Six policies economists love

July 21st, 2012 at 9:00 am by David Farrar

Theo Francis at NPR writes:

Tuesday’s show presented the common-sense, no-nonsense Planet Money economic plan — backed by economists of all stripes, but probably toxic to any candidate that might endorse it. …

One: Eliminate the mortgage deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

We don’t have that in NZ, but we did use to allow depreciation to be claimed despite house prices appreciating.

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Health insurance is not tax deductible here. Many argue it should be, but the evidence tends to be that it doesn’t help more people take up health insurance, it just provides a tax dodge for people who already have it.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Owners would still be taxed on dividends, but a zero company tax rate would get investment flowing.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

Which we already do, to a degree.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

Very true.

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38 Responses to “Six policies economists love”

  1. Than (440 comments) says:

    How exactly would a progressive consumption tax work? Would this mean higher GST on more expensive goods and services, so (for example) you might pay 10% GST on prices up to $500, but 25% on the next $501-2000? That would have a significant distorting effect on prices and spending habits.

    To be honest these ideas sound as unhelpful as some of the Greens worse policies. Say we remove income tax; great, everybody gets more money in the hand. But thanks to the progressive consumption tax, everybody is also paying more for everything. To be revenue neutral to government these two effects would have to exactly match, so we’d have bigger numbers in the pay packets and price stickers, but no increase in purchasing power.

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  2. wat dabney (3,721 comments) says:

    To be revenue neutral to government these two effects would have to exactly match, so we’d have bigger numbers in the pay packets and price stickers, but no increase in purchasing power.

    That’s true as far as it goes, but the point about that particular proposal is that it changes incentives: the economy would grow faster so we would indeed end up with more purchasing power.

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  3. krazykiwi (9,189 comments) says:

    Six: Legalize marijuana.

    They were clearly all stoned when coming up with the previous five :)

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  4. Than (440 comments) says:

    wat dabney, that would entirely depend on how the “progressive consumption tax” works, and no details are given. I strongly suspect it would just end up encouraging the rich to buy lots of cheap goods rather than few expensive ones (go to the movies twice a week, rather than go to a deluxe screening once a week, say)

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  5. virtualmark (1,514 comments) says:

    I’ve long argued that we should have no company tax. Tax dividends and fringe benefits as income, as we currently do. And introduce a low rate of tax or levy on offshore transfer payments (to stop profits being taken out of the country without some kind of modest impost).

    Encourage companies to grow, and encourage offshore companies to locate here.

    I strongly expect we would more than make up for the lost corporate tax via the increased economic growth and employment.

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  6. swan (659 comments) says:

    Than,

    I agree a progressive consumption tax sounds unworkable, but I think the rest of the list is pretty sound. I would go for a universal basic income to protect the poor, eliminate welfare, reduce income tax to a low level and increase consumption tax, eliminate the minimum wage (or have one that reflects the market clearing price – purely as a means to reduce and prosecute exploitation and slavery).

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  7. virtualmark (1,514 comments) says:

    Oh, and at the same time, put an end to “corporate welfare”. No soft taxpayer funding to companies like Right Hemisphere or Xero or whatever fashionable company grabs the attention of the Prime Minister.

    The Government’s helping hand to business is that it won’t tax them. If they have that then there should be no need for subsidies and soft money.

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  8. UrbanNeocolonialist (231 comments) says:

    Fundamental problem with eliminating all of these taxes is that above a certain level of wealth there is no means for redistributing that wealth throughout society over the long term (ie inter generationally) as the spending habits of even the most prolifigate trustifarians cannot erode the investment. This is a really bad situation – where you have dynastic wealth accumulation, and arguably a lot of what is wrong in West as 2nd-3rd etc generation super-rich do not make a useful contribution to development of society with their hoarded capital. Situations like that have lead to almost every revolution and societal failure.

    So while I have no problem with driven types making squillions of dollars, if you want to institute such a system of taxes you also need to make damn sure that kids can’t inherit more than say 10-20% of it from their parents, to prevent the rise of non-productive rentier classes. Aristocracy is not healthy for a society. The Frenchies had it dead right with Egalite.

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  9. hj (6,732 comments) says:

    “I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.”
    ….
    Good boy!

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  10. thor42 (971 comments) says:

    Those are the six policies that economists love, and here is one that *I* would love. Axe the DPB and Bludging for Families. In other words, from date “x”, no more new people to receive either of them.

