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7 reasons why cutting GST on food will not help

Written By: - Date published: 9:00 am, April 29th, 2008 - 30 comments
Categories: tax - Tags:

Scrapping GST is a classic, populist issue that sounds delicious in times of high food prices but at closer inspection – it doesn’t taste good at all and isn’t the best way to help those struggling to buy food.

The cost of food and fuel has dominated the media over the long weekend and there will be many of you, like me, that just wanted this idea of removing GST to be the silver bullet. But sadly it won’t.

Here are the 7 reasons why:
1. We are global citizens and we are all facing a global food shortage. Drought (climate change), armed conflict and a surge in demand from China and India mean are the causes. Cutting GST on food is not going to do a thing about our food prices which are set internationally. Another wave of increases would take us back to square one.

2. Having two different sets of rules for GST is complicated and costly for food retailers to administer – and you can guess whom they are likely to pass their new cost onto.

3. And new costs are created for Government as well – money that could be spent on public services.

4. It will create a new, energy-sapping and probably never ending debate about what should have GST attached and what shouldn’t. Australia has this problem – cooked chickens have GST attached but cooked cold chickens do not. You have probably heard the stories. And what about taking GST off other healthy/desirable goods and services? Nicotine patches? Pilates DVDs? Doctors visits?

5. This one I just know will happen: in the initial confusion about the new prices of food, retailers will take a slice of the cut for themselves, meaning prices may not decrease by the full 12.5%. This is exactly what happened immediately after the changeover to the Euro.

6. It’s regressive – wealthy people spend more on food and will receive a bigger benefit.

7. It slashes probably 100’s of millions off our tax revenue as a country. This is money we need (especially during these times of higher economic stress) to spend on teachers, roads, doctors, Working for Families, nurses… So we either need to sack some of these people, halt some of these policies or increase taxes.

Those on no or low incomes do need more support at this time – so thank god for Working for Families, which is real financial assistance in the hand to those who need it.

30 comments on “7 reasons why cutting GST on food will not help”

  1. Phil 1

    Pretty good summary sparkie – I agree with virtualy all of your reasons… except the regressive part “wealthy people spend more on food”

    Really? I doubt it.

    I think it’s probably true that wealthy people spend more nominal dollars on food, but the idea that they would spend a greater proportion (which is necessary for your claim to hold true) just doesn’t make any sense

  2. Graeme 2

    Phil beat me to it – one of the charges against GST is that it is regressive – punishing those who need to spend more of their money on food etc. while those who can afford to save/invest don’t have to pay so much (proportionately).

  3. Tane 3

    Of course, we could always abolish GST and pay for the shortfall by creating a new tax bracket for individuals on more than $100,000 a year.

  4. Steve Pierson 4

    also, the benefit of a reduction in GST would be shared both by consumers and business – the cost would go down say half the amount of GST (depending on the elasticity of demand for the product), and the profits for the businesses supplying the product would go up accounting for the other half.

    To a degree, that’s going to happen with any tax cut, but GST in particular would have less benefit to the consumer relative to the amount of lost tax revenue.

  5. Good set of reasons sparkie – my only issue was the regressive one but people have already said that. Overall a good post on a difficult issue.

  6. Matthew Pilott 6

    I find this very similar to the petrol tax issue especially points 1, 5 and 7. Cutting excise taxes or GST on petrol will give a short term benefit for consumers. Then our mate Ahmadinejad gets lippy, the markets get skittish and it’s “hello square one, I missed you for those two months we were apart”…

    Tax it, but use the money investing in alternatives such as a modern rail system, good public transport, and maybe easing those ridiculous restrictions on electric cars!

  7. r0b 7

    See also John Armstrong on this topic, and the (current) bipartisan agreement not to mess with GST:

    http://www.nzherald.co.nz/section/1/story.cfm?c_id=1&objectid=10506804

  8. randal 8

    at the moment it has become code for who is in the national party/act camp and who is spreading rumours about how the gubmint could do it if they only cared and so therefore vote national/act and all our problems will just errr ummm vanish!

