Minister makes sense on alcohol minimum pricing

27/04/2014 § 6 Comments

Note: Eric Crampton at Offsettingbehaviour is an expert on the economics of alcohol consumption in New Zealand, and has posted on this. I purposely wrote this post first (because I have looked at modelling of minimum pricing), then checked out his comments. This post is especially long — sorry.

The Ministry of Justice released a report calculating the impacts of a mandated minimum price for alcohol. The reporting (in both the Christchurch Press and the Dominion Post) was that the report said minimum pricing would be good, lots of people were in favour of the policy, and the Minister blocked it anyway.

Minister Collins was absolutely correct to stop the policy, but not for the reason stated. The reporting was that

The ministry recommended that a minimum pricing regime should not be considered for five years. It said this would give time for Government to assess the impact of alcohol reforms which passed in late 2012.

And you think, fair enough, let’s see what happens with existing measures before we go adding new ones.

Back up a moment — who were these ‘people’ who favoured the policy? Well, all the same people who have been trying to reduce alcohol consumption for years. Specifically, SHORE can’t just let people drink in peace. They feature prominently in the article. It turns out that they supplied a lot of the data and analysis for the MoJ report, too.

SHORE got wound up a while back because alcohol has become ‘more affordable’. What does this really mean? It means (a) people have become richer, and (b) they have decided to spend some of their new riches on drink. This is clear evidence that people like alcohol. Given their druthers, they would like more of it rather than less. Alcohol is a ‘normal good’. Affordability is generally a good thing — think housing.

Back to the MoJ report — what did the report say, anyway? I’ll give you the high points.

First, a minimum price produces nearly the same reduction in moderate drinking as harmful drinking. The report acknowledges that harmful drinking is less price sensitive, but says that the fact that harmful drinkers consume cheaper alcohol means that the minimum policy has more bite with harmful drinkers. Figure 27 makes the link, showing that those who drink more frequently are more likely to be buying cheaper alcohol. The link is there but fairly weak. For those who drink daily, 25% are buying alcohol in the cheapest 20% of products (with no link, it would be 20% of them). So, 75% of daily drinkers are buying more expensive products.

My main issue with this is the blatant classism: if you work drunk on Bombay gin martinis or ruin your liver with Dom Perignon, that’s all good. The report wants to sort those icky people drinking Chateau Cardboard and growlers. While trying to target the fraction of the fraction of the population who BOTH buy cheap booze AND drink harmfully (roughly, 25% of 11% (Figure 1), or 3% of consumers), they are penalising people who want a moderate drink on a budget.

My second issue is the elasticities that drive the whole analysis. Just to be clear, there are two main elements to the modelling. The elasticities (how price affects consumption) are one main element. One set of elasticities, from SHORE and AC Nielsen, are in table 7 (p. 24). They are, shall we say, inconsistent with the literature. The report even points this out:

It was decided that the significant reductions in consumption estimated using NZ elasticity estimates are not a realistic representation of what is likely to happen in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.

And yet, the analysis still uses these elasticities. The report also uses the Sheffield elasticities, provided in Appendix 3, which have harmful drinkers as more price elastic than moderate drinkers (own price elasticity). So, a key element of the modelling is suspect.

Thirdly, the other main element of the modelling is how drinking links to harm. I spent a little time trying to dig up reliable data, and it isn’t available. The report tells us that it’s a problem:

For all the harm models there is the possibility that the functional form and slope of the relative risk functions are mis-specified (for example, most functions are assumed to be linear). The savings in alcohol-related harm generated are highly sensitive to the form and specification of the relative risk function. (p. 8)

Translation: we don’t really know, and it makes a big difference, but we’re gonna just go with what we’ve assumed.

Finally, the report finds:

A minimum price or excise increase would have some impact on low risk drinkers, but the savings to society significantly outweigh the lost benefits to consumers. (p. 7)

I’m not sure how they’ve made the calculation, but I’ll explain what I’ve seen. Chapter 9 has a big graphic in which the net social effect is the benefits in reduced harm less the ‘Costs of the pricing policy (deadweight loss + lost value of industry assets)’. This figure is after Chapter 8 runs through impacts on consumer surplus, industry revenue and Government revenue. The figures in Chapter 8 are pretty standard, but figure 13, the long-run impact of a price increase, splits the lost consumer surplus into ‘Lost consumer surplus after pricing policy’, which is a deadweight loss triangle, and ‘Transfer of consumer surplus to government or industry’, which is a rectangle showing the rent from the increased price.

The problem arises because it isn’t immediately clear how that rent rectangle is being treated. According to the Chapter 9 definition, it isn’t a social cost, because it isn’t a deadweight loss and therefore isn’t a cost. Now, this is technically true. If the rent can be captured by government or industry, then it is not a loss to society; it is a transfer from consumers (who may then gain by, for example, more government spending).