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  11. hj (6,732 comments) says:

    A land tax seems to be a good way to redistribute as real estate blurbs often claim that 90% of the worlds wealthiest people got there through real estate investment. Land in one way or another is a vital component of just about every form of economic activity and yet no one made land and by occupying it you exclude others. When the Jews started buying land in Palestine they were able to bypass the common people who held land in usufruct . The Jews were able to buy off off absentee owners (I think?). If the commoners held an interest there might have been a different situation in the middle east today.

    http://www.nuffield.ox.ac.uk/politics/papers/…/McLean%20Land%20tax.p...

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  12. hj (6,732 comments) says:

    I notice increase immigration isn’t on that list and yet “NZ is a pro immigration country” (John Key to BBC Hard Talk) and “we show by equilibrium analysis that “immigration benefits everyone” “and “high levels of immigration correspond to increase in house prices, but when we look at the local level it is expat Kiwis who are buying the houses” (despite 8/10 of the top real estate salespeople being Asian and the Savings Working Group stating that high levels of immigration have put up house prices and “worked directly against the adjustments NZ needed to make”).
    http://www.treasury.govt.nz/downloads/pdfs/mi-jarrett-comm.pdf
    http://www.stuff.co.nz/business/money/4622459/Government-policies-blamed-for-house-prices

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  13. Linda Reid (407 comments) says:

    Houses don’t appreciate in value, the land the house sits on does.

    I agree with eliminating all corporate and and personal income tax. I agree with consumption taxes.

    I disagree with carbon taxing – all carbon taxing and trading should be eliminated.

    I think legalising pot is a good move – and not because I use it. I don’t. I think the government should get out of the morality game.

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  14. Viking2 (11,275 comments) says:

    Blatant dishonesty.

    hj (2,599) Says:
    July 21st, 2012 at 10:22 am

    “I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.”
    ….
    Good boy!
    Now compare what the original author said to what hj and DPF said.

    Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

    DPF
    I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.

    Now I have a five year old granddaughter that has better comprehension skills that those two.
    No where was land mentioned in the post above.

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  15. tvb (4,254 comments) says:

    The privacy issues will be abused. The police will want access to the information. And the politicians will let them have it and on and on it will go. No no no. The efficiencies are minimal the potential abuses huge.

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  16. Harriet (4,614 comments) says:

    “….We don’t have that in NZ, but we did use to allow depreciation to be claimed despite house prices appreciating…”

    That’s wrong. The land value appreciates….OK sure…technicly speaking building costs may go up a wee bit but if you look at the ‘bang for your buck’ you will find that the quality of what houses are built from compared with what they are built from in the past, you will find that you are getting more or better ‘product’ per dollar…..just compare the cost of things like linoleum to tiles and the life span….wooden frame windows and the associated costs later on to aluminium….single glaze windows to double or triple glaze and power costs ect…..all in all house prices don’t really increase ‘in the way’ that people imagine they do.

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  17. nickb (3,675 comments) says:

    We don’t have that in NZ, but we did use to allow depreciation to be claimed despite house prices appreciating.

    No depreciation was ever allowed on land, which is by far and away the larger component of appreciating property values. Buildings clearly do in fact depreciate, hence why this has always been allowed to be claimed, until National caved in to the moral panic regarding “rich landlords”.

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  18. Harriet (4,614 comments) says:

    “…Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich….”

    Crap!

    NSW police took ONE…YES ONE….drug dog through a gay niteclub – the gays went ballistic. NSW as I understand still do take dogs through public bars, train stations and other ‘areas of interest’.

    They are VERY VERY effective in DETERRING people from drug taking!

    NZ Police are very weak on this matter.

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  19. hj (6,732 comments) says:

    Viking 2. I jumped the gun there a bit but:

    “Our ideal society finds it essential to put a rent on land as a way of maximizing the total consumption available to the society. …Pure land rent is in the nature of a ‘surplus’ which can be taxed heavily without distorting production incentives or efficiency. A land value tax can be called ‘the useful tax on measured land surplus’.”

    —Paul Samuelson, Nobel laureate in Economics (1970)

    “In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

    “I share your view that taxes would be best placed on the land, and not on improvements…”

    “Yes, there are taxes I like. For example, the gasoline tax, which pays for highways. You have a user tax. The property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land.

