Kiwiblog

Newmarket Retailers Assn CEO Cameron Brewer writes:

Increasing the goods and services tax would hurt the country’s retailers just as they’re getting back on their feet. Christmas trade was an improvement on the previous year, but retail is still not out of the woods.

It would impact retailers, but the issue is what tax cuts would we get to compensate, and what would be the impact on the overall economy.

I’d be against GST going up, with no reductions in other taxes. But there is an argument to be made for slightly more taxation on consumption and less on income.

My wife tells me that before GST came into effect nearly 24 years ago, she remembers her mother rushing off to buy a vacuum cleaner. So yes, leading up to an increase taking effect, there would be a rush on consumption.

However the shops would then go quiet as people’s cost of living went up overnight.

Yep, but an increase from 12.5% to 15% is a lot less of an impact than bringing in a 10% GST. On an item that did cost $100 a 10% GST increased the cost by well 10%. That same $100 item now already costs $112.50 and would go to $115. That extra $2.50 is an 2.2% increase in total price – less than the annual inflation rate of late.

If an increase in GST is to lead to a fall in consumption, a tightening of business margins and a Government being hurt politically, it is hard to imagine theFinance Minister announcing it in his second Budget.

There are political risks around any GST increase. However it occurs to me that the overall economy as a whole would grow faster with less tax on income and capital and savings and a bit more tax on consumption. The target is a 30% top tax rate for individuals, trusts and companies. Now before the recession and Cullen’s last budget, one might have been able to do that by reducing surpluses. However unless one is politically suicidal, it will take several years of spending restraint to get back into surplus.

The Dom Post reports:

Low-income earners would have to be compensated if GST was increased as a result of the current tax review, Finance Minister Bill English says. …

“Low-income earners, in particular, would have to be compensated for any increase in GST,” he said in a speech to chartered accountants in Auckland. “The tax working group will have to come up with some fairly compelling reasons to convince us of the overall benefits of further property-related taxes or an increase in GST.”

“We don’t want to go down the route of raising taxes,” he said. “The Government has a strong preference not to increase taxes to close the deficit. We prefer more efficient taxes over higher taxes.”

Most forms of income should be covered and, where possible, loopholes that allowed income to be sheltered from tax should be closed.

With one of the most mobile workforces among developed countries, New Zealand’s tax system must help attract and retain people, businesses and investment.

I of course agree that spending restraint should be used to close the deficit rather than higher taxes. But a more “efficient” tax system which contributes to higher economic growth is very desirable.

Brian Fallow writes:

Here’s a suggestion for the tax working group set up to figure out how to put the tax system on a more durable and efficient footing to consider: scrap the provision exempting mortgage payments and rents from GST.

A brave suggestion.

But remember, any recommendations the working group comes up with are expected to be revenue-neutral, taken as a whole. And the broader the tax base the lower rates can be.

The question I then have is how much extra GST revenue would ending the housing exemption bring in, which would indicate howmuch tax rates in other areas could decrease.

More than 40 per cent of the income tax – much the biggest single source of Government revenue – comes from the top 10 per cent of taxpayers ranked by income, which is dangerous when labour is as mobile as it is and the income gap with Australia and most other developed countries is as large as it is.

It sure is. The top 9% pay 42% of income tax and the top 14% pay 53%.

What is so special about expenditure on housing that warrants exemption from a consumption tax? Other necessities like food, clothing and electricity attract GST.

A fair point.

According to Statistics New Zealand’s household economic survey the average household expends just over $10,000 a year on rents or mortgage payments (including principal).

With nearly 1.6 million households, at the current GST rate and ignoring any second round effects, that would yield about $2 billion a year. That is also about what an increase in the GST rate to 15 per cent would yield and is reportedly enough to fund, for example, a cut in the top income tax rate to 30c in the dollar – an avowed goal of the Government.

Oh I love it when a journalist actually does research and provides the info you need.

It would cost around $800 million to drop the 38c rate to 30c and around $280 million to drop the 33c rate to 30c so GST on housing would easily allow that it seems.

But that is not all. Applying GST to mortgage payments deals with one of the biggest distortions in the current tax system, the problem of “imputed rentals”. Avoiding the need to pay rent is a large part of the return on investing in the roof over your head. An untaxed capital gain is the rest.

