Kiwiblog

Sent in by a reader, in response to my blog post yesterday on David Cunliffe saying it was a no brainer to reduce the threshold on which GST is applied to online purchases from overseas.

Tom Pullar-Strecker at Stuff reports:

Retailers are stepping up efforts to close a “loophole” that allows GST-free purchases of overseas goods costing less than $400.

They should give up their silly campaign to tax minor online purchases. It would cost the Government far more in administration than it would bring in, in revenue.

Retailers Association chief executive John Albertson said the import threshold was costing the Crown $300 million a year in lost revenue, far more than the $17m the Government had sought to raise through its ill-fated plan to tax employee car parking.

Well first of all I doubt that figure. They’re saying that $2 billion of sales are being made online from overseas retailers, which sounds way too high too me. But the compliance costs would be huge. Customs would have to intercept every single letter coming into NZ, open it, hold it, calculate GST, send an invoice for say $5 and then get it paid and then dispatch it on. A bureaucratic nightmare.

Labour revenue spokesman David Cunliffe said a low threshold for charging GST on overseas purchases would stop the Government “subsidising foreign commerce” and was a “no-brainer”.

Oh wonderful. Make sure everyone knows this. Labour Party policy is to tax your online purchases more. Buy a book from Amazon, and Labour will hold it up at the border until you pay the Government an extra 15% of the price.

Will Labour also block itunes? We can’t have people downloading music and not paying GST on it. So to implement their policy they’ll have to block itunes in NZ, and only allow people to purchase from a NZ located online retailer.

Labour grandstanded on the carpark tax (yet never had a clear policy on it), but have now trumped that with their e-tax. I look forward to detailed Labour policy on what they would reduce the threshold to so we know how many of our online purchases they plan to stop at the border.

Greg Harris at Stuff writes:

With Christmas just around the corner many kiwis will be purchasing online to take advantage of the strong New Zealand dollar and the lack of queues.

The rise in online shopping is putting considerable pressure on retailers’ slim margins. Various retail groups continue to lobby for GST and duty to be payable on all privately imported goods regardless of their value.

Customs imposes duties and collects GST on goods imported into New Zealand. If the GST and duty to be collected by Customs is less than $60 the charges are waived. Generally this means the maximum value of goods that can be imported tax free is $400.

The threshold was introduced as a practical solution to address the cost of collecting small amounts of GST and duty where it was outweighed by the revenue raised.

This is a key point. Customs would lose money if it tried to impose GST and/or duty on smaller purchases. They’d need a huge bureaucracy to cope.

The New Zealand Retailers Association believes that this “tax break” for online shoppers detracts from the retailers’ ability to compete in the market.

When I shop online, I prefer a NZ retailer as the delivery is much faster. I only go to Amazon (for exampe) if it is not on Fishpond.

With the effects of the economic financial crisis lingering, consumers are looking for bargains. Retailer loyalty does not rate highly amongst many consumers. It is not unusual for consumers to physically shop in New Zealand to find the desired item before purchasing online GST free.

I’d be interested to see any hard data on this. It sounds unusual to me. People may look at something in the shops and then buy it online – but that may be from a NZ website.

Regardless, even though it is an issue for some NZ retailers, asking the Government to lose money collecting GST on small purchases is just not a sensible strategy.

One of the memes being pushed by Labour and the Greens is that the 2010 tax package wasn’t revenue neutral. They assert this because tax revenues are lower than was projected. The problem with their arguments is that tax revenues often differ from what was projected, and there is no way of knowing how much is because of changing economic projections, how much is impacted by a policy change and even how much is just because the forecasts are imprecise.

As an example. Let’s say you forecast GST to be $12.5b at 12.5% and you increase GST to $15% and hence forecast GST will bring in $15b. That extra $2.5b of income is distributed back as income tax cuts. But let’s say once GST goes to 15%, the revenue only goes to $14b. Now Labour and the Greens are saying that $1b less is due to the policy change, and hence the tax switch was not fiscally neutral. They argue that it is purely because of the rise in GST that people spent less, and hence less GST was paid. But the drop in GST might just be because of lower economic growth, or a drop off in consumer confidence etc.

To give you an idea of how dramatically forecasts change over time, I’ve collated the forecasts from the last nine fiscal updates. They tell quite a story. Let’s start with total tax revenue.

The last two columns are best to focus on, as we get a full history. This is the total tax take projected for last financial year and the current one.

Back in the 2008 budget Dr Cullen projected $62.1b in tax revenue for 2011/12. Then by the PREFU it had dropped to $61.2b. It further dropped to $58.3b in the DEFU, which takes accounts of National’s election tax cuts. However those changes were compensated by expenditure reductions – mainly KiwiSaver.

