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Two great tastes that taste crappy together

by JakeS Thu Feb 26th, 2009 at 05:02:44 PM EST

As I type this, the fine details on what promises to be the major tax package of 2009 are being hashed out on Christiansborg. Originally, the government (a V-K coalition) invited S, SF, O, Y and R (Danish party run-down here, here and here). Over the last few days, S, SF and R walked out one by one, characterising the negotiations as, quote-unquote "gathering signatures instead of negotiating" (- Margrete Vestager, chairwoman (R), my translation). So we're substantially looking at yet another VKO tax package [1].

I obviously don't know what the content will be precisely, and judging by the careful leaks and presentations that have been going on over the last fortnight, digging through the whole package would be a sore test of my gag reflex, even if I had the full text and could summon up the patience to do so.

So I'm not going to comment on the tax downsizings, risible though they will undoubtedly be (no points for guessing which end of the income distribution they'll favour). I also won't comment (much) on the real estate tax hike: A decade late, five or so percentage points short and will probably only hit the middle class.

No, what I'll comment on is the combination of weatherisation assistance for homeowners and a round of taxes on unhealthy food (think candy, refined sugar, tobacco, that kind of stuff).

Both of these policies are, considered in isolation, actually pretty good policies: There is no doubt that a price hike of 10-25 % on ice cream and cigarettes would change consumption patterns in desirable ways. And weatherisation assistance is straight out of the progressive playbook (in the interest of keeping the record straight, that particular initiative was copied virtually wholesale from a much larger package proposed by R...). So why does this combination leave such a bad aftertaste?

If you guessed "because it's distributionally regressive," then points to you.

The increased taxes on unhealthy foods is essentially a selective VAT increase. Like "green" taxes (on, say, heating energy or electricity), this is a regressive tax, which means that, if the whole package were to be distribution-neutral, (other) taxes would have to increase on the rich. Not. Gonna. Happen. Furthermore, if this selective VAT increase actually does what it's officially supposed to do, it will not generate as much revenue as it would for unchanged consumption patterns. Wanna bet on which scenario is going to be used for revenue projections?

So if this is not a contractionary fiscal package (and really, they aren't that stupid - besides, expansionary fiscal packages are a great excuse to give even more gifts to their friends), this risks leaving a potentially rather substantial hole in their financing, if they decide to go Bushist on the revenue projections. Now, if we could trust them not to use that as an excuse to Starve The Beast, then that might not be such a bad thing, because we do need expansionary fiscal policy. Still, I think it bears pointing out that this is potentially another exercise in giving money to their buddies and paying for it with downsizings in the public sector later on.

A weatherisation programme, while a nice thing in and of itself, is also a regressive beast, distribution-wise: By its very nature, it can only go to the people who actually own a house. Furthermore, according to the proposal, it is not going to be a capped figure, but a percentage of the cost of the improvement (and may well be extended to cover home improvements in general, even those that have no perceptible environmental benefit).

The capped contribution model would at least have the saving grace of being progressive within the homeowner subgroup (since the overall tax scheme is still progressive), although it would probably still be regressive on the whole. But the proposal that's floating around right now amounts to little more than (yet another) handout to the rich and the very rich, wrapped in a little greening to make the centrist voters swallow it.

Now, if such a program were to be paid for - € for € - out of increased real estate taxes, or even through any reasonably progressive tax increase, it would be an entirely different story - it would be hard to make it regressive when considered as a whole. But if you believe that VKO are gonna do that... well, then I have some equity tranche CDO^3s I wanna sell.

Actually, we've seen this movie before: The last time around (fall before last, a couple of months before the last election), Fogh II cobbled together a fiscal package, after being rather forcibly prodded by the Conservatives. It included fairly substantial tax downsizings (although thanks to the Popular Party, they did not go entirely to the top income brackets). That time around, the tax downsizings were financed (inasmuch as they were financed at all - the Conservatives have a penchant for the notion of self-financing tax downsizings - Laffer didn't live in vain) through increases in the "green" taxes mentioned above. And it worked too: Several of my friends - who are neither innumerate nor particularly in favour of the Fogh regime - thought that this was A Good Idea, because green taxes are a good idea. They usually revised that opinion when the distributionary consequences were pointed out explicitly, but the press coverage - surprise, surprise - never did point that out, so my guess is that a good number of social democrats still think that the 07 tax downsizing was at least partly progressive policy.

- Jake

[1] Y pretty much disintegrated a couple of months ago after a putsch by Anders Samuelsen, who was backed by the party's major donors shareholders. This cost them half or so of their grass-roots, who finally had enough of having "their" party's policy dictated by shadowy men with suitcases full of money. Oh, and Asger Aamund - their largest donor shareholder stopped bankrolling them after his daughter jumped ship to V.

They don't have enough MPs to topple VKO by themselves, and they're looking at opinion polls in the 0.1 % range. They're in a coma and they won't get out of it, barring a direct intervention by God (or Satan, whichever you prefer). All that's left is for the next election to pull the plug on their life-support, and the coroner to sign the death certificate.

They will not be missed.

"...would be a sore test of my gag reflex..."

Ah~! how well said is that? I have so many categories that have just merged into that one. thanks.

Your points about weatherizing without caps turning into a home improvement bill for the rich are also well noted. One rarely digs into the nuance to find glaring minutia like that, or realize the importance of it.

Thanks again.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Mar 1st, 2009 at 03:57:34 AM EST

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