Edward Elgar, Cheltenham, 2006, xiii + 261 pp., hardback, 1 84720 042 7, £65.
The New Zealand Goods and Services Tax (GST) has no exemptions and is imposed at a single rate; but there are also excise taxes on alcohol, tobacco and petrol, and these have created rebate debate.
This book assumes that households will consume less of goods when tax on them increases. This means that a tax on a commodity will potentially distort a consumer’s expenditure pattern, thus creating a marginal cost, an inefficiency for that consumer, and an economic burden greater than the tax paid.
The authors recognize that taxation is not simply a way of raising revenue for the Government and that other social policy factors are relevant, such as the environmental impact of carbon tax (a tax on carbon dioxide emissions), and in this area the authors find that an increase in carbon tax causes only a small effect on family after-tax income, an ambiguous distribution pattern, and no large distributional effects. The marginal welfare cost is low, and thus the tax is relatively efficient. On taking a variety of factors into account (such as the relative fuel use efficiency of different industries), the authors conclude that reductions in carbon dioxide emissions are possible without too much distributional effect and without costing too much.
This book is impressive in the care taken to take account of as many factors as possible and in the detail offered to the reader. Conclusions are carefully drawn, and what frequently emerges is a rather complex picture. For instance, the welfare effects of a petrol excise tax increase are
‘found to vary considerably among demographic groups, reflecting the different variations in budget shares with total expenditure’ (p.65).
‘overall measures of social welfare over all households, allowing for the combined effect of equity and efficiency, were found to increase by only one half of one per cent when all excises are removed. The results therefore offer little support for the view that excises are highly regressive and inefficient. Any policy decision in this context must of course also combine these findings with perceived or measured effects of excises on the environment and health levels’ (p.189).
Also impressive is the care taken over the different parts of the analytical method. For instance, much care is taken over the relative advantages of different equivalence scales (which count a two-adult household as less than two adults in terms of the welfare benefits of a given net household income); and over inequality aversion (because for both individuals and households equality is a differentially valued good).
Whilst some of the authors’ assumptions could be challenged (such as those relating to expenditure preferences), this is a serious attempt to evaluate actual and possible policy changes whilst taking into account a wide variety of factors.
A similar approach needs to be taken in the field of income taxation in relation to changes in employment patterns consequent upon changes in the structure of the taxation system or in tax levels. Just as we ought not to ignore expenditure pattern changes when indirect taxes change, so we should not ignore labour market changes when income taxes (and tax credits and welfare benefits) change.
This book offers an example to follow.