A huge drop occurred between 2008 DEFU and the 2009 budget, with tax revenues dropping $4.3b! Now bare in mind it was in the 2009 budget National cancelled its planned tax cuts for April 2010 and April 2011, so it would have been an even bigger drop without that. This change was pretty much all due to the global financial crisis and recession.

By year end forecasts got more positive, going up to $56.6b, and then the tax switch in the 2010 budget projected it to go to $57.4b. However then forecasts dropped again, dropping to $56.7b and then $54.7b.

Now Labour and Greens say that the difference between 2010 Budget and the latest forecasts is all due to the tax switch. But as one can see over time the wider economy is a far bigger factor in tax projections. Recall how in 2009 tax revenues forecast dropped $4.3b even though National cancelled tax cuts.

Now let’s look just at GST.

This shows projected GST revenues only. Note how they from 2008 to 2009 they went from $13.5b down to $11.3b. Then they were projected in 2010 to go up to $15.8b with the increase to 15%. Just six months later Treasury revised that down to $14.0b, but then this year revised up to $15.0b.  This is still lower than originally forecast in 2010, but again no greater than other variances from year to year.

So when Labour and Greens say the tax switch cost $2b, they are making it up. What they are saying is that there has been $2b less tax revenue than projected. But if the tax switch had never happened it is quite possible the drop in tax revenue would have been the same or even greater.

And for the paranoid out there, this is all my research, taken from going through the last nine fiscal updates. No one suggested it to me, helped me with it, or even knew about it. I did it because I got sick of the uncontested claims about the impact of the tax switch.

Ruth Porter writes in the Telegraph:

Today the pasty is fighting back, but it shouldn’t be. For years it has enjoyed a special exemption and privilege which it should never have had. Companies and consumers of hot pasties have benefited unfairly while fish and chip shop owners and consumers who preferred pizza have had to pay more. Through a strange anomaly bakery goods were exempt from VAT, the Budget changed that, but today Cornish MPs are objecting to the change. Other MPs are now complaining about another reform which will see certain types of caravans subject to VAT as well. …

Britain’s VAT system is a mess, with arbitrary exceptions all over the place. In recent years this has led to absurd legal battles over whether Pringles are crisps and whether Jaffa Cakes are cakes or biscuits.

A report from the think tank Reform showed how inefficient the current zero and reduced rates are. Citing evidence from the OECD and looking at how our system is one of the most complicated in Europe. They suggested exemptions total more than £30bn. This £30bn could be given back to people in more efficient tax cuts. …

Other countries like New Zealand manage perfectly well with a much simpler GST system. We should follow their example.

But we can not take our simple system for granted. The Greens and Maori Party want to bastardise it, and Labour campaigned last election on doing the same. It looks like that policy will be dropped, which is a good thing.

If you are interested in British politics you can follow Ruth on Twitter, @ruthoporter.

The Telegraph reports:

George Osborne has been mocked by MPs over his “pasty tax” after it emerged people could avoid paying VAT on hot baked goods if they wait for them to cool in the shop.

These are the sort of stupidities you get when you don’t have a clean GST like we have in NZ. Labour’s pledge to exempt fresh fruit and vegetables was bad public policy, and will lead to situations like the above. For exampel frozen peas might have GST on them, but if you waited to thaw them, then would they be exempt?

James Weir at Stuff reports:

New Zealand’s GST is the best value-added tax in the world and should be protected from any exemptions that undermine it, according to Treasury secretary Gabriel Makhlouf.

Hopefully Labour is listening. The saddest thing of the Goff leadership was his turning his back on 25 years of sensible tax policy, for basically a political stunt.

Makhlouf said New Zealand’s GST was a simple tax that raised a large amount of revenue, with minimal distortions.

“Using GST to promote particular policies comes at great cost,” he said.

Removing GST from food would see the tax take from GST drop about 20 per cent.

The compliance costs, uncertainty and complexity of bringing in exemptions and multiple rates “are overwhelming compared with the asserted benefits”.

There were far more effective ways to promote social outcomes than by “fiddling” with the consumption tax on a good or service, and far more effective ways to redistribute than taking GST off swathes of goods and services.

“GST remains our best designed and more efficient tax,” he said.

The signs are looking reasonably positive that Shearer will have a more sensible tax policy than his predeccesor.

Countries looking for ways to raise more revenue should follow the advice of the OECD and “tidy up their tax codes to remove tax expenditures” which typically favour higher income taxpayers, so more money could be raised without increasing tax rates.

Tax “expenditure” – short for tax concessions or exemptions to particular industries or groups not available widely, were just subsidies “by another name”, Makhlouf said.