My incentive was to stop paying rent. Any capital gain is a bonus.

Compared with a land tax or the McLeod review’s wealth tax, attacking housing through the GST system has the advantage of not relying on what someone from Quotable Value – however professional and incorruptible – estimates a property is worth. How much you pay a bank or landlord is cut-and-dried, not a matter of opinion.

I wonder why Fallow advocates GST on a mortgage only, and why not GST on the sale of a house? Maybe because most sellers are individuals and not GST registered?

The brutal reality is that if politicians set their face against a shift in the tax mix from direct to indirect taxation because they think the short-term distributional effects are too hard to deal with, then they are bequeathing to their successors a tax system that resembles an iceberg drifting slowly northwards. It will just not deliver the revenue required to provide the services people have come to expect from the state.

This is the killer paragraph and one the Government should remember.

Vernon Small writes on tax:

If it does not move, tax it. If it can move, try to tax it less. If Treasury used single syllable words, that is how it might define its view of revenue raising.

That’s a great summary. And if we want to have decent economic growth in future we do want a tax system that drives people and investment offshore.

Put simply, since people can leave or  go elsewhere – and so can investment  dollars – they should be taxed the least.

On the other hand, local consumption – which attracts GST – can by definition only happen here.

Similarly, stuff that is nailed to the ground is relatively immobile, though the investment dollars that build and develop it are slippery.

GST is also a lot harder to avoid than income tax.

Much has been made of ministers “leaving the door open” to a capital gains tax, but that has long been a poisoned chalice. More pertinent is the group’s request for officials to also look at land or property tax.

By coincidence on  the Auckland-Wellington leg of the flight back from Hawaii, I was seated next to a prominent economist and the pros and cons of a land tax was part of the discussion. It is an interesting area to look at (on the proviso that any new tax be matched by reductions in other taxes).

But the economic case for a tax on the unimproved value of land are intriguing – though it would require a big sell to property owners, especially older voters, some farmers and Maori who are asset rich and income poor (with high levels of equity in their properties) and would take the biggest hit from any consequent fall in property prices.

A small land tax could take some of the heat out of the housing bubble, with less need for interest rate hokes in future.

A small tax on land alone could fund a big move in personal tax rates.

A 0.1 per cent tax – $460 million on the $460 billion of privately-held land – would offset the lost revenue from cutting the 38 cent rate to 33 cents.

Starts to get appealing.

It would genuinely broaden the tax base, taxing foreigners who own property in New Zealand, and be likely to push more investment into areas other than property while helping curb a new housing boom.

The inevitable drop in property values would be a two-edged sword. Home ownership would become more affordable, and the extra impost would give owners of bare land an incentive to develop it.

It would arguably be relatively progressive, because wealthier people tend to have more valuable property holdings. And it would provide far more predictable revenue than a capital gains tax.

There is also a ready-made framework in the local-body rating system, to help keep compliance costs down.

I look forward to some of the economist blogs discussing the pros and cons of reducing income tax and instituting a land tax in a fiscally neutral manner. So far the pros seem pretty strong.

Even so, it is hard to make the leap of logic that would see National – the natural home of the landed – slap a new tax on the land beneath their voters’ feet.

It comes back to how seriously you want to close that gap with Australia.

Agenda hve the transcript up of their interview with Mairo Party MP Hone Harawira. First the good parts:

HONE Oh sure, I mean they have, to assume that they can simply sit there and pass an Electoral Finance Act when the whole world was saying this sucks and in fact it’s come back to bite them on the bum shows how disconnected they were with reality to try and ram through legislation at this late stage in the game is arrogant, it suggests that they are really only – and then to stack all of these quangos with their cronies suggests that they see themselves going out and they’re really just trying to maintain as much power as possible, that’s arrogant, that’s nothing to do with coalition building, and in fact the Labour Party has yet to come out clearly and say these are the sorts of things we’d like to do with the Maori Party.

Harawira is of course right with his analysis.

GUYON What about National then are you comfortable, could you actually work with National?

HONE Another difficult one there, but no more difficult than working with Labour as far as we’re concerned. People have this big fear of National and Maori in terms of oh they’d get rid of the Maori seats wouldn’t they, but my response constantly is always the greatest land theft of my generation has actually been the Foreshore and Seabed and that wasn’t stolen by National that was stolen by Labour, would you expect us to jump into bed with them happily.

