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Outside the Asylum: chapters three and four of an epic essay in praise of New Zealand

We continue serialising an epic essay from the New Zealand Initiative’s Eric Crampton, exploring what life is like in and out of New Zealand. Today: chapters three and four, covering tax and airport security. Read chapters one and two here.

Chapter 3: A sense of proportion: The tax system

“He’s spending a year dead for tax reasons.”

Ford Prefect, talking about Hotblack Desiato, lead singer of Disaster Area – the band which is the loudest noise of any kind anywhere in the universe, and whose tax returns “prove that the whole fabric of the space-time continuum is not merely curved, it is in fact totally bent.”

It is difficult to like taxes. It is easy to like many of the services funded by taxes, but taxes themselves are terrible things. When they are managed well, they are an unwelcome imposition. When they are managed badly, they are a nightmare.

New Zealand’s tax system is probably the best in the world, largely due to a strong commitment to the principle of sound taxation. Taxes are levied on a broad base at a low rate. Wellington tax wonks call it BBLR. And a good principle for public policy in New Zealand is not to break BBLR.

Consider the Goods and Services Tax (GST). It is a beautiful value-added tax applied cleanly and comprehensively across the tax system. But nobody in New Zealand appreciates it. Because nobody in New Zealand appreciates it, everybody wants to carve out a tax exemption for their favourite thing: fruits, vegetables, healthy foods generally, and feminine hygiene products are recent examples.

Here is what happens if you do that.

Australia runs a messy GST riddled with exemptions. Somebody decided groceries should not be subject to GST, but some snack foods should be. So bread is not taxed while crackers are. In 2010, Justice Sundberg of the Federal Court in Melbourne had to decide whether an oven-baked Italian flat bread, a mini-ciabatta, counted as a bread or a cracker for tax purposes.

The importer of the bread flew in Giampiero Muntoni to testify in court that the mini ciabatta was a bread, not a cracker. And Muntoni is far from a layperson in such matters. As Australia’s Centre for Independent Studies reported, Muntoni “holds an EU certificate that entitles him to certify whether a product is a bread or a non-bread item for value added tax purposes in Italy.”

Think about that. Italy’s value-added tax needs expert certified bread deciders. A certified profession dedicated to determining whether something is bread. The only conceivable reason such a profession can or should exist is to satisfy the requirements of a broken tax system.

Australia had to fly in Muntoni to decide the fate of one type of mini-ciabatta. But it gets worse. The Australian Broadcasting Corporation reported:

Under the GST law, food is generally GST-free unless it is a type of food specifically listed as being subject to GST. This appears to be reasonably straightforward but is not. Pizzas, pizza subs, pizza pockets and similar foods are subject to GST. In contrast, pizza rolls are generally GST-free but can be subject to GST when they are similar to “pizzas, pizza subs or pizza pockets.” Defining whether something is a pizza or a similar food has proved complex in the context of various baked goods.

The ATO has advised that determining whether a pizza roll is taxable requires consideration of the depth of any filling or topping, the recipe for the dough and whether the roll can be cut, have additional filling added or is expected to be served as is. This analysis is complex and undertaking it places a considerable burden on businesses. The rationale for having different tax treatments apply to pizza rolls with thicker topping is not clear.

Just imagine the conversations the bread deciders might have at cocktail parties.

“Oh, what do you do for a living?”
“Well, I’m a bread decider.”
“A what?”
“A bread decider. I decide whether or not things are bread.”
“But doesn’t everybody know what’s bread and what isn’t?”
“Ah, but think about a mini ciabatta, which is an interesting borderline case.”
“But why would anybody care?”
“Well, taxes …”
“And you’ve not shot yourself yet?”
“Well, I also have a side-gig as a pizza decider …”

We do not know how lucky we are in New Zealand. We have no need of bread-deciders. So far.

Canada has a similar set of problems in its messy GST. Children’s clothing is exempt from GST but adult clothing is not, so smaller sized adults shop in the children’s section. You just have to tell the check-out clerk the dress is for your niece.

And in the United Kingdom, the tax on a takeaway Cornish pasty may depend on how recently it has been in an oven. Politicians want to exempt groceries from sales tax, but not restaurant meals. But how to set rules that tell the difference? Is a sandwich an exempt grocery item or a taxable catered meal?

As the Financial Times’s John Kay put it:

Officials translate the incompletely formulated thoughts of policy makers into enforceable laws and regulations. But this is rarely an easy or trivial task… The common sense that says “I know the difference between a Cornish pasty and a ham sandwich when I see it” is appealing, but we would rightly find it unacceptable that the decisions of a tax inspector should be based on the principle that he knows what to tax when he sees it. And that is before you encounter the problem of tax advisers whose profession it is to make a Cornish pasty resemble a ham sandwich (or the reverse).