“Work on tax expenditure is focused on identifying such expenditures in the interests of transparency”.

With a broad-base, low rate approach and a comprehensive GST system, New Zealand did not have many “tax expenditures”, but they have been listed in the Budget since 2010, he said. The aim was to get a complete tally of all the implicit and explicit subsidies the government awards, “so they can be appraised on their merits”.

That’s a very good thing to do. And I agree with having as few exemptions as possible. That is why I don’t support health insurance being tax deductible.

Got sent a spreadsheet comparing costs in the Hawke’s Bay of various fruit and vegetables between outlets and products. It shows that the difference between various retail outlets is far far more than the 15% GST. Some examples – all expressed as costs/kg:

• Pumpkins – 94c at roadside vendor v $1.99 supermarket
• Cabbages – $1.88 at roadside vendor v $4.43 supermarket
• Brocolli  – $5.11 at roadside vendor v $9.97 supermarket
• Tomatoes – $14.56 at supermarket fresh v $3.75 canned
• Beans – $6.57 frozen v $3.75 canned
• Peas – $5.23 frozen v $3.75 canned v $2.49 Pams Peas

Amazing there is such a huge price variation.

Susie Nordqvist in the Herald reports:

New Zealand has one of the lowest goods and services tax rates in the OECD, despite households being charged at a higher rate than before.

Tax accountants KPMG said even at 15 per cent New Zealand has the fourth lowest GST rate in the OECD and contrary to global rates, corporate tax rates were trending down. …

KPMG New Zealand’s GST partner Peter Scott said unlike any other country in the world, the recent increase in GST was matched by personal tax rate reductions.

But didn’t Labour say the reason they want to exempt fruit and veges was because our GST is one of the highest in the world? That wasn’t a populist porkie was it?

Matthew Hooton writes in NBR (off line) exposing another consequence of goofynomics:

Mr Goff’s policy would slash the price of American pomegranates, now selling at over $30/kg, New Zealand cranberries, selling at $25.30/kg, and Philippine figs selling at $2 each but would leave the price of low-fat milk, wholemeal bread and natural muesli untouched.

The ultimate in excess, fresh Alban truffles, currently selling for $6000/kg in Auckland, would fall by $800/kg under Mr Goff’s policy.  Good luck selling that one in West Auckland.

The residents of Epsom whose like French cusine, will be thanking Mr Goff for knocking $800/kg off the cost of their truffles.

But before they celebrate, I have to take issue with one aspect of Matthew’s claim. You see a truffle is a fungus, and is a fungus a vegetable?

I don’t know the answer for sure. But what I can guarantee is that when the answer is worth $800/kg, the court case will go all the way to the Supreme Court.

And think if the Supreme Court rules that a truffle is not a vegetable, for GST purposes. Then presumably mushrooms will also be deemed not to be vegetables. And so all the supermarkets will have to remove mushrooms from their fruit and vegetables sections.

We may end up with our own version of the 1893 Nix v Heddon when the US Supreme Court had to rule on whether a tomato was a fruit or a vegetable (it is a vegetable – well at least in the US).

I can see Labour’s GST policy attracting lots of votes from lawyers.

On budget  Day I blogged:

The tax rate changes from 1 October 2010 are:

• Up to $14K – tax rate goes from 12.5% to 10.5%
• $14K to $48K – tax rate goes from 21.0% to 17.5%
• $48K to $70K – tax rate goes from 33.0% to 30.0%
• $70K+ – tax rate goes from 38.0% to 33.0%

Workers earning around the average full-time wage ($40K to $48k) will, over 18 months, have had their top marginal tax rate go from 33% to 17.5% – almost halved.

Two thirds of the “cost” of tax cuts goes to reducing bottom two rates and 73% of income earners will have a top tax rate of 17.5%. You keep 82.5% of every extra hour you work.

And the reduction at each income bracket:

As I commented at the time, the reductions are pretty even, as a percentage of existing tax paid.

And this takes into account the likely impact on prices with the GST increase.

The Dominion Post is unimpressed:

Labour’s promise to remove GST from fresh fruit and vegetables reeks of desperation.

With his party languishing at 32 per cent in the latest Colmar Brunton poll – a formidable 22 points behind National – Labour leader Phil Goff’s desire for a circuit breaker is entirely understandable. However, that does not make his choice any less wrong-headed.

And the inconsistencies:

Mr Goff and his senior colleagues are experienced enough to know that to open the door for exemptions is to also open a can of worms.

They will be asked why those who buy their peas fresh should be favoured over those who buy them frozen – there is little, if any, difference in the health benefits they deliver.