However, it is still a loss to consumers. They still, as consumers, have to pay more, and are losing that consumer surplus. Therefore, if you want to draw a conclusion like ‘the savings to society significantly outweigh the lost benefits to consumers’, you need to include that transfer in the ‘lost benefits to consumers’. It is not clear that the analysis does this.

So, a summary. This report is suspect. I haven’t read the whole thing and investigated every calculation, but what I’ve seen suggests that all the assumptions are spelled out and all the details are included, so that if you work at it you can begin to understand how parameters and assumptions were transformed into a crusading conclusion that alcohol must cost more! But it should not be the reader’s job to sort through those details. It is incumbent on the Ministry to provide accurate and impartial analysis. I do not believe, in this case, that they have done so.

Correcting the Dom Post

24/02/2014 § 1 Comment

The Dominion Post published an article on US/New Zealand tax negotiations. The US is trying to get New Zealand to have the IRD and banks release information about ‘US people’, whatever that means. The article was scare-mongering about poor Kiwis who will suddenly be targeted by big bad American tax agents. I wrote the following to the reporter, Ben Heather:
Hi Ben –

Your article, ‘American tax grab may target Kiwis‘, contained important errors, and I am writing to correct them.

– US citizens are subject to US tax on their worldwide income. This is true regardless of where they live. Thus, any actions by the US government to have those taxes paid are simply ‘enforcing the law’, not a ‘tax grab’.

– A child born abroad to a US citizen does not ‘automatically’ become a US citizen. He or she has the right to citizenship, but the parents have to apply, and the right lapses once the child reaches a certain age (18 years of age, I think). Thus, the couple in your article had to apply for citizenship for their child, which means they chose US citizenship and all the rights and obligations thereof. Those obligations include paying taxes on worldwide income.

– A green card lapses once a person has been out of the US for a certain period of time. From memory, it remains valid for 2 years, and one can apply for an extension, but only for another fixed period (2 or 3 years). One can keep a green card valid by returning to the US for some period of time, the details of which I don’t recall. All of this means that your statement, ‘Under US law, any Kiwi who has a green card, or US residency, is liable to pay tax in the US, even if they have not lived there for decades’, is false. If the person has not lived there ‘for decades’, the green card is no longer valid and the person is not subject to US tax laws.

In this situation, there are essentially four classes of people:

– People subject to US tax laws, that is, US citizens and permanent residents. They are legally obligated to pay their taxes. The US is asking for New Zealand’s help in enforcing US tax law.

– People tied up somehow with US citizens and permanent residents. These are, e.g., New Zealand spouses of US citizens. The New Zealand government is obligated to protect their privacy and not obligated to share anything about them with the US. They will need to work out what to do about things like bank accounts held by the non-citizen spouse.

– People who once held green cards (or US citizenship) and no longer do. They are no longer under any obligation to the US government, and New Zealand should ensure that their details are not sent to the US.

– People who do not fall into any of the above categories. New Zealand should ensure that their details are not shared, either.

You would be able to check the details of tax obligations and citizenship with the US embassy or consulate. Much of the information is also on official websites.

Kind regards,

Taxing people into better lives

30/10/2013 § 9 Comments

I’m struggling with sugar and fat taxes. The hope is that we can encourage people to improve their diets by changing relative food prices. We know that in theory we can, and that in practice there seems to be some effect.

But does it make those people better off?

This is purely an economics exercise, not a medical/public health one. So, all the usual assumptions and disclaimers apply.

Assume that someone drinks a lot of soda (technically, sugar-sweetened beverages — SSBs). The consumption contributes to their obesity and puts them at greater risk for diabetes. Let’s just focus on the diabetes angle. What this means is:

soda now > diabetes later.

That is, they prefer having soda now, and are less concerned about diabetes later. Or, rearranged:

soda now – diabetes later > 0.

This presentation emphasises that the pleasure from soda now, even once the diabetes later is taken into account, is net positive.

Now, let’s say that we tax soda so this person stops drinking it:

soda now + tax < diabetes now.

We haven’t made them ‘better off’. We have taken away their pleasure and substituted something less valuable.

There are essentially three ways that this might be an improvement:

  • information problem — they didn’t know how bad diabetes would be when they drank the soda, so the tax keeps them from the negative experience
  • time-inconsistent preferences — the future self would have wanted the past self to abstain
  • externalities — diabetes imposes costs on everyone else, so the person isn’t facing the true costs.

This third option is interesting. Let’s say I am poor. My consumption is generally constrained by my budget. The one area where this isn’t true is public goods — botanical gardens, beaches, education and healthcare. If I contract diabetes, I expand my use of healthcare beyond my own budget constraint. By drinking soda now and contracting diabetes, I am actually consuming outside my budget constraint. On the other hand, stopping people from drinking soda and thereby stopping them from contracting diabetes is pushing them back inside (or closer to) their budget constraint. Therefore, the policy makes them poorer.