  9. Instead of reducing GST on food, why not just cut GST across the board – back to 10%? Or even remove it entirely, as Tane said?

  10. Steve Pierson 10

    Remove GST and partially fund the lost revenue via a 45 cent tax bracket coming in at $100,000

  11. Draco TB 11

    GST is a funny tax and seriously needs looking at. Somebody selling their labour to dig a hole has to charge GST. Somebody selling their labour to move money doesn’t. This is, IMO, a fairly serious discrepancy. This is just one example.

    That said I don’t think GST should be removed from food. I think it should be applied far more evenly across the board so that the advantages and disadvantages apply equally to everyone.

    Now, if the unions really wanted to do the best for their members they would be telling them to get off wages and become self-employed. People would become much better off doing that than dropping GST from food.

  12. A really good post, with the exception as others have noted of the issue of how regressive GST is. In an absolute sense wealthier people pay more GST, but as a percentage of income they tend to pay less as they save less.

  13. gobsmacked 13

    Reason, schmeason. Hey, it’s an election year. Politics will trump economics.

    In the final week of the 2005 election campaign, National suddenly announced they would cut GST on petrol. So get ready for …

    Scene: a supermarket, November 2008. Shoppers, all with children (must be cute, no runny noses). John Key in his smart casual, one of us, pushing laden trolley (memo: Lion Red NOT Corona).

    “As a Kiwi parent myself … price of cheese … ordinary, decent Kiwis … hard-working Kiwi taxpayers … we will review GST on food … Labour say it can’t be done … bureaucrats say so … tell that to these kids .. they deserve better … time for a change!”

    Just visible, Bill English in background, smiling through clenched teeth.

    (Note to JK from McCully: say “review” quickly, sounds like “reduce”. We’re targetting viewers, not listeners).

  14. Tane 14

    Now, if the unions really wanted to do the best for their members they would be telling them to get off wages and become self-employed.

    Draco, are you suggesting process workers quit their jobs and set up their own mini factories in their back yards?

  15. r0b 15

    with the exception as others have noted of the issue of how regressive GST is

    Any suggestions there David?

  16. Steve Pierson 16

    GST is a regressive tax, so no GST on food would not be regressive, it would lessen the tax burden more for the poor, and since the poor spend more of their income on food focussing on food alone would be more progressive – but it would be the rich who benefit most in dollar terms.

  17. Phil 17

    Actually economic theory changes it’s tune somewhere between second and third year university on GST as a regressive tax.

    Basic economic theory say’s its regressive – those who can save (ie; NOT spend) pay less of their total income to GST. However, once you add in time horizons and stuff like drawing down savings (where you’re spending more than you’re earning in retirement) it balances out and we all end up paying pretty much the same rate.

  18. Graeme 18

    Somebody selling their labour to move money doesn’t. This is, IMO, a fairly serious discrepancy. This is just one example.

    Adding GST to debt like credit cards and mortgages would go down really well…

  19. Matthew Pilott 19

    Phil – that rings a few bells. In that case, I’d say it’s more regressive – if we’re looking at the ‘here and now’ of families struggling to pay bills, as opposed to the earnings life cycle of the individual.

    It’s pretty vague in its regressive/progressive nature – these terms only fit well with income taxes, not those on expenditure.

  20. roger nome 20

    I say NZ-grown fruit and veges should be tax-free. That would make us healthier, and would boost our food-security (i.e. what would we do, if for some reason our food imports were cut off? About half of our food is currently imported – in such an event many may starve).

  21. Ari 21

    Removing GST on food isn’t so much regressive as simply “not progressive”. It removes the most regressive element of GST, but it still doesn’t take away the fact that the wealthy will buy more food and thus get a larger tax break.

    Personally, I think GST is better gone altogether, as expense taxes are terrible to manage and inherently regressive in some form or another.

