Tuesday, 5 August 2014

Planner induced madness?

Planners hold the main advisory role in local government zoning decisions. They're a well-meaning bunch but they can drive economists to distraction because they often don't analyse trade-offs in any detail. As a result, they can come across as being driven by the subjective preferences of themselves and their friends.

I'm wondering if perhaps this planner-induced effect is partly responsible for the local government finance views expressed by NZ Initiative director Oliver Hartwich in this excellent profile. Hartwich said he'd like to
abolish the rates system tomorrow. I would like to introduce a local income tax and give local governments more control
This is a very strange proposal for anyone familiar with taxation economics. Most taxes make us change the things we do. For example, you face an income tax of 60%, you might work a bit less than if the rate was 30%. That reduces the total value created by working, which is an efficiency cost. The more price sensitive something is, the greater the efficiency loss from taxing it.

This is why it is more efficient to tax real property than flows of income or spending: you get less behavioural change so smaller efficiency losses. There are other benefits too, for local authorities: it's easier to do and (compared with an income tax) your tax base can't get up and relocate to another jurisdiction.

What would we gain for all that inefficiency cost? Hartwich seems to think it'd give councils better incentives to promote house building. He got this idea from Europe where he reckons that
local councils who were funded by rates had perverse incentives to limit development, as new projects added to infrastructure costs without directly boosting council coffers.
I think perhaps he is unaware that in New Zealand councils routinely charge developers fees that are designed to recover the extra infrastructure costs, so there is no such perverse incentive here. It might also be worth noting that there are 67 councils in New Zealand who would have rates funding abolished, but more house building isn't a pressing issue anywhere except Auckland and Christchurch.

So I'm hoping this idea is examined more closely and unless there is a lot more benefit lurking somewhere, I'd expect it to die at that point.

No comments:

Post a Comment