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GST up? It depends

Written By: - Date published: 5:08 am, August 19th, 2009 - 40 comments
Categories: tax - Tags:

The Government’s Tax Working Group has proposed increasing GST to 15-20% to pay for cuts to income tax. I’m not automatically against GST or even raising it, if it’s part of the right package. Here’s the issues as I see them:

Points in favour of increasing GST
Taxing spending is better than taxing income: generally, the government should tax things that it wants to discourage and not tax good things like work. That’s the logic behind implementing a capital gains tax, and the same logic can be applied to GST. We buy too much as a nation, our savings rate is too low, and that is a major contributor to our current account deficit. A higher GST might change that balance some what, and allow us to take some of the burden off income. By allowing cuts to income tax, raising GST would decrease the ‘tax wedge’ (the amount an employer must pay the government on top of net wages to employ someone), which is already one of the smallest in the OECD – this could lead to more jobs.

Taxing consumption is better than taxing work: this consumerist society is environmentally unsustainable, GST as a tax on consumption can discourage it. It’s not as good a tool as precise a tool as levies or quota for resource use but it’s something.

Points against it
Elasticity of GST expenditure: The wealthy are more able to reduce their spending on things that attract GST if the tax goes up – more on housing (you don’t pay GST on a house), less on plasma TVs. The poor can’t change their behaviour to avoid the tax because they’re spending most of their money on the basics.

Fuelling housing: GST up makes putting your money in houses even more attractive. The last thing we want to do is make housing a more attractive investment. We’ve just had one housing bubble resulting from over-invesmtent in housing and, before that one has even deflated, another one is getting underway. It’s all going to end in tears and if higher GST makes the bubble bigger it will just be harder on us in the end.

GST is regressive: the poor pay a higher portion of their income on a sales tax than the rich do.
tax working group GST graph
(source: tax working group)
A tax system ought to be designed so that the cost of paying for a given level of government spending is shouldered principally by the well-off, not the poor who can barely make do as it is. That means it needs to be progressive – low on low incomes, higher on high incomes. GST does not meet that test.

The big question
Who benefits?: Any increase in GST would be revenue neutral, paying for tax cuts elsewhere. As GST works against the aim of a progressive tax system, any increase should be used to make the income tax system more progressive. Increased GST revenue shouldn’t be used to pay for cutting the top tax rates – that would just constitute a transfer of wealth from poor to rich. It should be used to cut the bottom rate or fund a tax-free bracket. The revenue from raising GST to 15% could fund a $6000 tax-free bracket benefiting everyone, or it could be used to cut the top tax rate to 27%, with most of the benefit flowing to the most wealthy 3% on $100,000+ and the 2.6 million taxpayers with incomes below $48,000 getting nothing. Which do you think Key’s Government would choose?

Reforming the tax system to put the burden on consumerism, rather than work is not bad in itself. As part of a package along with a bottom-end cut to income tax and a capital gains tax, it would be OK but my fear is that this government will just increase GST to pay for tax cuts for the rich. That would be nothing but a giant transfer of wealth from the poor to the already wealthy – something no decent person should support.

40 comments on “GST up? It depends ”

  1. Which do you think Key’s Government would choose?

    I’d expect them to bring in the middle income cuts they promised in the last election so that they can go into 2011 having (sort of) made good on their previous promises.

    • Marty G 1.1

      Danyl. You think those were middle income tax cuts? Most of the money was going to go to the very wealthy. Crumbs for the rest.

      • The last round of tax cuts were for top bracket earners (which is still ~20% of the workforce, so not exactly crumbs) but the ones that were cancelled were the $10-15/week rebate for those earning between $24k to $48k.

        • Lanthanide 1.1.1.1

          No, the ones that were cancelled are:

          2010: Raise 33% threshold from 48k to 50k, reduce 38% rate to 37%
          2011: Reduce 21% rate to 20%, increase independent earner rebate to $15 from $10

          The 2010 cuts really gave diddly squat to most people except the wealthy, it was only the 2011 cuts that would do anything for the lower-middle class, and even then their tax cuts were less than what Labour offered to that tax bracket, and Labour’s cuts would have started to kick in in 2010 for those people, not so National’s.

        • Bright Red 1.1.1.2

          Danyl. You’re thinking about the independent earners’ rebate – that’s already in place and only about 400,000 people get it.

          Poor

    • burt 1.2

      Danyl

      Indeed the top 5% tax was scooping circa 20% of the working population. Against 2006 figures it was already scooping 16% of the working people ( ~ 12% of the working age population) so 20% by 2008 is entirely possible.

