Saturday, February 10, 2007

Typically misleading

DPF is up to his usual tricks again, this time with a graph of government revenue over the past six years being used as a rhetorical prop to argue for (what else?) tax cuts for the rich. But as usual, he's being more than a little misleading - and quite deliberately so.

Firstly, there is the use of nominal (dollar) figures and total crown revenue and expenditure statistics. But as I've pointed out before, this is grossly misleading. Nominal figures inflate the difference between past and present expenditure by failing to correct for inflation or GDP growth. Because of this, the proper way to compare government spending and revenue over time is as a percentage of GDP growth, rather than in nominal dollars. "Total crown" figures include not only government spending and revenue, but also every dollar earned and spent by SOEs and crown entities. As much as the right would like to pretend, growth in this statistic (or at least the SOE and Crown Entity component) is not a sign of expanding government, and it does not represent government spending which could be "returned to taxpayers" as tax cuts. Instead, it is the result of growth in government-owned businesses - which to the extent it represents an increase in the government's wealth, and in its dividend income, is something we should welcome.

(I should add that a large part in the growth in total revenue in 2006 is due to exactly this reason. In its fiscal outlook [PDF], the December 2006 Half Year Economic & Fiscal Update noted that SOEs and Crown Entities made "large investment gains, resulting from strong global equity markets and one-off gains on sale of physical assets". These amounted to about 1.3% of GDP).

So, DPF is being misleading. As a former spindoctor, it was his job to mislead, and I guess old habits die hard. But he has included some valid statistics in the form of taxation revenue as a percentage of GDP, which does show an increase, both over time, and over the last year. Does this alone prove his point?

No. As the table below shows, the increase in 2006 DPF relies upon to prove his point was a one-off:

(Stolen from the December 2006 HYEFU Forecast Financial Statements [PDF])

The 2006 Budget Forecast Financial Statements [PDF] predicted 2006 tax revenue to be 31.7% of GDP. It turned out to be much higher, but is expected to decline thereafter to a long-term average of about 31% of GDP. This is an increase since 2000, but not as much as DPF makes out. Part of that increase (about 1% of GDP) is due to fiscal drag (which the government is finally moving to eliminate); the rest is due to a policy decision to make the tax system more progressive by taxing the rich more to fund public services for all - something I don't think anyone should be apologising for.

As for the source of this windfall, comparing the budget and half-yearly fiscal updates is informative. Essentially, it came about to due a far stronger economy than expected. Higher growth in wages due to the tight labour market and unions pushing for increases resulted in individual taxes being $746 million more than expected. But the real surprise is in corporate taxation: this was up by $1.36 billion - 15%! - due to strong economic growth and higher corporate profits. This won't last - corporate taxes follow the business cycle and have already returned to forecast levels, but in the meantime its a nice little windfall - and all the more startling when you remember that corporate taxes amount to on average 18% of tax revenues - compared to 48% for personal taxes.

As for DPF, when you dig into it, his argument boils down to two claims, that a) a one-off (but not enormous compared to the size of the overall budget) windfall justifies a significant permanent reduction in revenue; and b) that the rich need a tax cut because they're doing so well at the moment. Needless to say, I don't think either argument holds water. But then, I'm not a member of the National Party...


I get the impression there isn't any point at which you would want tax cuts.

Posted by Anonymous : 2/10/2007 05:00:00 PM

You accuse me of being misleading and not once do you mention that the graph I prepared included % of GDP stats.

That is grossly misleading indeed.

And it is entirely legitimate to look at total crown as well as core crown. I know the left have no problem when the state owns over 50% of NZ, but the overall size of the state is a legitimate issue for debate.

By your argument if the state purchased every supermarket chain, then this should not be an issue as it is good for the government to make money from businesses.

And finally you mislead yourself by ignorign the fact that we have had a massive structural surplus fro several years, not one off, and the projections for the future have a history of massively under stating the actual outcomes.

For example in 2002 the forecast for 2005/06 core crown revenue was $49 billion. The actual revenue turned out to be $59 billion or ten billion higher.

Posted by David Farrar : 2/10/2007 05:14:00 PM

Actually I/P, it's not really tax cuts that we want. Just reversal of the continuous tax increases. The tax position of middle class and wealthy people has got worse and worse since labour took office, with huge bracket creep, new taxes, and electricity price increases. We would just like to be back where we were, in *real* terms.

