“Last GST hike had little impact, say tax experts” – Herald
The article is about inflation but it is also true of growth. There is no evidence that increasing GST from 10% to 12.5% and cutting income taxes boosted growth. In fact, the country entered a long period of stagnation and recession.
And why would we expect small changes in marginal tax rates to affect growth? The Right seems to think that if there’s less tax on income people will say ‘whoopee I’ll work more’. In reality, most people don’t have flexibility over their work hours and incomes. Whoever heard of a person saying ‘If my marginal tax rate was 30% I would work more but at 33% I can’t be arsed’ anyway?
So we shouldn’t expect putting up GST and cutting income tax to have any appreciable effect on growth, but it will have effects. For a low-income person it’s like taking one dollar in every fifty away from them. That matters when you’re on a tight budget. Which is why compensation is so important. When Labour introduced GST they cut all income tax rates. And, contrary to what Key claimed in the House yesterday),when they increased it to 12.5% they cut all income tax rates, including the bottom one from 19.5% to 15%.
I don’t support a lot of what the Fourth Labour Government did but it was a good move to take tax off work and onto consumption, and they didn’t leave the poor and middle income earners out of pocket in doing so. I don’t see the same commitment from the Key Government.
So two conclusions:
1) don’t expect shifting a little of the tax burden off labour and onto consumption to create faster growth, it’s not going to happen. Fiddling with the margins of the tax system is not the great leap forward to catching Australia.
2) if there is going to be an increase in GST, the money will have to be directed firstly at cutting income tax for low and middle incomes. Anything else is a money grab for the rich.
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