – what Mancur Olson calls ‘distributional coalitions’.

We see this oh so clearly by the Grey Mob’s fury over a few trips to Waiheke. ‘How Dare They!’ is the cry.

Bill E’s sober estimate of less-than-sufficient tax revenues is also no doubt an outcome of a ‘John Galt’ effect: you cannot force people who can control their net income, and therefore their tax liability, to Produce and be Taxed if they don’t agree with the uses to which said Tax is being put.

They will quietly arrange their production to suit their own need for income.

E.g. in most farming situations, the distinction between living expenses and small luxuries is quite invisible, and you can go fishing on the King Quad.

They will minimise the net income externally reported.

E.g. by a doctor not doing those few extra surgeries, or a consultant deciding that 24 billed hours/week @ $150 is enough, ta very much, and going golfing the other two days.

And of course in all these scenarios the tax liability (and national tax revenue) falls sharply.

Or, being smart, ambitious and mobile, they simply up stakes and leave.

I reckon that the Greek outcome is the most likely: as internal economic arrangements are so incestuous – a Gordian Knot, indeed – only the cold eye of external parties – bondholders spring to mind – has any power to force the needed changes.

Which changes are of course bleedingly obvious:

- arrange tax matters to minimise tax arbitrage
- remove welfare traps such as WFF and roll these into a finer-grained tax structure
- means-test universal benefits
- work for dole
- less Gumnut overhead

Then, and only then, does John Galt shuffle back to the pages of badly written if expository novels, because it would only then be clear to all Producers that their hard-earned Tax is not being misapplied to produce more underclass infestations, unintended outcomes, and perverse incentives.

The depressing if logical outcome of my estimate of the situation (and I see Mark H’s comment as a John Galt moment, too), is this:

There is no political way out of this. Because the distributional coalitions and the voices of the ‘entitled!’ are, taken together, a massive majority. And because (as I recall an ex Nat pollie telling us at an MBA briefing a decade and a half ago) MMP is a recipe for stasis – nothing much will change, because nothing much Can change.

So, chaps and chapesses (BH, you owe me a royalty for that term, BTW), don’t be going looking to Politicians of any stripe, to solve the pressing issues of our quirky little Isle.

And the follow-up, from comments which suggest marvellous ways to restructure tax:

JK and crew are castigated for an incremental/pragmatic approach, but political realities and the structures of MMP rule out anything else.

The change process, crudely put, is Unfreeze Existing/Change/Refreeze New.

Your proposals are for the middle bit.

Hitting a wall of some kind (bond-buyer revolt, sovereign debt default, Repo Man, bankruptcy) would seem now to be our best hope for getting the Unfreeze. After that, Change can happen.

But wishing this in public on all of us is, shall we say, Not a Good Look.

So we carry on, just kicking the can down the road. And, some of us, quietly preparing for a harsher, colder world.