The United Kingdom also enjoyed a 13-year lawsuit over a Marks & Spencer teacake: whether it was a cake or a biscuit for tax purposes, whether the government owed Marks & Spencer £3.5 million in back-taxes, and whether HM Revenue & Customs should pay millions of pounds in court costs. The instructions on John Watson’s packet of toothpicks [see: chapter one] look positively sane by comparison.

America’s patchwork of state-level sales taxes are even worse. Every state can apply its own unique taxes. This is not limited just to deciding the rate of taxes, but also the definitions of what is and is not taxable. Some states apply sales taxes to candy but not to other foods, and different states have different definitions of what counts as candy. Wisconsin’s Department of Revenue even issued a 1,437-word memo explaining which types of ice-cream cakes, or slices thereof, are taxable or untaxed.

The mess is just as bad at the federal level, where free tans at video-rental stores are taxable but not tans provided as part of a health club membership. A simple enough (albeit ludicrous) 10% tax on tanning services proved anything but.

The economic consequences of a system riddled with bread-deciders and jam-deciders and ice-cream deciders and tan-deciders can be staggering. Taxes become far less efficient not only because of the holes riddled throughout the system, but also the legal costs of producers trying to convince courts that their product is exempt rather than taxable.

When there are experts aplenty whose livelihood depends on complicated, messy and incomprehensible tax systems, with large penalties for anyone getting things wrong, it is difficult to make the tax system less complicated, messy, incomprehensible and punitive.

New Zealand’s GST is uniquely, and admirably, clean. It applies broadly. Every producer has an incentive to report honestly because they also report the GST they paid to their suppliers on every item when claiming GST on their inputs.

Were New Zealand to exempt healthy foods from GST, we would well be on the slippery slope. It is one of those things that sounds really easy, but would be an utter disaster in practice.

What counts as healthy? Not only does the medical evidence keep changing, but there would also be a string of boundary cases needing adjudication. If beans are healthy, what about frozen beans? Beans in a can? Beans in a can with pork fat and sauce? How much pork fat and sauce before it is taxable? What if we use Jamie Oliver’s recipe and fly him in to say it’s good?

Even worse, think through the consequences of tax exemption.

Under the current beautiful broad-base, low-rate system, companies gather all their receipts for everything they purchased when making things and claim the GST on them. They then charge GST on the full value of their final product. Their net GST is on the value they added to their inputs along the way, since they netted out the GST from the inputs. Nice, clean and easy.

If some goods were exempt from GST, we would have problems. Imagine you were a food manufacturer making two products. One attracts GST and one does not. It is possible to charge GST on one product and not the other, but all the point-of-sale terminals would need to be reprogrammed – feasible but expensive. But how do you start thinking about claiming the GST on your inputs if you are selling an exempt product. You will need to justify how you apportion all your plant’s shared costs across the different product lines. And Internal Revenue would worry you were loading costs onto the taxable line to claim GST where you shouldn’t. The auditors would be kept busy.

And an industry would quickly emerge to make everything seem easier – and to prevent it all from ever really being easier. The political case for exemptions is dangerously tantalising. And when you’ve granted one, it is almost impossible to resist granting others.

Even more perilously tempting are proposals to tax some politically disfavoured thing in order to provide a special pool of funding for some politically favoured thing. These ‘hypothecated’ taxes make sense under limited conditions. Petrol excise in New Zealand goes into a special fund to cover road building and maintenance. If it is too hard to charge drivers for using roads, petrol levies are the next best thing.

That’s different from taxing soda to fund early childhood education – as Philadelphia proposed. Canada is considering taxing Internet services to fund and promote Canadian content.

It’s an easy game to play. Would you support a tax on frappuccinos if it supported orphans with cancer? And if you don’t support it, do you hate orphans? I mentioned that it’s orphans with cancer, right? How about a tax on Wellington hipsters’ beard oil if it supported recovery programmes for the endangered tieke, the New Zealand saddleback? None of these proposals encourage sensible conversations around the projects’ relative merits.

There are worthy causes innumerable. But if government is to fund them, it is almost always best to do it from general tax revenues. The overall tax system is already designed to balance equity and efficiency – to place the burden where it can most easily be borne.

When spending proposals face off at budget time, we can hope they are held to similar cost-benefit standards. Mix-and-match tax-and-spend programmes short-circuit that process.

We don’t know how lucky we are to have a clean tax system. Because of the Dagg Effect, we don’t know what we risk when we countenance daft proposals that would drag New Zealand’s tax system into the Asylum. Contemplate the tax horrors on the other side of the Asylum’s wall before taxing things you don’t like, or exempting things you do. It is far riskier than you might think.