Posted by Anonymous : 2/10/2007 05:38:00 PM

DPF: You accuse me of being misleading and not once do you mention that the graph I prepared included % of GDP stats.

Perhaps you should read the above more closely:

"But he has included some valid statistics in the form of taxation revenue as a percentage of GDP, which does show an increase, both over time, and over the last year..."

(Emphasis added).

You also included percentage of GDP figures for the (irrelevant) total revenue statistics. But my point in that part of my criticism is that you also included nominal figures, which you should not be including at all in this sort of analysis unless your intent was to mislead.

The overall size of the state - or rather, the level of government ownership which is appropriate - is indeed a legitimate topic for debate. But its worth noting that your post doesn't debate it. Instead it tries to pretend that the gross revenue and expenditure of Air New Zealand and Meridian Energy are somehow relevant to levels of taxation. They are not. All that matters for tax purposes is the dividends the government receives from them - dividends which incidentally help reduce taxation.

I far prefer structural surpluses to structural deficits. But it is also worth noting that given the style of accounting the government uses, a surplus does not necessarily translate into money that can be handed out as tax cuts. This is something else the right is consistently misleading about. As for systematic underprediction, predicting economies is notoriously difficult, and the accuracy of any projection decreases the further into the future it looks. Of course Treasury gets it wrong (by an average of 14% over 4 years - whether that's good or bad I'll leave to the economists). But it is worth noting that the assumptions behind Treasury's projections are right at the front of every BEFU, and I'd take your complaints a little more seriously if someone from National had questioned the assumptions behind those projections at the time. Strangely, they didn't - which suggests they found them to be reasonable enough in the past.

Posted by Idiot/Savant : 2/10/2007 07:36:00 PM

blah blah blah, justify taking more tax, blah blah blah, the middle class are too rich, blah blah blah.

I think that's the gist of it.

What's rich? Labour thinks rich means someone earning $61,000, because the top margin kicks in at 60K. Ignore the words, that's the deed. And without income splitting, a partner who chooses to stay at home to look after the kids effectively throws away their marginal rate of 19.5%.

So you've obviously decided the middle class are too rich to ask for tax cuts, and indeed, should probably pay more I suppose. Because more is coming. We must pay homage and dollars to the Kyoto God, because the latest socialist craze is not only pay taxes to your country, but to the new world government. Guess how much that will actually reverse Global Warming. Any takers?

I guess we don't even get to discuss "redistribution" without your opening line being "tax cuts for the rich"

There are other ways of generating tax revenue and be fairer for middle income NZ.

Posted by ZenTiger : 2/10/2007 09:36:00 PM

Zen Tiger,

Have for years tried to get I/S to quantify "rich" and he cant.

The groundswell of opinion on taxation and levies (both national and local) is that it is way to high and eating up disposable income.

A real problem facing Labour which, judging by Cullens even raising the idea of a levy for fixed morgages, shows they are unable to get their heads around the fact leaving money in peoples pockets is what the electorate wishes for.

Off cource the left wingers will say that without the taxes we wont have the services we require (schools, hospitals, roading, etc.

But I can recall them being around when taxation was a lot lower.

Posted by Anonymous : 2/11/2007 07:03:00 AM

You dont really have to look at a graph to know that these commies are taking more money off us, just look in your wallet.
Although their is a pack of gum in my other pocket....

Posted by Anonymous : 2/11/2007 11:24:00 AM

The top tax rate is pretty much irrelevant to someone on $61k. Sure, they pay it on $1k of their income, but the other $60k is taxed at lower rates. They'd benefit rather more from a cut to the lowest marginal rate than from shifting the top margin upwards.

Posted by Commie Mutant Traitor : 2/11/2007 01:56:00 PM

When the economy does well the government's infrastructure investments pay off. When there's more turnover the GST take goes up. When the government keeps our dollar under control their external investments pay off better.

But hey, obviously a flourishing (yet stable) economy is a sign we all need substantial personal tax cuts, rather than a sign it's time to hammer the hospital waiting lists (and the lists for the lists, and the lists for those lists).

Posted by tussock : 2/11/2007 02:45:00 PM


Your implied argument seems to assume that all money belongs to the Government, and that we should only have what they let us. Such oppressive behavior by the crown have a long history of provoking dissent and social disorder.

Indeed, you could argue that the history of the Westminster system is the history of the fight against an overweening crown.