      Pfff to tax being something done under a policy eh, expediently rorting the middle earners (hell 75% of high school teachers were ‘rich’ under Cullen) with fiscal drag – didn’t see that in any Labour manifesto. Shit any muppet Minister of Finance can deliver a surplus with that “policy” under the global conditions that prevailed during that time. .

      However I digress, I think you are probably on the money with tax cuts pre 2011. Traditional political process would see a much wider path of reform in a second term, levered on the back of delivering on first term promises. National has however got the global economic crisis, and the domestic recession prior to that, to justify reneging on election bribes. So could go either way really.

      All that aside, unless the 2010 budget is a 1984 style bomb shell – stuff all will radically change till 2011.

  2. Tarquin Montford 2

    Get off the fence mate! Personally I don’t like GST going up as it impacts the poor and fixed income proportionally more. Governments like it because its a good regular cash flow with quite simple rules. If GST goes up then tax thresholds need to be raised at the bottom end to allow the first 5k as tax free,also drop the tax rates all the way up the ladder. New Zealand has been taxed to death over the past decade.

  3. smitty 3

    Get off the fence mate! Personally I don’t like GST going up as it impacts the poor and fixed income proportionally more. Governments like it because its a good regular cash flow with quite simple rules. If GST goes up then tax thresholds need to be raised at the bottom end to allow the first 5k as tax free,also drop the tax rates all the way up the ladder. New Zealand has been taxed to death over the past decade.

  4. So Bored 4

    If I spend $100 on goods the taxman gets $12.50, if the GST gets raised to 15% the taxman will get $15. My purchasing power decreases from $87.50 to $85.

    Logically (without vapourware freakonomics from Treasury etc) the purchasing capability of the masses will be diminished. Is the real intention to further subdue demand?

  5. ieuan 5

    So Bored: Actually the tax man gets $12.22 (not $12.50) as GST is added to the non-GST price at a rate of 12.5%. To work out the pre-GST amount divide the price by 1.125.

    Increasing GST will be very unpopular.

    I am pleased that the government is looking at our tax structure and do seem to understand that we need to promote the activities that are good for our economy and discourage those that are not.

    I hope they remove the negative gearing tax deduction that people use on investment property, I have never understood why it exists and how it benefits our economy.

    • So Bored 5.1

      I bow to your superior maths ability, the gist remains much the same. My worry was that in a recession this might further dampen demand.

      Totally agree with the negative gearing on investment property comment, I have always found it totally inequitable.

    • Spectator 5.2

      Actually the taxman would get about $11.11: GST is one ninth of the purchase price.

      Captcha: silly; what Bill English is if he thinks the public of New Zealand are going to acquiesce to a tax rise instead of the “north of $50” tax cut they were promised.

  6. aj 6

    I agree with ieuan – very unpopular, and the negative gearing tax deduction has to go.
    Imagine the Grey Power response for starters. Irrespective of the mix, it would be seen as ‘National raising taxes’ and I think the average working person hasn’t forgotten the broken promise of ‘north of $50 tax cuts on the average wage’

  7. graham 7

    the bigest problem with our taxation system is that it rewards the use of trusts and loss making companies. the advantage by having a flat tax and higher gst is that we would remove those rewards. the rich will still pay more tax and if it encourages people to save then the nation will be better off. houseing costs do include gst so i dont understand that point.

    • Marty G 7.1

      So because there’s some small scale abuse of the system we should throw out the entire system and lose all its advantages (and reward the rorters with lower tax rates?).

      Baby. bathwater.

      Trusts and loss-making companies are the problem, not progressive tax.

      You don’t pay GST when you buy a house (or pay rent) don’t include GST.

    • Zaphod Beeblebrox 7.2

      You make a very important point. A large reason why inventive tax structures (you need a lawyer to decide how legal they are) are invented are to get around paying high top marginal tax rates. I’d be surprised if a lot of unexpected income didn’t come the government’s way as less people hid their true income.
      The other thing to do would be to align to the top personal rate to the company tax rate. This would make running a company so much easier as self employees could know that taking income as wages or dividends would be the same thing.
      BTW would it be possible to make the GST rate divisible by an integer? 12.5% works well because dividing by 9 is so simple to calculate.

  8. Tim Ellis 8

    I disagree with your premise about what National will do, Marty, but this is a very interesting debate.

    What I find interesting is at the moment there isn’t a big backlash against the suggestion of raising GST and lowering personal income tax. There seems to have been an unspoken consensus for a long time among tax experts that increasing tax on consumption and lowering tax on income was a more efficient structure, but would be a political hot potato that politicians wouldn’t touch.