    — Milton Friedman, Nobel laureate in Economics (1976)

    “It is important that the rent of land be retained as a source of government revenue. Some persons who could make excellent use of land would be unable to raise money for the purchase price. Collecting rent annually provides access to land for persons with limited access to credit.”

    — Franco Modigliani, Nobel laureate in Economics (1985)

    “The user of land should not be allowed to acquire rights of indefinite duration for single payments. For efficiency, for adequate revenue and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land that he or she prevents others from using.”

    — Robert Solow, Nobel laureate in Economics, 1987

    “Assuming that a tax increase is necessary, it is clearly preferable to impose the additional cost on land by increasing the land tax, rather than to increase the wage tax — the two alternatives open to the City (of Pittsburgh). It is the use and occupancy of property that creates the need for the municipal services that appear as the largest item in the budget — fire and police protection, waste removal, and public works. The average increase in tax bills of city residents will be about twice as great with wage tax increase than with a land tax increase.”

    — Herbert Simon (1978)

    The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes.

    — James Buchanan,
    Professor of economics and winner of the 1986 Nobel Prize;
    from a lecture at St. Johns University, New York City

    “While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies — taxes on such things as incomes, sales, and the value of capital goods.”

    “It (land value taxation) guarantees that no one dispossess fellow citizens by obtaining a disproportionate share of what nature provides for humanity.”

    “Economists are almost unanimous in conceding that the land tax has no adverse side effects. …Landowners ought to look at both sides of the coin. Applying a tax to land values also means removing other taxes. This would so improve the efficiency of a city that land values would go up more than the increase in taxes on land.”

    — William Vickrey, Nobel laureate in Economics (1996)
    and past president of the American Economics Association

    “I think in principle it’s a good idea to tax unimproved land, and particularly capital gains (windfalls) on it. Theory says we should try to tax items with zero or low elasticity, and those include sites.”

    — James Tobin (1981)

    “The main, underlying idea of Henry George is the taxation of land and other natural resources. At the time, people thought, “not really that too,” but what was underlying his ideas is rent associated with things that are inelastically supplied, which are land and natural resources. And using natural resource extraction and using land rents as the basis of taxation is an argument that I think makes an awful lot of sense because it is a non-distortionary source of income and wealth. …

    … The question is: “Would it be better if we had more taxation of land and natural resource, and more revenue from natural resource management, and I would include atmosphere and spectrum.” And less tax on income and savings. And I would say, “Yeah.” And I think many economists would agree with that. So, if you want to sell it as a “Single Tax,” then, no, you won’t get anyone to agree that there’s enough revenue there. If you look at is a more “central” tax, then, yes, you will get most economists to agree with you.

    Joseph Stiglitz, Nobel laureate in Economics (2001)
    in 2002 interview

    Time for a property tax
    http://www.economist.com/node/21546014

    IMF recommends to govt to broaden capital gains tax base and introduce a land tax.
    http://www.interest.co.nz/news/52737/imf-recommends-govt-broaden-capital-gains-tax-base-and-introduce-land-tax-your-view

    Motu economist Arthur Grimes Land Tax Option
    http://www.slideshare.net/…/motu-economist-arthur-grimes-land-tax-option

    and it was “all the talk at the Association of Economists conference” I read.

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  20. hj (6,732 comments) says:

    A 1% land tax would immediately reduce land prices by 17%, while a land tax phased in over 20 years would reduce land prices by 11.5%, he said.
    ….
    A land tax would effectively transfer wealth over time from the old to the young. “The retired cohort would be more likely than younger cohorts to incur a wealth loss (in absolute terms) given the higher initial value of their housing assets. They would also likely face an increased overall tax burden if a land/property tax was matched by an income tax reduction, simply because their incomes tend to be low in relative terms. Younger cohorts would face reduced current and future income taxes that, on balance, would generally more than make up for their higher lifetime land tax payments.”

    A land tax would capture foreign owners of New Zealand land, Grimes said. “One currently untaxed sector that it would fall on is foreign-domiciled owners of New Zealand property, who otherwise pay no income tax and who pay no GST if they do not purchase goods and services in New Zealand. A shift to a land tax would therefore widen the tax base not just in terms of the base of assets on which tax is raised but also in terms of the number of people (i.e. non-New Zealand residents) who become taxpayers.”

    http://www.interest.co.nz/news/41324/tax-working-group-favours-land-tax-over-capital-gains-tax

    Unsurprisingly the Donald Trumps (Property Council) are against it.

