Taxing Issues

Description

With Andrew Coleman, Reserve Bank of New Zealand

Outline

This course examines the main economic principles behind the design of tax systems. Adopting an international perspective, it covers the trade-offs between equity, efficiency and simplicity, and the main features of different types of income, consumption, and environmental taxes. Analytic frameworks are developed that enable participants to understand the potential economic consequences of different types of taxes.  A focus of the course is the way that New Zealand funds public retirement incomes and taxes private retirement incomes has generated a tax system that differs significantly from the tax systems adopted in most OECD countries, and how these differences may be crucial for understanding the performance of New Zealand’s economy and redistribution systems.

Description of course

This course provides an introduction to the economics of taxes. The course:

• describes the basic “optimal tax theory” perspective of how taxes typically involve choices between equity, efficiency, simplicity, and political sustainability.
• explains the basic principles involved with tax analysis including the incidence of tax, calculation of marginal and average tax rates, and the distortionary effects of taxes.
• explains the key differences between income and consumption/ expenditure taxes, and the different types of income and consumption taxes that are used/ could be used. It discusses evidence on the empirical importance of these differences, and why many economists believe income taxes are more distortionary than consumption taxes. It explores possible ways that progressive consumption taxes have been or could be introduced.
• outlines the main differences between New Zealand’s tax system and the tax systems used in most other countries, and discusses the potential consequences of these choices. It shows that the way New Zealand funds public retirement incomes and taxes private retirement incomes is the main reason why New Zealand’s tax system differs from tax systems in other countries, and how this leads to a system that imposes relatively high taxes on capital incomes and low taxes on labour incomes. Some potential implications for these choices are analysed.
• analyses the case for capital gains taxes on efficiency and equity grounds.
• explains the effects, benefits and limitations of taxes designed to change behaviour, with a focus on “sin” taxes and environmental taxes. This section includes a discussion of the second best theory and the Weitzman uncertainty principle on the optimality of emissions trading systems relative to environmental taxes.

Objectives

On completion of this course, participants should be able to:

• understand the main features of New Zealand’s tax system, and its points of difference with other OECD countries;
• understand and use the basic economic frameworks used to analyse the equity and efficiency consequences of different types of taxes;
• understand the underlying links between tax and social welfare systems,
• discuss the costs and benefits of changing existing taxes, or introducing new taxes, to raise revenue or modify behaviour; and
• evaluate and critique fiscal policy recommendations from a broad international tax perspective.

Targeted audience and assumed background

This course will be most helpful to policy advisors who wish to understand the economic effects of different types of taxes and the trade-offs typically considered when new taxes are introduced or existing taxes are changed. It will be particularly useful to those who wish to consider the lessons that can be learned from OECD countries that have significantly different tax systems than New Zealand.

The course assumes some familiarity with basic microeconomic analytical concepts and graphical techniques: for example, the elasticity of supply and demand, income and substitution effects, and the graphical representation of utility maximisation subject to budget constraints. From time to time basic algebra will be used to demonstrate important concepts.

Session outline and delivery

Day 1

• A description of the basic types of taxes, and analytical concepts. Fairness, optimal tax theory, and tax incidence.

Day 2

• The similarity and differences of different types of income taxes and consumption taxes. The theory of capital gains taxes. Wealth taxes.

Day 3

• Efficiency issues pertaining to income and consumption taxes. Incentive effects, participation and marginal effects, and deadweight losses. The central role of retirement income choices for the overall design of the tax system.

Day 4

• Behavioural and environmental taxes, the Weitzman uncertainty principle, and the theory of second best.

Day 5

• Final moot session: where participants engage in structured debates about tax topics.

Teaching and Learning Methods

Much of the course is lecture based. Since the aim is to expose students to the core analytic ideas in tax theory, participants will have the opportunity to do some in-class exercises in groups for practice.   Presentation slides and materials will be circulated, and some analytic examples will be tackled. There will be also class discussion on contemporary New Zealand topics in most sessions; participants will be encouraged to contribute to these discussions.