Monday, 27 March 2017

Evaluating the fiscal cost of tax cuts

As reported in the New Zealand Herald today, the Taxpayers' Union released a new report today titled "5 Options for Tax Relief in 2017". I haven't had a chance to read the report in great detail, but here's what the Herald had to say:
The average New Zealand worker is paying $483 a year more in tax because income brackets have not been adjusted with inflation, a new report by a right-wing lobby group claims...
In an effort to put pressure on the National-led Government ahead of May's Budget, the report assumes $3 billion is available for tax relief in 2017/18.
The report outlines five different options for how those tax cuts could be divvied out.
They are:
• A tax-free threshold of up to $13,000. The report states this would save taxpayers $1295 a year, for those earning more than $13,000.
• Cutting the marginal tax rate for earnings between $48,001 and $70,000 to 17.5 per cent, and increasing the 10.5 per cent threshold from $12,000 to $24,000.
The report says this would particularly benefit middle income earners, giving the example of a $4000 a year saving for a dual-income household with a combined income of $100,000.
• Cutting tax rates for high income earners by eliminating the top tax bracket and reducing the rate above $48,001 to 26 per cent, and slashing company and trust tax rates to 26 per cent.
Those measures would save a person earning a $120,000 salary more than $4300 a year. A low income earner would get no benefit, while the average earner would save just $360 a year.
• Increasing the income thresholds of each tax bracket without adjusting any of the tax rates.
• Reducing the company tax rate from 28 per cent to 13 per cent, at a cost of $2.88 billion.
The report stated that an "average worker" on $57,000 is paying $483 a year more in tax than they would had income tax thresholds been adjusted for inflation since 2010.
Back in February in another article about tax cuts, Brian Fallow pointed us to this handy tool on the Treasury website: The Personal Income Tax Revenue Estimate Tool. It's an Excel-based tool (it would be even cooler if it were fully online) that allows us to evaluate the impact of changes in the tax brackets or marginal income tax rates (the proportion of the next dollar that would be paid in income tax) on total tax revenue (from personal income tax).

I had a bit of a play with the tool and the assumptions above, and here's what it came up with:

  • The tax-free threshold of up to $13,000 would reduce personal income tax revenue by $3.35 billion
  • Cutting the marginal tax rate for earnings between $48,001 and $70,000 to 17.5 per cent, and increasing the 10.5 per cent threshold from $12,000 to $24,000 would reduce personal income tax revenue by $3.46 billion
  • Eliminating the top tax bracket and reducing the rate above $48,001 to 26 per cent would reduce personal income tax revenue by $2.49 billion (and reducing company and trust tax rates to 26 percent would reduce taxes paid by those entities as well) 
  • Increasing the income thresholds of each tax bracket without adjusting any of the tax rates (as per their report) would reduce personal income tax revenue by $3.46 billion
  • Reducing the company tax rate can't be evaluated using the PITRE tool.
I leave it up to you to decide whether these different tax changes, each costing around $3-3.5 billion according to the PITRE tool, are affordable and worthwhile. The estimates should be taken with some caution however (and the PITRE tool even warns against making large changes to the tax rates and bracket thresholds). Whenever marginal tax rates change there are a raft of effective marginal tax rate changes that affect incentives to work (or not work), that cannot easily be evaluated with a simple tool such as this. However, I do encourage you to download and play around with the tool, especially if you want to see how marginal and average tax rates work, and the effects of changing them (slightly!).


Wednesday, 22 March 2017

Personality traits and field of study choice in university

I found this new paper by Martin Humburg (Maastricht University) published in the journal Education Economics very interesting (sorry I don't see an ungated version anywhere online). In the paper, Humburg used data on over 14,000 Dutch students, and looked at whether cognitive skills (maths ability, verbal ability, information processing ability) and the Big Five personality traits (measured at age 14) affected whether students later went to university, and (for those that did go on to university) their choice of field of study. Measuring these traits at age 14 is important, because it avoided any issues of reverse causality (field of study affecting personality traits). The fields of study are fairly coarse (limited to six categories).