  22. DS 22

    “I say NZ-grown fruit and veges should be tax-free.”

    While I can understand the sentiment, such a loophole would put us down the road to an Australian-style GST mess (you will get disputes over what counts as NZ-grown, and what counts as fruit and veges). Removing GST on food completely would be easier, but you would still get grey areas (pet food, for instance?).

    The way to deal with GST is either cut it back to 10%, or scrap it entirely.

  23. Draco TB 23

    Draco, are you suggesting process workers quit their jobs and set up their own mini factories in their back yards?

    No, they would still work at the same place and for the same people but they would take care of their own taxes, ACC levies etc. When they do this work related expenses become tax deductible which they aren’t ATM for the average worker.

    My nephew is a builder. He contracts his labour out and does his own (well, he has an accountant) taxes etc. Recently he has had to go on wages for the first time in his life and it’s costing him more. He cannot save anywhere near as much as he was when he was a contractor.

    My advice to workers – get off wages and go on contract. Get a good accountant. I happen to think that the unions, to remain relevant, need to help their members do this.

  24. deemac 24

    an accountant from PwC (not a source I often agree with) explained on Radio NZ in words of one syllable why it was a bad idea. Scrapping GST on food would mean no tax cuts OR tax rises elsewhere – and huge bureacratic costs. Still, bad ideas have cost elections in the past and will probably do so in the future. As he said, if you are worried that poor people can’t afford basics, give them more money.

  25. Draco TB 25

    Adding GST to debt like credit cards and mortgages would go down really well

    I just said there was a discrepancy – I didn’t say I had a solution. Although, it has been suggested that if we cut GST down to ~1% and applied it to everything we may be able to get rid of income tax.

  26. AncientGeek 26

    I was around when GST was introduced. In fact I was helping install accounting systems everywhere specifically because people needed them to cope with GST.

    This was in the mid-80’s and a lot of businesses couldn’t tell you if they were making a profit on a month by month basis. They didn’t have adequate accounting systems. Some of those businesses were reasonably large. A lot of them would only do their accounting when they had to – when they had to pay taxes. Otherwise they just looked at the state of their bank balances.

    One of the major benefits of GST was that it forced businesses to be come more efficient and to start understanding what was happening.

    Personally I’d hate to see some items become GST exempt. All that does is increase the complexity of running a business, and therefore the costs. Paradoxically it would happen the most in the businesses that have some exempt items in their range. They’d have to start putting extra systems in place to cope. They’d have to put prices up to cover the cost.

    Bad idea. A better idea would be to look at the areas that are currently exempt and remove the exemption if possible. They were the areas that in 1986 were considered to not be cost-effective to collect from. Maybe they are now. Reduce the complexity – don’t increase it.

  27. higherstandard 27

    And even Don Brash is in broad agreement with you chaps.

    http://www.nzherald.co.nz/category/story.cfm?c_id=77&objectid=10506943

  28. Phil 28

    “… you chaps”

    Are the authors of thestandard really “chaps”?

    My suspicion is that they do not meet the official criteria…
    http://www.thechap.net/content/section_epistolary/am-I-chap.html

  29. lprent 29

    Phil: it looks like someone spoofing the concept. I’d say the posters here would fit that bill.

  30. Richard Williams 30

    Any exemption from GST for food (or any other item) is just making the system unneccessarily complicated. A much better idea is to simply reduce the GST rate to 10%. This is a simple solution that requires no extra work for businesses. This will have an immediate effect for everyone on almost everything. After all, GST was originally set at 10% when we were promised lower personal tax rates as a justification for introducing it in the first place. Then the government promptly increased the rate to 12.5%.

    Note that point 5 in the original post is fundamentally flawed. Does no-one understand simple arithmetic these days? Removing GST would not reduce prices by 12.5%. Taking the GST off means reducing the price by 1/9th – or 11.11111%!

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