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  21. Anthony (785 comments) says:

    The tax system taxes nominal income which is a weakness but as long as it does then it is usually correct to say that buildings don’t depreciate in nominal terms. Building costs keep rising at least the same rate as inflation so the value of existing buildings generally also keeps rising, as long as they are maintained and in an area where there is demand.

    It was therefore quite unfair to allow landlords a depreciation deduction for buildings that didn’t generally depreciate while taxing savers on the whole amount of their interest income – even though a large portion is only compensation for inflation. That combined no taxation of capital gains on house sales (except in exceptional circumstances) and the rich prick income tax hike by Labour was why every middle class man and his dog borrowed money, purchased property and became a landlord!

    Of course land is capital so it is silly to say tax land and not capital. Capital gains should be taxed as income to be fair.

    I do agree with a land tax in particular for non-resident land owners. I have suggested before that this could deductible against NZ income tax so there is little or no extra burden imposed on productive tax paying land owners.

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  22. Harriet (4,614 comments) says:

    hj#

    Nobel laureate….blah….blah

    Nobel laureate….blah….blah

    Nobel laureate….blah….blah

    Nobel laureate….blah….blah

    This transfers wealth too ya know…….

    Robert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model and coined the term Black–Scholes options pricing model. Merton and Scholes received the 1997 Nobel Prize in Economics (The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for their work. Though ineligible for the prize because of his death in 1995, Black was mentioned as a contributor by the Swedish academy.[4]

    “…..A 1% land tax would immediately reduce land prices by 17%, while a land tax phased in over 20 years would reduce land prices by 11.5%, he said……….A land tax would effectively transfer wealth over time from the old to the young. “The retired cohort would be more likely than younger cohorts to incur a wealth loss (in absolute terms) given the higher initial value of their housing assets…”

    WTF?

    Why don’t we just instead devalue the dollar to zero….then everyone like you will be happy….forever and ever.. :cool:

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  23. wikiriwhis business (3,883 comments) says:

    As long as we have big govt we’ll always have income tax for politicians to trough from. This is where we get career politicians from

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  24. rog (8 comments) says:

    “I doubt we’ll ever eliminate income tax, but generally it is better to tax consumption and land than income and capital.” I agree in principle this is a good approach. However, we still need to retain some element of progressive income tax – otherwise we will end up with a few very wealthy and large numbers relatively poorer and that outcome would be unstable and unjust. Democratic capitalism makes more sense than recreating an aristocracy. That doesn’t mean however that we couldn’t gradually reduce income tax further once we have started storing up surpluses and repaying debt to below 20% of GDP. We should also look at a pollution tax too – better for the environment and in line with user pays principle. Tax the things we want less of.

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  25. wikiriwhis business (3,883 comments) says:

    Credit is the new currency and destroying economies.

    The breakaway from the gold standard was the open door to financial collapse and the modern financial trend failure is very easy to understand

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  26. wikiriwhis business (3,883 comments) says:

    Now watch this guy who responds

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  27. Nick K (1,133 comments) says:

    Another moron who believes carbon is bad so we should tax it.

    I quite liked this post until that last bit.

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  28. kowtow (7,945 comments) says:

    Introduce a 100% inheritance tax. No one needs wealth after they’re dead and the great benefit would be to create what so many progressives claim to love……..equality!

    Now these doper,stoner economists seem to want to change the tax system as a smoke screen :) to introduce legalise drug taking and use the old “it’s so expensive “to gaol em excuse. I reckon very few users ever go to gaol anyway so that particular piece of justification is bollocks.And if making gang leaders rich is a problm then tackle that with anti gang legislation and real gaol time for them as they are the serious criminals.Prostitution is legal in many places and lowlife are still involved in it and the women no better off despite what all the progressives have claimed all these years. Legalise dope and the gangs move to something else anyway, the Californian chemists keep coming up with new shit for losers to blow theii minds on anyway.

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  29. Johnboy (15,586 comments) says:

    Just get rid of cash. Every transaction would then have a paper trail. “Cashies” would be fucked. Dealers would have a serious problem swapping their P for turnips or sacks of potatoes.

    It is so fucking simple there must be something wrong with my idea!

    Come in folks!!! :)

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  30. Viking2 (11,275 comments) says:

    The very best way to eliminate taxation is to remove the need for it. Have a sinking lid policy on taxation. Rates to go down by 5% a year. 20 years and no taxation.
    Make for either cutting out spending that isn’t absolutley necessary or encourage a lot more creative thinking about how stuff is funded.