In terms of the first part of the paper, Humburg found that:
all three measures of cognitive skills as well as extraversion, conscientiousness, and openness to experience increase the probability of going to university... Cognitive skills seem to be the primary driver of educational attainment. For example, a one standard deviation increase in math ability is associated with an increase in the probability of entering a university of 7.7 percentage points. These effects are very large, given that only around 15% of individuals in our sample go to university. Of the personality traits that influence individuals’ probability of going to university, conscientiousness has the largest effect. A one standard deviation increase in conscientiousness is associated with an increase in probability of entering university of 1.9 percentage points. While much smaller than the impact of cognitive skills, this effect is substantial and amounts to a relative increase of the probability of entering university of 12%.
So, university students (in the Netherlands) are more conscientious and open to experience that non-university-students, and have greater verbal, maths, and information processing abilities. No surprises there. I note that the extraversion result is only marginally significant (and negative - university students are less extraverted than non-university-students).

In terms of the second part of the paper, here is the key table that summarises the results:


Extraverted students are more likely to choose to study law, or business and economics, and avoid science, technology, engineering and mathematics (STEM). Agreeable students are more likely to study social sciences (excluding business and economics). Conscientious students are more likely to study medical studies (probably due to the entry requirements that keep out low-performers) and less likely to study social sciences (that probably confirms some people's priors). Emotionally stable (least neurotic) students are more likely to study STEM and less likely to study the humanities (more on that in a moment). Finally, students who are most open to new experiences are more likely to study law and less likely to study social sciences (which the author finds surprising - so do I!). The results for gender are unsurprising too, with women more likely to study social sciences, and least likely to study STEM or business and economics.

Importantly, the effects of the personality traits on field of study choice are similar in size to the effects of the cognitive skills (whereas university vs. not-university was mostly related to cognitive skills). The results are fairly robust to the inclusion of additional control variables (parental education, income, father's occupation, migrant status). You might worry about selection bias (since only the field of study choices of students who actually went to university are observed), but I doubt that is a big factor.

On that emotional stability and humanities result, Humburg concludes:
Another explanation can be derived from Tokar, Fischer, and Subich’s (1998) finding that emotionally instable (sic) individuals exhibit higher career indecision. It may therefore be the case that less emotionally stable individuals are more likely to choose the Humanities as they have a weaker link to particular occupations than STEM and Law programmes, which enables these young people to postpone their final career decision.
I'd be interested as to whether our conjoint degree students (who often seem to be studying joint degrees because they couldn't settle on one or the other) have similar personality traits. It would also be good to know, for those students who are non-conforming (in terms of their personality traits compared with others in their field of study), how well they performed academically (and in terms of getting a job, etc.). That additional work would certainly provide some valuable data for careers advisors, which is sorely lacking.

Tuesday, 21 March 2017

The Maxim Institute on dealing with population decline

Last week the Maxim Institute released a new report on regional development in New Zealand. Radio New Zealand reported on it here, but note that they say the report:
predicts populations in many regions will drop or stagnate within three decades.
Actually, that's based on work that Natalie Jackson and I have done, which is available in this working paper (forthcoming in the Journal of Population Ageing, and with an update based on stochastic projections methodology due in the journal Policy Quarterly later this year - I'll talk about that in a later post).

Anyway, the Maxim report (written by Julian Wood) doesn't contribute anything new research-wise, but does do a good job of collating important research on regional development with a particular focus on New Zealand. There are some parts of the report that should be required reading for local council planners, particularly those in rural and peripheral areas where populations are declining. As one example:
When looking at the age composition of population growth this broad-based regional decline is accelerated by the fact that “only 16 TAs will not see all their growth to 2043 at the 65+ years [age group].” In short, in 10 national election cycles (thirty years), the majority of local governments will not only be experiencing population stagnation, but the vast majority will be experiencing far older populations with far fewer people in their prime working age (aged 15-64). This reality means that the vast majority of rural New Zealand shouldn’t be planning for, or counting on population growth as a driver of economic growth.
Rather, as a rural community’s population ages and or declines it will likely come under increasing economic, financial, and social pressure. Fewer people of working age can mean less employment income in a community and less consumer spending and hence less business income. Local government income can also decline as there are fewer people and businesses paying rates.
And this quote from the report pretty much sums it up:
There is a need for a “growth everywhere” reality check.
The reality that population growth is not a given for most of the country has not dawned on many councils (based on many discussions I have had over the years). Many councils still refer to population projections as 'growth projections', which makes no sense whatsoever if your population has been declining for two decades or more!