That is a very different tune to a few years ago.

But some idea of the challenges ahead:

GUYON Let’s talk about a couple of the things that you said you want to do if you have influence over a government, you wrote recently in the Northland Age that you want to remove GST from food and abolish tax for people earning $25,000 and under, how much would that cost?

HONE Actually Guyon I couldn’t care less how much that costs, what I do know is this.

Guyon says Treasury worked the cost out for them:

GUYON Well we did something that you should have done, we asked Treasury how much this would cost, they said it would cost two billion to remove GST from food and three billion more to cut taxes for those earning less than $25,000. You want free health care for kaumatua and kuia too, where is the money coming from?

I have a figure of $2.4 billion for removing GST from food. The no tax on those earning less than $25,000 could be even more than $3 billion. That is the cost of zero tax for everyone who earns $25K or less. But if you read it as being zero tax on the first $25,000 of income (which you would need to do otherwise someone at $25k pays $0 and someone on $26K pays pays says $5k) then the fiscal cost is arouynd $11.4 billion (according to NZIER calculator).

HONE Well let’s say the tax off cigarettes for the last we’ll say five years, that’s five billion dollars. This isn’t very hard eh, this isn’t rocket science, the government is taking a billion dollars a year off tobacco tax, they could certainly spend it in this area.

Hone is correct that tobacco excise tax is around $1 billion a year. But that tax is already budgeted for.

Even if Hone was suggesting we double the excise tax on tobacco, that would bring in an additional billion a year at most. Probably quite a bit less as the amount of tobacco purchased would decline. But even if it was $1 billion that is not even close to the $5 billion to $13 billion cost of what he wants to do.

I am really pleased to see that the Government is not abandoning rationality and succumbing to polls showing people want them to reduce taxes on petrol. Of course people will say they want taxes reduced on almost any item they regularly purchase.

Let us deal with the call for getting rid of the so called tax on a tax or GST on petrol excise.

There may have been a case for this, when the petrol excise went into the consolidated fund but it now basically all goes into the land transport fund. It is a form of user pays. We don’t yet have the technology to charge people for their actual road usage, so the petrol tax is a substitute for it.

Now let us say we did have the technology to charge people directly for their road usage. Well when you get a monthly bill from Transit for your road use, that would of course have GST on it. So why should it be different when you pay for your road use via petrol tax?

Cullen is also right that higher petrol prices are now resulting in more GST revenue for the Government. The extra GST people pay on petrol will be matched by less GST collected in othe areas as people reduce spending to compensate.

Finally the effect of removing GST on the excise tax component of petrol would be a one off gain to consumer that could disappear without people noticing it. A 6c reduction means little when prices are $1 higher than what they used to be. It is tinkering at the margins.

NZPA reports that Winston has announced the following policies for NZ First:

1. No tax on first $5,200 of income
2. GST to reduce to 10%
3. Superannation to increase to 68% of net average wage

Now once fully implemented, what would be the reduction in the surplus:

1. $14.7 billion of income would have no tax, and with a current rate of 15% would be less income of $2.21 billion
2. GST income would drop by $2.38 billion according to Treasury Ready Reckoner
3. Superannuation at 66% of average wage costs $7.29b so taking it to 68% would cost around $0.22b

So Winston is saying the surplus is large enough to be reduced by $4.81 billion a year. I suspect Dr Cullen does not agree.

I suspect Winston’s proposals would be bad for inflation – which is no surprise as Winston does not beleive in low inflation. They also do little for home affordability – in fact make it worse probably.

Cutting tax on spending instead of a tax on earning is more likely to be inflationary.

Giving every person a tax cut of $780 or $15 a week will see most of that spent not saved.

Boosting Superannuation (already the most generous scheme in the world) will see most of it spent not saved, as retired people tend to spend their savings (as they should).

My ideal package would be increase GST to say 20%, but compensate for that by a tax free threshold for say the first $20K of income. Say someone earns $25,000 on the minimum wage. They would pay $3.630 less income tax if first $20,000 is tax free. Now their current after tax income is around $20,320. Let’s say they spent $15,000 on rateable goods and services including GST. Well an extra 7.5% on that is only $1.000 so they are $2,630 better off.