They will be asked why the exemption should apply only to fruit and vegetables, and not to other elements of a healthy diet, such as fish and lean meat.

They will be asked why they do not provide for other exemptions to promote other activities that benefit society – removing GST from bicycles or solar panels, for example.

Most of all, they must pledge to also remove GST from condoms. Does Labour not care about herpes? Are they unconcerned over AIDs? Do they want to be responsible for tens of thousands of abortions, because they have not removed GST off condoms?

And The Press:

After spending more than two decades assiduously defending the integrity of the GST system it originally introduced, Labour has back-pedalled with its promise to scrap the tax on fresh fruit and vegetables. …

Despite Labour claims to the contrary, retailers have rightly warned that making fresh fruit and vegetables exempt would still compromise the simplicity of the system, which was one of its greatest virtues. This will inevitably lead to added compliance costs for many businesses and, in terms of monitoring or administering the GST change, for the government as well.

The benefit accruing to families, which Labour puts at $6 a week and National at just $1 a week, must be offset against the hidden compliance costs and the lost tax revenue of around $250 million a year. …

Rather than increase the costs to retailers, the Government focus, especially in post-quake Canterbury where employment losses are likely, should be on providing an economic environment which fosters job and income growth. This is a preferable way to ensure that fruit, vegetables and other healthy foods are affordable.

Exactly.

If one goes to the Stats Household Expenditure Survey, it give details of spending on fruit and vegetables by income decile.

The poorest 10% of households spend $9.80 a week on fruit and vegetables. Assume two thirds is “fresh” and that is $6.53 they spend on fresh fruit and vegetables.

The “rich pricks” households making up the top 10% spend $30.70 a week on fruit and vegetables. Assume two thirds is “fresh” and that is $20.47 they spend on fresh fruit and vegetables.

The Goofynomics announcement yesterday means a weekly saving of 98c for the poorest households and a saving of $3.07 for the rich pricks. So the rich pricks gets more than three times the benefit of Goofynomics than the poor.

But let us give the final word on Goofynomics to Dr Michael Cullen, who said on 4 August 2004:

Hon Dr MICHAEL CULLEN: I am aware of many countries that have appallingly inefficient GST systems where they exempt various articles, where they have differential rates, and where one has to differentiate between food taken away from a place and food consumed within a place. Thank goodness we have not followed those very bad policies.

So we have it officially from the last Govt – “very bad policies”.

Bill Engligh writes:

Labour’s unfunded policy to remove GST from fresh fruit and vegetables would deliver only $1 a week for the average Kiwi – and much less for low income earners, Finance Minister Bill English says.

The estimated $250 million cost of the new policy would have to be paid for by extra borrowing, pushing up already fast-rising public debt. …

The $250 million annual cost of the move, divided among all New Zealanders, is worth, on average, just over $1 a week – less for low income earners and more for high income earners.

“This puts the Government’s tax switch, which will leave the average income earner $15 a week better off, into perspective,” Mr English says.

But here is the real ripper:

“It’s also worth noting that fruit and vegetable prices have actually fallen by 11 per cent since National took office, having jumped 54 per cent under Labour.”

The removal of GST will have a relatively minor impact on overall fruit and vegetable prices and affordability, compared to normal price movements.

This is a point Danyl also makes at the Dim Post:

The real flaw with the policy is that its just a gimmick. I’ve written before about how the price difference between fruit and veges at the supermarket and the farmers market down the road is several hundred percent.

I predict that if Labour ever got to implement their policy, it would have next to zero effect on the uptake of fruit and vegetables.

Bill continues:

“Labour’s policy makes no sense and smacks of political desperation,” Mr English says. “Phil Goff must explain to New Zealanders why he is removing GST from imported, out-of-season raspberries and asparagus, but not from New Zealand frozen peas, which are a nutritious part of many Kiwi meals.

“People would be able to buy GST-free potatoes, take them home and make deep-fried chips. But at the same time, healthy foods like Weetbix, low-fat milk and wholegrain bread would be subject to GST.

Distinguishing between fresh and frozen vegetables is just the start of the stupidities that this policy would lead to.

Phil Goff today abandons the concept of a simple all inclusive GST. Taxation experts time after time praise our GST for its relative simplicityand fairness as it applies to everything.

The Herald reports:

A Labour-led Government would scrap GST from fresh fruit and vegetables to encourage healthy eating and help New Zealanders as higher GST on other goods is imposed.

This is an exceptionally bad move, because it is the start of a very slippery slope.

For 25 years, lobby groups have pressed National and Labour for a GST exemption for their pet cause. Up until Phil Goff, major party leaders have had enough fortitude to say no. They have said GST is about having a consumption tax – it is not a device for designating what goods are “good” or “bad”.