    Perhaps with wider discussion it might see the backlash that a lot of people assumed it would have, but it seems at the moment there is scope for at least a constructive debate on the idea.

  9. I would be in favour of increasing GST as long as it did not make things worse for people on lower incomes. Would a tax free threshold mean that benefits go up? (I think they’re taxed for technicality reasons… right?)

    • Quoth the Raven 9.1

      Without completely offsetting any increases in taxes with reductions in tax that lower income earners pay it couldn’t fail to make things worse for people on low incomes and our whole economy. I am surprised that anyone ostensibly on “the left’ , and we have to use that incredibly loosely nowadays becasue of social democrats, could support this. We should be pushing for reducing the tax burden and it is a burden of lower income earners.

  10. ak 10

    The incessant mantra of “Tax cuts!” and in particular the “North of $50 a week!” call was quite simply the most blatant political vote-bribe ever conceived. And it worked a treat.

    Now that power is achieved, the true NACT colours are showing: the insidious incremental rises in fixed charges of every stripe – especially line charges, targeted rates, the grotesque UAGC and now GST – is the slowly tightening noose of regression that relentlessly punishes the less well-off.

    The vein is tapped and the draw-off increases by minute degrees; the patient numbed by mesmerising rhetoric swirling under the flimsy cloak of “fairness”.

  11. Tom M 11

    There’s been a good debate about this on Matt Nolan’s blog, but it’s a bit of a myth that GST is regressive. Being rich is not the same as being a multi-millionaire (of which NZ has very few) – it’s a bit unlikely that a 2.5% increase in the price of TV’s is going to make the rich suddenly start buying up large in houses. Most of them simply could not afford that, and that’s not a substantial amount of arbitrage anyway.

    In fact, most people spend most of their money over their lifetime, so over your whole life GST approximates more of a flat tax. I guess that would be regressive with respect to the current system, but not very regressive in and of itself.

    • Draco T Bastard 11.1

      Being rich is not the same as being a multi-millionaire

      The tax brackets don’t define who is rich.

      it’s a bit unlikely that a 2.5% increase in the price of TV’s is going to make the rich suddenly start buying up large in houses.

      What they would do would be dependent upon their net benefits. The way the taxes are structured ATM it would probably mean that a few of them would start buying up large on houses (not that there’s any indication that they ever stopped).

      In fact, most people spend most of their money over their lifetime, so over your whole life GST approximates more of a flat tax.

      The operative word here being most. Financial services are GST exempt and so are houses. For GST to be the flat tax you in your ignorance assume it is those would have to apply. Inheritance would also have to have GST on it. Actually, you’d have to get rid of all the exemptions.

      The rich don’t pay as much tax proportional to their income as anyone else because they don’t pay as much GST. The difference comes from the fact that most of the poor persons income goes on living costs and the rich persons goes into financial services.

      • Tom M 11.1.1

        “The operative word here being most”

        So you admit that it is ‘most’-ly flat? I’m all for removing exemptions for housing*, et, but in any case I suspect that most rich people don’t spend the majority of their income on buying new houses. As I said, it’s not like a 2.5% increase in the price of everything suddenly makes a house a good investment for most people. At the margins, perhaps. But that is just an argument for a capital gains tax…

        *Inheritance less so, because it will be taxed when it is actually spent.

        • Draco T Bastard 11.1.1.1

          So you admit that it is ‘most’-ly flat?

          No, I”m pointing out why it’s a regressive tax.

          *Inheritance less so, because it will be taxed when it is actually spent.

          Except that it’s never spent.

  12. Greg 12

    “GST is regressive: the poor pay a higher portion of their income on a sales tax than the rich do.”

    Tom M hits it on the nail. This point is simply incorrect. GST is a tax on expenditure. By definition all money must be spent at some point. So as long as the expectation is that GST will not decrease, an increase hits all income groups equally.

    • Bright Red 12.1

      Greg. you’re arguing with the tax working group on this basic point? Maybe you should read their report.

      Rich people save, the poor de-save (ie borrow), that means they pay different amounts of their net income in GST.

    • Draco T Bastard 12.2

      No, that point is well understood and is correct. GST is regressive.

  13. RedLogix 13

    By definition all money must be spent at some point.

    Yes and in the long run we are all dead. Which is of course an easy and ultimately useless answer.

    The point you seem to have missed is that not all expenditure is GST rated. The main exceptions are financial transactions, housing and rents… being the three main ingredients of property bubbles.