Middle to high income earners would not fare so well, which is why I would also move to a a top tax rate of 30%, eventually reducing to 25%. Not got time to cost that but the extra GST would bring in $7 billion so could do a bit lowering income tax from that.

Of course the GST increase would have one off inflation issues, so timing would be important.

Don Brash chaired the committee that established GST in the 1980s, so is pretty much an expert in this area. He labels any move to remove GST on food as a “seriously stupid thing to do”.

… we gave serious consideration to exempting food from GST at that time, and decided for three reasons not to do so. Those reasons are still absolutely valid today.

First, it is clear that every exemption from GST adds greatly to the compliance costs imposed on businesses collecting the tax. …

Secondly, abolishing GST on food would be a very inefficient way of helping those low-income families who most need help with their food bills in terms of the amount of government revenue foregone.

While it is certainly true that low-income families spend a disproportionately large part of their income on food, most of the money spent on food across the whole community, and therefore most of the revenue which would be lost if GST on food were abolished, is paid by middle and high-income families. If the Government sees a need to help those families most adversely affected by rising food bills, then the best way of doing that is by reducing the income tax levied on low-income families, or adjusting the Working for Families policy to help those on low incomes.

Thirdly, if GST is abolished on food, why not on other “essentials”, like children’s clothing, doctor’s bills, books, and the like? In no time at all, political pressures would build up to exempt other goods and services.

Compliance costs would go through the roof. Revenue from GST would fall, with the result that the GST rate of tax would need to rise on the goods and services still subject to the tax (as has happened in most European countries). Or income tax rates would need to be higher than would otherwise be necessary.

New Zealand has one of the best GST systems in the world. Don’t succumb to short-term pressures to bastardise it.

All excellent arguments. Luckily Labour are not showing signs of panic and are not looking likely to give in to the calls to do so.

There could be few greater acts of economic vandalism than removing GST on food. It is the wrong answer to the problem of increasing food prices.

It is no surprise, as the Herald reports, that people outside supermarkets will sign a petition calling for GST to be removed from food. And if you stood outside medical centres with a petition for no GST on doctor’s fees, people would sign that also.

So why should one not remove GST on food. Here’s a few:

1. It would impose significant compliance costs on retailers. Instead of just dividing their sales by nine, they would have to be able to track every single item sold, and whether or not that is food. If you go to the corner dairy and buy a pie and a newspaper then the pie has no GST on it and the newspaper does. So the poor corner diary would be forced out of business as they can’t afford a supermarket type electronic scanning system where every item sold is tracked.
2. It would start a trend of removing GST on more and more items, and the future political scene will be a series of debates about what GST should be one. If one removes GST on food, then some would argue GST should be removed on gym memberships as a public health initiative. Then GST should be removed books as a literacy initiative. Seriously – there would be almost no end.
3. As Dr Cullen says this is a one-off change that can never be repeated, and any benefits from it could well be swallowed up by further changes in international food prices.
4. It would mean direct taxes would be $2.4 billion higher than they need to be, to compensate for the GST loss.

The AA has called for GST to be removed on the excise portion of petrol, reports the Herald.

AA spokesman Mark Stockdale last night urged the Government to consider removing GST on petrol excise tax, a move it says could cut prices by more than 5c a litre. …

But a statement from Finance Minister Michael Cullen’s office last night said the Government would not change the GST system, “as creating exemptions would add extra compliance costs for businesses which would be passed on to consumers”.

A one-off change to GST would have had no effect against the “global forces” driving petrol prices.

“If the New Zealand Government had changed GST rules along these lines 12 months ago, no one would have even noticed as the benefits would have been wiped out almost immediately by the global rise in oil prices,” the statement said.

I’m with Dr Cullen on this one. First of all I think an absolute strength of GST is that is is near universal for all goods and services. The moment you start varying out a few exemptions, you then end up in an endless litany of moral judgements on what should or should not have GST on it. In Australia you have (or had) GST on your bread if it has sultanas in it, but no GST if no sultanas.

Cullen is also right that piddling about with stuff that will knock 5c a litre off only, when retail prices have almost doubled in the last few years, will not even be noticed.