Once you concede that principle, you can’t say no to all the other requests. We saw this in Australia, where a Government had to exempts tampons from their GST, because of a campaign.

By saying fruit and vegetables will be exempt (as they are good and healthy), how can a Goff led Government possibly stand firm against say a campaign to reove GST off medicines? I mean, how dare the Government tax people for being sick.

Next to go will be GST off doctor’s visits.

Then my God, how dare you tax the school bus. That must become GST exempt.

TV3 report:

John Key is accusing Labour of lying in advertising material it’s sending out ahead of next week’s GST increase of 12.5 percent to 15 percent.

Labour leader Phil Goff says he stands by the flyers, which claims National is adding 15 percent GST to all power, phone, rates and food bills.

Pretty clear they are lying.

Chris Wright thought something was wrong when a Labour Party pamphlet turned up in his letterbox, and he was right to question it.

“It’s just wrong, they’ve just added 15 percent to everything and that’s what GST is going to be. And that’s not the case, no I thought it was going up 2.5 percent,” says Mr Wright.

The pamphlet sent out by Labour MPs highlights the increase in GST next week.

But instead of saying it’s going up 2.5 percent it adds what it calls National’s 15 percent GST rate to all power, phone, food, rates and car bills.

“It says National 15 percent as though National has just added 15 percent,” says Mr Wright.

But Mr Wright was further confused when he rang Labour’s head office – he says the woman there told him, yes 15 percent is being added to the current 12.5 percent.

“She told me GST was going up 15 percent and I said ‘does that mean it is going to be 27.5 percent’ she said ‘yes’,” he says.

I guess merely telling the truth that the GST increase will push prices up by 2.2% doesn’t scare enough people.

In one of the examples Labour starts with a GST exclusive $189.34 power bill and adds National’s 15 percent of $28.40. The power bill becomes $217.74.

But Labour should have started with a $212 power bill including the 12.5 percent GST that Labour introduced.

National’s 2.5 percent increase actually amounts to $5.74, not $28.40.

Prime Minister John Key is accusing Labour of lying.

“Labour is using taxpayers money to get these lies out into the public domain,” he says.

National, or someone, should complain to the Advertising Standards Authority. I’d say it was an open and shut case.

Mr Goff says it is not his problem.

“National has increased it to 15 percent; therefore it’s National’s 15 percent.”

Do you really want Labour back in Government with this attitude?

The equivalent would be Labour putting income tax up from say 19% to 21%, and National putting out pamphlets that tell you that your take home pay is going to drop by 21% because of Labour.

It is so fundamentally dishonest, that it really i indefensible.

One senior Labour MP told 3 News the brochure is technically correct but he accepted it was a bit “exuberant” in places.

Just like the 2005 pamphlet claiming National will evict state house tenants if elected.

The Herald reports:

Political momentum for removing GST from healthy food is increasing with both the Maori and Labour parties working on the idea.

But even in the event the two parties were to put aside their differences and work together on the policy they would not have the numbers to pass the required legislation since the National Party and United Future are opposed to it.

Maori Party MP Rahui Katene’s Goods and Services Tax (Exemption of Healthy Food) Amendment Bill is likely to get its first reading when Parliament returns from recess next Tuesday.

The member’s bill would remove GST from fruit and vegetables, bread and cereals, some dairy products, lean meat, poultry, seafood, eggs, nuts, seeds and legumes.

Yesterday, Labour Party leader Phil Goff – who has previously opposed similar proposals – said his party was close to adopting what he believed was a more workable policy to remove GST from fresh fruit and vegetables.

Revenue Minister Peter Dunne said Ms Katene’s proposal wasn’t viable because of problems around defining what constituted healthy food. Furthermore, removing GST from the food specified in the bill would mean the loss of about $330 million a year in tax revenue which would have to be found somewhere else.

I can’t believe how desperate Labour are getting with its support for such nonsense. The only winners from removing GST on so called healthy food will be the tax lawyers.

The moment you start picking and choosing what goods are included, you get massive distortions and gaming of the system -and huge complexity.

Also any removal of GST may be insignificant compared to normal price movements. By coincidence the Herald reports today:

Food prices dropped by 2 per cent in the past year – the largest annual fall since records began more than 50 years ago.

The Food Price Index, released yesterday, shows that fruit and vegetables are nearly 10 per cent cheaper than they were a year ago.

So fruit and veges are 10% cheaper without fiddling with GST, which would cause the Government to borrow a further $330 million a year.

Vernon Small reports:

The Labour Party is opening the door to policy change, including taking GST off food and clamping down on foreigners buying farms.