"But won't Big Project XXXX lead to expanded population growth?" I've heard that one before, and in fact in one of the early population projection projects I was involved in we quantified and accounted for 'big projects', but it turned out later that if we took the projected populations excluding the big project effects we weren't too far off. 'Big projects' are simply business-as-usual for a growing city or district like Hamilton City or Waikato District, but for declining peripheral areas the money would probably be better spent elsewhere. The Maxim report notes:
The overall picture remains, however, that building physical infrastructure alone will be insufficient to economically “restart” a rural economy in long-term population stagnation and decline.
The Maxim report recommends three 're-thinks', which are definitely worth considering:
  • Rethink #1: All regional development goals must be explicitly and clearly stated to enable clarity, transparency, scrutiny and co-ordination. As part of this “regional wellbeing indicators” should be explicitly developed and included in these regional development goals.
  • Rethink #2: Regional development goals need to be ranked and prioritised with tensions, trade-offs, or the subservient relationships between the goals explicitly outlined and prioritised so as to enable evaluation.
  • Rethink #3: New Zealand needs to rethink its sole focus on economic growth, shifting to a framework that also empowers communities to meet both the economic and social needs of their populations in the midst of “no growth or even decline.”
The first two should be obvious for any decision-making, not just in terms of regional development. The third needs policy makers to face up to the reality that population growth is not the destiny of every part of the country. Which is a point I have made before.

Read more:

[HT: Natalie Jackson]

Sunday, 19 March 2017

Newsflash! NZ health insurers want us to buy more health insurance

Roger Styles (chief executive of the Health Funds Association of New Zealand, the industry body for health insurers) wrote an opinion piece in the New Zealand Herald last week:
Thanks to an ageing population, healthcare inflation, and the rise of new and costly treatments, New Zealand's health spending has one of the fastest rates of increase in the OECD.
The Treasury has repeatedly advised this unsustainable growth presents a bigger fiscal problem for the Government than the soaring cost of NZ Super...
Currently about 20 per cent of healthcare in this country is privately funded, amounting to about $4b a year. Just over a quarter of this is funded through health insurance, which is held by about 1.36 million New Zealanders.
Health insurance could be playing a bigger role in meeting future healthcare costs and thereby relieving the pressure on government budgets and the public health system.
Private health insurance is ideally placed to be able to routinely fund high-cost treatments, which user charges cannot. We just need to address some of the disincentives that stand in the way of more people taking out cover...
Insurance works by aggregating premiums across a large number of people in order to fund the healthcare costs which might otherwise be unaffordable or cause financial hardship.
The fact that New Zealand can achieve $1.13b annually of healthcare funding through 28.5 per cent of the population having health insurance indicates that there is significant scope to increase the contribution to future healthcare costs by lifting coverage rates...
he Government needs to face up to the unsustainability of future health spending and develop a collaborative strategy to reduce dependency on public financing and move closer to the OECD average for public/private health spending shares. It won't be able to raise the age of eligibility for surgery, and it will have to act before 2040.
It may be true that health care costs will rise in the future, due in part to population ageing but equally or more due to Baumol's cost disease (see here for more on this). However, that in itself doesn't mean that we need more health insurance. Anyone who believes that health insurance is a solution ought to be looking carefully at the continuing mess that is the cost of healthcare in the U.S.

The main problem with insurance is adverse selection - insurers want low-risk people to buy insurance, but the incentives to buy insurance are greater for high-risk people. In the case of voluntary health insurance (as in New Zealand currently), the people who buy health insurance are either: (1) the worried well and risk averse healthy people; and (2) people at high risk of getting sick. The second group are of course quite expensive for insurers, so they rely on getting as many healthy people (who won't make claims) to sign up as possible. One way to do this is the lobby government to make health insurance more attractive in some way, such as making employer-funded schemes tax-advantageous to firms (which is what Styles is arguing for).

However, we need to see this for what it is. A self-serving lobby from a profit-motivated health insurance industry that ought to be ignored by policy makers.