Wednesday, March 13, 2013

Tax all the things

New Zealand has one of the world's cleanest tax codes. It typically aims to avoid distortionary effects and to avoid collecting tax where the collection costs outweigh the taxes that would be collected. So we have GST on imported goods, but only where the total value of the import is high enough to make it worth IRD's time. And, we have a Fringe Benefits Tax to avoid giving employers undue incentive to provide in-kind benefits.

The FBT does result in some silliness where the administrative hassles imposed on firms for FBT blocks some value-enhancing deals between employer and employee, but the thing seems right in principle.

NZIER has criticised IRD's latest proposed extension of the FBT to employer-provided parking. The extension, as I read it, seems consistent with IRD's general philosophy: don't bother collecting a tax where the value at stake is small; apply FBT where a valuable consideration is provided to the employee in lieu of salary. So they will charge FBT on employer-provided parking downtown, where parking is expensive, but not out in the burbs, where it's cheap. The value of employer-provided parking has risen along with downtown land prices. But administrative costs here are going to be pretty high, and the new system will likely wind up distorting location choices near the tax/no-tax FBT parking zone boundaries. Whether the distortions caused by the tax will wind up being bigger than the distortions caused by failing to implement it isn't clear to me.

But I do like Bill Kaye-Blake's demand that IRD be consistent and tax all the things. Some employees might negotiate a parking spot instead of a raise, but what about a bigger office? Nicer coffee? A bigger desk? Plusher carpets? More attractive assistants?
The Government can’t stop there, either. From my office, I can see any number of buildings with stunning views of the Wellington harbour. The sun sparkling on the early-morning ripples, the picturesque hills — those views aren’t available to everyone. Some workers are clearly receiving much more of these benefits from their offices than others. It’s about time the Treasury sorted out some non-market valuation studies of the amenity value of offices and made sure that those perks are properly taxed.
In fact, it isn’t just the views and the sunshine. Some workers get more floor space, larger desks, nicer office coffee. What we really need is a ‘defined office package excess’ (DOPE) tax. The Government can set minimum standards for office workers, and any provision of amenities in excess of that minimum gets taxed. Once the process is in place for the Auckland and Wellington CBDs, it can be rolled out to other localities and other types of workplaces.
The most egregious evasion of taxes on benefits, though, is going to require collaborative intervention by economists and psychologists to tax properly. It is my understanding that some workers are receiving an additional benefit beyond their wages and salaries, cellphones, nice office surroundings, and the like. A tax system can be properly calibrated only if it contains a PFT — a Personal Fulfilment Tax.
I like where Bill's going with this, but he clearly hasn't gone far enough. What happens if, after you've negotiated your job and salary, the employer chisels on the non-pecuniary side by sticking you in an open plan shed for a few years before moving you into a much-smaller-than-expected office in another building? Or if the work conditions deteriorate substantially? Shouldn't the employer get a FBT credit for those kinds of things that they might then provide compensation to the employees and prevent their departure?

Recall that failing to tax fringe benefits induces inefficiency by encouraging employers to provide compensation in non-cash benefits rather than cash at the margin. Suppose that the employer could provide some benefit the employee values at $1.00 at a cost of $1.10. An employer should prefer providing cash. But, because of income tax, it otherwise costs the employer $1.33 $1.50 to provide $1.00 to the employee (more if you count GST), so the employer chooses the inefficient non-pecuniary benefit.*,**

Now, think about disamenities. Suppose there's some disamenity that would cost the employer $1.20 to avoid (say, installing a better air conditioning system) but that the bearing the disamenity only costs the employee $0.95: he would prefer the bundle of the disamenity and a $1 cash transfer. The best solution has no abatement and a higher salary. But, it costs the employer $1.33 $1.50 to provide the $1 cash transfer and so the employer inefficiently abates the disamenity because of the lack of FBT tax credits.

Some might think it perverse that an employer be awarded a tax credit for providing disamenities. But efficiency may well require it. If, that is, the administrative overhead isn't itself more distortionary.

* In the presence of FBT where there are hassle-costs imposed on the employer, we can get underprovision of some otherwise efficiently-provided amenities: the employer may fail to provide an amenity valued at $1 and costing the employer $0.90 if the additional FBT hassle costs total more than $0.10.

** $1.50 - 0.33*$1.50 = $1 ==> I made stupid math fails when the actual numbers don't really matter in a constructed example.

5 comments:

  1. If NZ has one of the cleanest tax codes, heaven help everywhere else. (Sure many Asian economies would be far 'purer'?

    ReplyDelete
  2. For employees at the top tax rate (33%), doesn't it cost the employer about $1.50 to make a transfer of $1 to the employee?

    ReplyDelete
  3. No worries. As you say, the numbers didn't really matter, so it's no big deal.

    ReplyDelete

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