Phil Goff is trying to go to the left of Helen Clark. Taking GST off food is a daft idea. Mind you McDonalds will think it is a great policy.

And it is vital we must stop farmers from being able to sell their farms. Imagine if a foreigner buys a farm. One minute it is sitting there in the Waikato, and suddenly the foreigner has packed the farm up and moved it overseas. The dirt, the grass, the cows, the sheds – all gone. Just a big chasm left in the earth.

I wonder if Winston will sue Phil for stealing his policies? I mean they already share major funders, so sharing policies is next logical step. Maybe their shared name can be Labour First.

Eric Crampton blogs:

New Zealand is blessed with one of the cleanest value added taxes in the world, our GST. Every new good is taxed at 12.5% (likely to rise to 15%); the tax provides about a fifth of national tax revenue. …

A fun Australian case, via the Centre for Independent Studies daily email update, ideas@TheCentre:You wouldn’t usually expect to find baking recipes in court judgments, but Justice Sundberg of the Federal Court in Melbourne made an exception recently. In doing so, he demonstrated how overly complex Australia’s tax rules are.

Take 67.5% wheat flour, 20% water, 8% olive oil, 2% sea salt, 1.5% yeast, and 1% malt extract. Follow the instructions in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, and what you get is either bread or a cracker.

At least that was the question Justice Sundberg had to answer. A small food importer from Melbourne had been importing Perfetto Mini Ciabatte, an oven-baked Italian flat bread that only culinary philistines – or the Australian Taxation Office – could mistake for an ordinary cracker.

Australian tax law has kept lawyers and bureaucrats busy for a long time over this mini ciabatta. Basic food stuffs are exempt from GST, but other foods are not. Thus, bread does not attract GST but crackers do.

The food importer thought he had a clear case when he claimed tax-free status for his mini ciabatta. He had even flown in Italy’s leading bread expert Giampiero Muntoni to testify in court. Signor 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. To this infallible bread pope it was clear that if the ingredients are that of bread, if it looks like bread, and if the Italian tax authorities classify it as bread, it must be, well, bread.

This was not good enough to convince an Australian court, though. Justice Sundberg noted that mini ciabatta cracks like a cracker; it’s sold next to crackers in Australian supermarkets; and a chemical analysis revealed similar gluten and protein content as that of crackers. In conclusion, he upheld that GST had to be paid on it.

It would be easy to find this issue ridiculous, but actually it is symptom of what is wrong with our tax law. It is incomprehensible that there should be different taxes for, arguably, very similar products.

Tax lawyers would do very well if we start introducing exemptions.

The Herald reports:

Pushing the line that the Government’s tax changes would “benefit the few, not the many”, Mr Goff said the Government’s promise that taxpayers would be compensated for any increase in GST did not stack up.

“You are going to get a one-off compensation for GST in advance. But what you know is that might barely meet the cost of GST, but then it will run out. And in a couple of years’ time, there won’t be the compensation, but there will still be the GST.”

I’ve read this many times, and still don’t know what Goff means. The increase in superannuation does not last for a year only. The Government doesn’t take it back at the end of the year. And the tax cuts lift after tax wages which will lift super permanently.

A Grey Power delegate rose to his feet, saying he loved what Mr Goff had to say, but asked if it meant that he would be reversing the GST increase if he was elected to Government.

Mr Goff replied: “I know the answer you want to hear to that. But I’m going to give you an honest answer: I can’t tell you at this point.

“If I was to promise you I could do that, without knowing whether we will have the financial means to be able to do that, I would be misleading and I won’t do that,” he said.

That is a no, in other words.

Grahame Armstrong in the SST writes:

THE GOVERNMENT is putting the finishing touches to its package of tax cuts and is now confident that low and middle income earners will have more money in their pockets – even after paying a higher GST.

The Sunday Star-Times understands the government has settled on lowering the tax rate for those earning between $14,000 to $48,000 – which represents the bulk of wage earners – from 21% to 19%.

The May budget is also expected to lower the tax rate for those earning up to $14,000 from 12.5% to 10%.

The Star-Times also understands the government will, in one hit, lower the top rate for those earning more than $70,000 from 38% to 33%, rather than doing it gradually.

So that would give up three tax brackets – 10% for low income earners, 19% for middle income earners and 33% for higher income earners.

What would be the reduction in income tax for people at various income levels:

• $26,000 – 13.8% or $590
• $30,000 – 13.1% or $670
• $40,000 – 12.1% or $870
• $48,000 – 11.6% or $1,030
• $70,000 – 6.4% or $1,030
• $100,000 – 9.2% or 2,530
• $150,000 – 10.8% or $5,030

That is pretty well targeted. Those on the minimum wage get the largest percentage increase, and everyone earning under $50,000 a year gets a double figure percentage drop in the tax they pay. And in fact, with WFF, many of these people are net tax recipients anyway, not net tax payers.