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  31. Viking2 (11,275 comments) says:

    How about increasing the GST to 25% on charge out including all credit card purchases and banking transactions for goods and services but only allowing a GST claim of 12.5%.

    Alternative is a transaction tax on all transactions via the banking system. EEasy simple to collect and administer as the banks can be paid a small fee for doing it and totally universal. (only cash or barter escapes the nett.)

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  32. Alan Wilkinson (1,848 comments) says:

    I’m with Nick. They lost all credibility with the carbon tax.
    First, it’s useless; second, it will be hopelessly rorted; thirdly, there is no way to make it spare the poor. The whole notion is nuts.

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  33. Luc Hansen (4,573 comments) says:

    We don’t tax carbon, dummy. We have an (ineffective) ETS scheme that places a price on carbon and allows the market to trade in various and sometimes nefarious ways.

    And carbon, per se, is the essential building block of all life. But when burnt and released into the atmosphere to combine with oxygen, it has effects deleterious to the climate in which civilisation developed.

    Do you understand that each litre of petrol, when burnt, produces 3.5kg (approx) of CO2? Think about it.

    And why eliminate company taxes? They make money by utilising the infrastructure society has paid for. Why incentivise free loading?

    Also. a consumption tax, even a progressive consumption tax, is still extremely regressive and would necessarily have to be combined with income taxes.

    A major advancement here would be to comprehensively tax trusts. That would require an honest parliament. Tough ask, that.

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  34. hj (6,732 comments) says:

    Economist:

    “For local governments a fully fledged property tax would provide a stable source of revenue. Unlike workers or businesspeople, homes cannot up sticks and leave. A property tax raises revenue year after year, in contrast to a land lease, which can be sold only once. What’s more, such taxes allow local authorities to capture some of the value they create: as they invest in local amenities, property values rise, and so do the taxes they are able to collect.

    Home truths

    A property tax could also temper the wild swings in China’s housing market. A recurring levy would make it costlier to buy and hold a second or third home as a speculative bet on rising prices. That would force some absentee homeowners to sell their vacant flats or rent them to the many citizens priced out of the market. Some economists believe that the light taxation of land in Japan contributed to its ruinous asset-price bubble in the 1980s.”
    http://www.economist.com/node/21546014

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  35. burt (8,025 comments) says:

    DPF

    Health insurance is not tax deductible here. Many argue it should be, but the evidence tends to be that it doesn’t help more people take up health insurance, it just provides a tax dodge for people who already have it.

    … Just provides a tax dodge for people who already have it…. Same would be true of people with kids in private school if private school fees were tax deductible. Same would be true if you had private accident insurance and could therefore not pay ACC levies….

    The key problem with the socialist mentality of taxation is that it seeks to tax more and more wherever expedient rather than where fair. It seems that by casting getting a tax deduction when you opt out of state provided services as a tax dodge rather than a fair rebate you have been suckered into the loopy left mindset – sort ya self out DPF ! ;-)

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  36. Nick K (1,133 comments) says:

    Luc, what type of “comprehensive tax” do you envisage on trusts?

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  37. wat dabney (3,721 comments) says:

    And why eliminate company taxes? They make money by utilising the infrastructure society has paid for. Why incentivise free loading?

    The point about company taxes is that only people pay taxes. Companies cannot and do not pay tax. It all comes out of someone’s pocket (shareholders and workers in some proportion.) There is no free money.

    Also. a consumption tax, even a progressive consumption tax, is still extremely regressive

    So a progressive tax is at the same time regressive? Hmm.

    A major advancement here would be to comprehensively tax trusts. That would require an honest parliament. Tough ask, that.

    Of course, switching entirely to a consumption tax would defeat the purpose of trusts at a stroke.

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  38. freethinker (685 comments) says:

    Johnboy (8,371) Says:
    July 21st, 2012 at 3:25 pm

    Just get rid of cash. Every transaction would then have a paper trail. “Cashies” would be fucked. Dealers would have a serious problem swapping their P for turnips or sacks of potatoes.

    It is so fucking simple there must be something wrong with my idea!

    Come in folks!!!

    Barter my boy Barter – the sub average citizen is far smarter than the most brilliant Polly or Treasury official. A recent study however showed that the cashless transaction is more likely to promote fraudulent intent than against cash due to the disconnect of the offence being personal.

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