  14. Daveski 14

    An interesting discussion.

    I think there’s no doubt that English and the review team see increased GST as having some regressive qualities but that is easily fixed and Buckle pointed out it was addressed also when GST was introduced.

    A simpler and fairer system will likely lead to increases in tax revenues while encouraging investment in productive areas. Time to consider a capital gains tax.

  15. RedLogix 15

    Time to consider a capital gains tax.

    Yes but as I have advocated here before, don’t expect it to have the desired effect of eliminating property bubbles. The late great bubble of these last ten years inflated just the same all over the world, regardless of what CGT regime was in place. That’s all you really need to know about how effective they are in that regard.

    At the same time they have lots of downsides, including being complex and expensive to administer, and create perverse incentives to not improve property (just increases the tax you have to pay) and to never sell if at all possible, leading directly to large scale slum-landording.

    Moreover everyone keeps forgetting that if you are deemed by IRD to be property speculator or developer you are ALREADY paying tax on capital gains. It’s called company tax. Moreover with property values likely to be relatively static for the foreseeable future the tax base is pretty thin. Overall the actual amount of increased net CGT tax collected by the govt is likely to be less than most people imagine.

    All the same I’m not especially against realised CGT’s per se, and as a ‘build and keep’ landlord myself, they would not affect me directly. On the other hand they would likely drive rents up to compensate, so I could look forward to that.

    If National want to go and sup from that chalice I’ve no objections.

    • RascallyRabbit 15.1

      I agree RedLogix

      CGT did not prevent massive housing booms in the UK and the like and there is no reason why they would here.

      I do however agree with the notion that New Zealand’s vast capital importation (witness our massive current account deficit) needs to be spent on things that are more productive than Grey Lynn villas. Hence any examination of the tax system and structure that leads to a more productive use of these resources the better.

      A model that doesn’t get much attention here for a potential property tax is Hong Kong’s http://www.ird.gov.hk/eng/tax/ind_ppt.htm

      Basically income derived from property is treated as exactly that – income to be taxed.

      Hong Kong has escaped the recent bubble better than NZ and Australia but whether the tax structure is the reason for this I’m not sure….

  16. George D 16

    This represents a huge tax increase on NZSuper recipients. Those graphs (pages 11 and 12) deserve their own post. They’re shocking.

    Someone (Labour, Greens?) really needs to get Grey Power fighting against this, because the evidence is very clear that this will hit the elderly worse than anyone else. National could reap a storm here.

    • aj 16.1

      Exactly right George D.

      Grey Power in particular will need a LOT of convincing that any GST rise is going to be fully compensated by a rise in benefit payments.
      Think of another 2.5% on already high power bills – rates bills – etc…

  17. burt 17

    Regarding the regressive nature of GST. This seems to be easily mitigated by calculating a basic living cost person against which a universal benefit is paid. EG. If GST was 20% and the basic ‘social wage’ was calculated at $20,000 then the standard entitlement would be $4,000. So, in that example, a weekly universal benefit of $76.92 completely mitigates the regressive nature of GST being unfair on the lowest earners.

    • RedLogix 17.1

      Decent idea burt. It’s only part-way to the notion of a full Universal Income system that I’ve been backing, but a worthwhile step in the right direction.

  18. burt 18

    RedLogix

    I was only addressing the GST implications of spending all of a ‘social wage’. How to make sure everyone is earning or otherwise receiving the social wage as a minimum is the bigger picture. You are doing a good job enlightening people about the concept – keep it up.

  19. Greg 19

    Red and Red,

    “The point you seem to have missed is that not all expenditure is GST rated. The main exceptions are financial transactions, housing and rents being the three main ingredients of property bubbles.”

    “Rich people save, the poor de-save (ie borrow), that means they pay different amounts of their net income in GST.”

    Put it another way. All investment is deferred expenditure. If you invest in housing, shares etc etc the expectation is that you will make a profit which you will spend. When you sell your shares etc and spend them you will incur gst. You can defer the tax burden, but you cannot avoid it. Even if you die, whoever receives your assets will ultimately spend them therefore paying your share of gst.

    • felix 19.1

      Only if you assume that at some point the asset will be liquidated. Otherwise it can be passed on to your children providing ongoing dividends and benefits (which also may be partially reinvested and therefore not “spent”) to each generation which holds them.

      Why you think that someone must liquidate and spend the asset thereby killing the cash cow I have no idea.

  20. jarbury 20

    Upping GST and introducing a tax-free threshold of say $10,000 a year sounds like a good idea.

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