What would be the fiscal cost?

• Dropping the 38% rich prick rate  to 33% – $500 million a year
• Dropping the 21% to 19% – $780 million a year
• Dropping the bottom tax rate from 12.5% to 10% – $820 million a year

So total foregone revenue is $2.1 billion.

Now how much extra GST might people pay. Let us assume that on average people spend 90% of their after tax income, and that the GST increase of 2.5% will lead to an average price increase of 2.0% (as estimated by Stats NZ). What is the impact at each income level:

• $26k – $391 more GST and $590 less income tax = $199 better
• $30k -$448 more GST and$670 less income tax = $222 better
• $40k -$590 more GST and $870 less income tax = $280 better
• $48k -$704 more GST and $1,030 less income tax = $326 better
• $70k – $969 more GST and $1,030 less income tax = $61 better
• $100k – $1,304 more GST and 2,530 less income tax = $1,226 better
• $150k – $1,862 more GST and $5,030 less income tax = $3,168 better

So it does indeed look like no one would be worse off (even if you assume 100% of after tax income is spent).

Obviously those at the top tax brackets do best in an absolute sense, but they are also the ones most likely to be property investors, and may in fact end up worse off overall. Also worth remembering two that half of the 100 wealthiest people in NZ do not actually pay the 38% tax rate, so will not in fact benefit from its reductions – they will just not need to operate through their family trust.

I have no idea if this is the package the Government will go with, but it looks pretty workable, and affordable. Most of all, it is not meant to be about just the redistribution of any changes, but the large benefits to the economy of increasing the incentives to work, save and invest and reducing the incentive to borrow and spend – plus the shifting of incentive for investment income from property to other areas.

The reason I support tax reform, is because I want higher economic growth for New Zealand. The media tend to focus just on who will pay more or less tax, but Adolf Stroombergen from Infometrics blogs at interest.co.nz:

The policy options currently on the table involve a change in the tax mix that deliver the same amount of revenue to the government. Whether the total tax take is too high or too low – whether government is too big or too small – is a different issue. The aim of the current proposals for tax reform is to find a better way to collect the same amount of tax revenue. What is meant by a better way? One that is more conducive to economic growth, fairer to those who can least afford to pay, easier to understand, more difficult to avoid and cheaper to comply with and administer.

Compared to GST, income tax is easier to avoid, more costly to administer, more complex and, as a result more unfair. Its interaction with welfare benefits warps the incentive to work and thus impedes economic growth. So what sort of advantages might an increase in GST coupled with a revenue neutral reduction in personal income taxes actually deliver?

GST also covers a wider base, such as tourists, not just income earners.

In some preliminary analysis with an economy-wide model I investigated the impacts of raising GST to 15%. This would raise enough revenue to fund a uniform proportional reduction in all personal income tax rates of about 10%. For example the 38% rate would drop to 34% and the 21% rate to about 19%.

The changes may not look like much, but the wider economic effects are quite dramatic:

1. An increase in employment of 17,500 full time equivalent jobs.
2. An increase in real income of an average $250 per person per year.
3. An increase in real household spending of $420 per household per year.
4. An increase in aggregate household savings of $280m, contributing to a lift in aggregate real investment of almost half a billion dollars per annum.

That sounds all very worthwhile to me. Note those increases to income and spending are not from redistribution – they are from the higher economic growth.

The uncertainties notwithstanding, it is clear that the macroeconomic gains are significant for what is in effect a fairly minor shuffle of the tax mix. One wonders what sort of gains could be generated by more fundamental reform of the tax and benefit system. If the incomes of New Zealanders are ever going to catch up with the incomes of Australians, tax reform is likely to be an important step in the process.

A very good point. It is a pity land tax has been ruled out.

John Armstrong writes:

Axe the tax? Labour would if it could. But it can’t. So maybe the tax will stay. Maybe it won’t. Who knows.

Labour isn’t saying. And it won’t be saying for quite a while yet. …

National’s overall tax package will leave Labour nursing a big political headache – how to make up the $2 billion shortfall in revenue if Labour pledges to restore the rate of GST back to 12.5 per cent.

Labour won’t say how. But it can hardly talk of raising income tax rates which National will have just lowered.

No party – not least one coming from such a long way behind its rival – can afford to saddle itself with that kind of platform.

I would welcome Labour giving New Zealanders a clear choice, and campaigning on increasing personal income tax rates.

But that is one thing Labour will definitely not be doing. It is not going to be trapped into declaring a position which it might later regret.