Posted by Anonymous : 2/11/2007 07:10:00 PM

i think what i find most amusing is the commenters here ignoring the substance of the post, that DPF is perhaps intentionally misleading on kiwiblog (which is entirely typical).

instead we get the usual bitching about taxes...

Posted by Triple T : 2/12/2007 06:58:00 AM

Che - point taken, but at the same time Labour has a choice. It can structure a tax cut that ensures the benefits are widespread (see the comments by CMT about the effects of cutting the lowest rate).

Or it can lose office on the back of an unpopular budget that refuses to move on taxes, allowing National to structure a tax cut to its liking (and the liking of its pals).

Cullen has a choice: a tax cut which benefits all, including those on the lowest incomes, or: another miserly budget, followed by ejection from the Treasury benches, followed by his unemployment/forced retirement, followed by tax cuts under National.

If he won't deliver then Clark should dismiss him and appoint someone (Goff or Dunne) who will.

Posted by dc_red : 2/12/2007 08:02:00 AM

Since it bears repeating, and you won't hear it from the right.

”In New Zealand, for example, only the richest tenth of households pay much more under the country’s progressive income tax than they would under a 25% flat tax (see chart on page 71).” - Economist, 14th April 2005

Posted by Anonymous : 2/12/2007 11:31:00 AM

k_d: You trippin' (which is to say, your inference is your own).

But as you bring it up, yes, money is an artificial legal construct, the laws being those made by our government and their predecessors. "Your money" only exists with the continuing good grace of government and society as a whole.

Posted by tussock : 2/12/2007 03:55:00 PM

This comment has been removed by the author. Posted by Triple T : 2/12/2007 06:06:00 PM

another way to look at it is that taxes are the cost you pay to live in a stable and free society.

if you don't like the rate, you're always free to go to another country. please.

but on the topic of reductions, i'm lead to believe a reduction of the lowest rate (19.5% up to $38K), would benefit everyone, including whinging high earners. unfortunately i have no influence over the people who make these sorts of decisions.

Posted by Triple T : 2/12/2007 06:07:00 PM

DPF pops up and then fails completely to justify his use of nominal figures. Which was the main thrust of the post.

What a complete crock.

Posted by Anonymous : 2/12/2007 06:21:00 PM

It's insane to insist the graph was misleading because the % GDP figures were included along with the nominal. They were on the same graph.

And nominal figures do have some use. Certainly the longer the period one compares over the less relevance they have but over merely six years it's not a big deal - people in the real world relate to the fact the govt is taking in $20 billion more tax than six years ago.

Also one can have an argument about whether tax as a % of GDP is the best measurement. It is politically very subjective to argue that it should be remaining the same.

If talking about taxation the best figures may be CPI adjusted $ per capita.

There is no univeral right or wrong answer about which stats to use. I provided nominal so people could relaise the huge increases in the actual tax take, but also % of GDP as a reference point. Entirely accurate and not misleading.

Posted by David Farrar : 2/13/2007 07:29:00 AM

DPF, so in the last 6 years inflation has been between 3% and 4%. Let's say 3.5% / year for the sake of argument.

Do the maths just to see what margin of error you are happy to work with. Over the period you are indicating insignificant changes have taken place the economy has grown by about 1/3rd and inflation has been about 20%. Do you play this fast and loose with all stats that come your way?

Oh, and next time you feel like berating the government about inflation theft on your own blog remember you said here "it's not a big deal".

Posted by Anonymous : 2/13/2007 09:11:00 AM

"It's insane to insist the graph was misleading because the % GDP figures were included along with the nominal. They were on the same graph."

The % of _2006*_ GDP figures were included on the graph. Showing Crown Revenue for 2000 as a percentage of GDP for 2006 is what's insane. Or deliberately and maliciously misleading.

(* one specific year, anyway - which one is irrelevant to the point)

Posted by Commie Mutant Traitor : 2/13/2007 10:08:00 AM

refer to dpf's use of this logic.

"*I* expected 90% of maori to think waitangi day to be significant. therefore *74%* of maori finding it significant is actually insignificant. it is especially insignificant because only a *bare minority* of 45% of mainstream NZlers think it is important"

short answer? yes, dpf plays fast and loose with all statistics

Posted by Triple T : 2/13/2007 10:18:00 AM

Look, it's simple, everybody knows the farblegaster interlinks schenooka parts to form the meridian of the counterwise, ergo, tax cuts.

Posted by Unknown : 2/13/2007 10:40:00 AM