Yes, I understand that it makes them healthier. I’m just not sure that it makes them ‘better off’.

Let’s get the taxes right

13/03/2013 § 8 Comments

The ‘fury’ at the suggestion of applying fringe benefit taxes (FBT) to carparks is utterly misplaced. The only proof I need of this is that ‘Unionists and business groups have joined forces in a rare alliance to lash out at the new tax’. What better indication that this new tax is being applied even-handedly?

It’s about time, too. I have to pay, every day, to park my car in a commercial parking lot. Part of my salary — my compensation for the time I’m in the office — goes to paying for that carpark. People who don’t have to pay for their carparks are getting tax-free benefits, and that’s not cricket.

I can only hope that the Government doesn’t lose the courage of its convictions. This effort should be extended to all the little perks and compensations given people in lieu of money.

Take those cellphones and laptop computers that employees get for free. Sure, during the week they might need a cellphone to keep in touch with the office or with clients. But after hours? That cellphone is still in use, receiving texts about completely personal dinner parties, making calls about entirely private gossip. And the laptops? They are getting into Facespace and Youtelly not just during office hours but also on the weekends.

The technology is there to shut down this rort of the tax system. All that’s needed is an app to disable devices outside of business hours. Then, those electronic toys would be completely tax-compliant. If the international IT cabal won’t do it, the Government needs to step in and take its rightful share.

The Government can’t stop there, either. From my office, I can see any number of buildings with stunning views of the Wellington harbour. The sun sparkling on the early-morning ripples, the picturesque hills — those views aren’t available to everyone. Some workers are clearly receiving much more of these benefits from their offices than others. It’s about time the Treasury sorted out some non-market valuation studies of the amenity value of offices and made sure that those perks are properly taxed.

In fact, it isn’t just the views and the sunshine. Some workers get more floor space, larger desks, nicer office coffee. What we really need is a ‘defined office package excess’ (DOPE) tax. The Government can set minimum standards for office workers, and any provision of amenities in excess of that minimum gets taxed. Once the process is in place for the Auckland and Wellington CBDs, it can be rolled out to other localities and other types of workplaces.

The most egregious evasion of taxes on benefits, though, is going to require collaborative intervention by economists and psychologists to tax properly. It is my understanding that some workers are receiving an additional benefit beyond their wages and salaries, cellphones, nice office surroundings, and the like. A tax system can be properly calibrated only if it contains a PFT — a Personal Fulfilment Tax.

Trying to see the big picture

01/03/2012 § 6 Comments

I’ve been reviewing research on how well the New Zealand economy works. Good golly, there is a lot of it. People seem to come to one of two conclusions:

  1. yeah, nah, it’s about what you’d expect, or
  2. it’s stuffed and needs fixing.

I try to take each article or report at face value, at least to start with. I assume it is correct and the research is valid. How can I add it to all this other information in a sensible way? My problem is the divide between ‘it works’ and ‘it’s broken’ sometimes seems unbridgeable.

An exemplar of the first group is Phil McCann’s assessment based on economic geography. He says essentially two things. First, New Zealand is small and distant. Of course, lots of people have noticed that about the country. Then, he goes on to say that the global economy has changed. Face-time has become more important for the high-value, knowledge-intensive work that pays well. That work is not just knowledge-intensive but relationship-intensive. So, it’s no wonder that the country is stuck in second gear. Shaun Hendy’s blog posts have a fuller discussion.

McCann is not alone. Some folks at Treasury looked at savings rates. They found that Kiwis are by and large saving enough for their retirements. The savings side of things seems to be working as you would expect, given the wage levels and superannuation. Some other researchers from MED and elsewhere looked at R&D and patenting. They found that the innovation system was about what you’d expect, given size and distance and the structure of the economy. Findings on productivity, such as this and this, are more complex, but they don’t indicate that the economy is somehow failing.

There’s also lots of research for the other side. The Savings Working Group, for example, linked poor economic performance to a low savings rate, which must therefore be raised through various policies. Likewise, the Tax Working Group found that the tax system was holding the economy back and needed significant change. The Powering Innovation report made many recommendations about how to fix the innovation system, with its low R&D investment, low connectivity, and poor performance.

Also in this camp are the many reports that make the problem ‘cultural’. It’s New Zealanders’ focus on the boat, bach, and beemer; or businesspeople’s desire to keep their firms small rather than go for growth; or scientists’ lack of entrepreneurial spirit.

The resolution I’m toying with is to say ‘yes’ to both camps. Yes, firms are smaller and R&D spend is lower and savings aren’t as high as elsewhere. But, these are all rational behaviours given the context of a small, sparsely populated country far from the economic centres of the world. So, yes, it is about geography and we are doing fine once you control for it.

This changes the tone of the policy recommendations. It isn’t about claiming that the institutions (the tax system, the science system, the education system) are messed up and need to be fixed. Instead, it is about recognising that we’re pushing this economy uphill and asking what tools might help.

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