Goff has been around long enough to remember National’s very own GST-induced political disaster.

When Labour introduced GST in 1986, National felt obliged to come up with an alternative – the long-forgotten “Extax”.

With Labour determining no items would be exempted from GST, National saw a gap in the political market. Extax allowed exemptions for basic foods, doctors’ fees, local authority rates and some charities. The tax was universally panned as an administrative nightmare.

The ridicule prompted senior National MPs to lose faith in the policy, resulting in mixed messages as to where National really stood on a broad-based consumption tax.

Not just National MPs. I was an office holder in National in 1987 and I actually voted for the Labour Party, partly because of National’s ridicolous Extax policy.

Meanwhile Bryce Edwards looks at the Axe the Tax campaign. He looks at whether or not is is electioneering regardless of the rules devised by MPs on what is legal:

The Labour Party obviously hasn’t learned much from the severe public ignomany suffered when it was revealed that the party had been paying for its electioneering Pledge Card with public funds while in government. Their latest rort – running a heavily branded bus campaign around the country – is no less electioneering, yet Labour has once again used taxpayer funds to pay for this political advertising. This blog post looks at whether such electioneering can really be called ‘legitimate’, even if the exercise is made to fit into the dodgy Parliamentary Service rules. Regardless of the expenditure’s legal status, few voters will appreciate having to pay for such overt political advertising.

Bryce goes on to distinguish between whether something is “legal” and “legitimate”

The Herald reports:

Labour’s “Axe the Tax” bus trip protesting GST increases is costing the taxpayer about $30,000 – but Labour leader Phil Goff has defended it as the cheapest way to get around the country on an issue that affects everybody. …

The bus features a red “skin” with Axe the Tax signage and Labour logos.

A spokesman for Mr Goff said the costs were expected to be about $30,000, including for the bus charter, the signage and other material such as signs and balloons.

It was funded out of Mr Goff’s parliamentary leader’s office fund.

He said it was a fraction of the $200,000 bill to the taxpayer for brochures Prime Minister John Key sent out to households last month to defend his party’s new national standards policy for schools.

Now Goff is quite correct that the bus is within the rules for spending from the leader’s fund. Just as the $200,000 on national standards brochures was within the rules.

But there is a danger that the public don’t care much about whether or not it is within the rules, and will judge the spending on the basis of whether it is providing information, or a series of photo ops.

I suspect most voters don’t mind parliamentary budgets being spent on a pamphlet which is sent to individual households, setting out a policy area, and why they are doing it. They may see that as useful communications.

With a bus tour, it is open to a very different perception. Voters know that it is not about communicating with voters – because if it was, it is hugely inefficient. It is about a series of photo ops, and desire to get media coverage.

Now again, this is all within the rules. But as I said, don’t be surprised if the public take a different view of parliamentary funds being spent on a bus tour, compared to direct mailing of pamphlets.

It would cost significantly more for him to use Crown cars to travel around in and for other MPs to use individual forms of transport. The signage was attention-grabbing and ensured people knew exactly what the MPs were there to talk about.

In my experience with bus tours, they cost massively more than the cost fo the bus. You see what they do not tell you is the fact that MPs normally fly in and off the bus to meet up with it.

As for the signage ensuring people know exactly what the MPs were there o talk about, this is not quite the case. Labour are not promising to axe the tax, and in fact they are not even promising to axe any increase in GST. As far as I know their policy is simply we will promise to do something different to whatever National announces, even though we do not know what National will announce.

It would be hilarious, if not rather tragic.

Labour’s current campaign for “ordinary New Zealanders” is “Axe the Tax”.

Now 95% of New Zealanders will take this as meaning that Labour want to axe GST. After all it is not called “Stop the hike” but “Axe the tax”.

So Labour are trying to make people believe that they stand for axeing GST. Sure not in the small print, but if you see that big bus go by with “Axe the tax” on there, that is the impression you will get.

So how much would Labour have to put up personal tax rates, to compensate for an axed GST. Well GST brings is around $9.6 billion from the private sector.

Now assuming Labour would not want to increase the two lower tax rates or the company tax rate, it means that Labour would be able to align the 33% tax rates and the 39% tax rate. They would both have to increase to 86%, so that any money you earn over $48,000 you only keep one seventh of it.

Maybe Labour may want to reconsider having such a misleading campaign slogan?

UPDATE: Some sharp eyed readers have noted that the campaign, its bus, etc are all funded by the taxpayer from the Leader’s fund. Now it is a legitimate expense within the rules, but it would be ironic that if Labour do axe the tax, then the current level of taxpayer funding to parliamentary parties may have to be axed also