Chapter 4: Airport security

He twisted his head till he was looking straight up into his captor’s face. A thought struck him.

“Do you really enjoy this sort of thing?” he asked suddenly.

The Vogon stopped dead and a look of immense stupidity seeped slowly over his face.

“Enjoy?” he boomed.” What do you mean?”

“What I mean,” said Ford, “ is does it give you a full satisfying life? Stomping around, shouting, pushing people out of spaceships…

Stop to appreciate the case of the knee that failed to jerk.

In February 2008, Asha Ali Adbille tried to hijack Eagle Airways Flight 2279 en route from Blenheim to Christchurch. She had a knife, claimed to have bombs on board, and demanded to be taken to Australia.

The plan failed. Her interference with the controls risked crashing the plane, but the crew subdued her. The plan to reach Australia was never going to work: the British Aerospace Jetstream had just over half the necessary range, even if fully fuelled.

Adbille was sentenced to only nine years in prison due to her guilty plea and mental health issues.

In 2017, when her release was imminent and she threatened repeat action, Wellington Airport barred her from the airport. The Parole Board went further and banned her from all airports and airplanes, and transferred her to the care of the mental health system.

The official reaction to the threat was measured and proportionate. The government required cockpit doors be secured against entry. Many threats can be averted by locking cockpit doors, though it does make passengers more vulnerable to suicidal pilots. Other measures aimed to help Adbille, while protecting everyone else.

To this day, I can board an airplane in New Zealand simply by waving my phone at a kiosk. The Air New Zealand app puts up a QR code with my boarding pass, and I’m on the plane having shown no identification to anyone. The lines at security are short and easy; I can even carry my coffee through without worrying about whether the cup is over 100 ml – you cannot get larger cups, or even large tubes of toothpaste, through security in American airports.

And due to the Dagg Effect, the government’s entirely sensible response is being taken entirely for granted.

The Americans have not been so lucky.

In December 2001, not long after the 9/11 attacks, Richard Reid tried to set his shoes on fire on American Airlines Flight 63 from Paris to Miami. He had packed the soles of his shoes with explosives to blow up the airplane.

The plan failed, partially because other passengers interfered with Reid’s attempts to light the fuse, and partially because his sweaty feet messed up the bomb. He was sentenced to three life terms plus 110 years without parole.

But in a broader sense, Reid succeeded. For the 16 years since his failed attempt, passengers in US airports have been taking off their shoes at security, just in case someone tries it again.

Security expert Bruce Schneier warns against measures targeted at yesterday’s threats. Real terrorists adapt to security measures and use new tactics. Hardening cockpit doors guards against a range of threats. Making people take off their shoes only guards against shoe-related threats.

Schneier describes such measures as “security theater.” They provide a pantomime of security that might make a few people feel safer – no real benefit for very real cost. For instance, at the busy Los Angeles International, every five minutes of delay per passenger costs $103 million per year of passenger time, and $64 million in forgone airline revenue.

You might say this is only a bit of time delay that counts for little against human life. And you would be right, in one sense. But there are several ways government regulations can add a little time to processes to save lives. We need to be careful that every dollar’s cost, and every minute’s delay, does as much as possible to improve safety.

By the standard thresholds in US cost-benefit assessment, a five-minute per-passenger delay at an airport like LAX needs to save at least 10 lives per year to be cost effective considering only the passengers’ time cost.

It gets worse. Post 9/11 security measures made air travel such a hassle that people turned to the road. And driving is more dangerous than flying. One study estimated that in late 2001, more than 300 people were being killed per month in car accidents because they chose to drive rather than risk American airport security measures. The total tally by 2005 was more than 2,000.

Unless stepped-up security measures after 9/11 prevented at least 2,000 deaths from terrorist attacks, those safety measures have, on net, killed people – just by pushing people out of planes onto the roads. This is without even considering the additional costs imposed on those who still do fly, and the wasted resources on security measures.

An Australian study found the US Federal Air Marshal Service, which puts marshals on selected flights, costs $900 million per year – about $180 million per life saved. By contrast, regulations mandating smoke detectors in houses cost about $200,000 per life saved. Firing the air marshals and diverting the savings to smoke detectors would save, on net, almost 4,500 lives per year.

US airports are a madhouse. And New Zealand’s airports have remained outside of that particular Asylum, with one exception. Passengers destined for the United States must pass through the Asylum’s security measures.

Which is how it should be. Wonko the Sane had a plaque at the exit of the Outside of the Asylum, inscribed with the toothpick packet’s instructions – just to remind him what he was in for whenever he visited the Asylum. America’s security measures at New Zealand’s airports, for those wishing to visit that part of the Asylum, are a nice caution.


If you’d prefer – listen to the chapters below.


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