Calls to cut GST, but how does it actually work?

Monday, 16 March 2020

Do you understand how our tax system works?

It's the tax you pay every day. But how much do you know about goods and services tax (GST)? And should we really be cutting it to get us through a downturn?

New Zealand has had GST since 1986. It was introduced at a rate of 10 per cent then rose to 12.5 per cent before settling at 15 per cent in 2010. New Zealand made $26.39 billion from GST in the 2017 financial year, about 30 per cent of all tax collected.

Supporters say its greatest asset is its simplicity – very few things are exempt from GST. But others say it could be better targeted and is regressive because lower-income people tend to spend more of their income on GST.

WHAT DO YOU HAVE TO PAY GST ON?

* It's getting harder to be poor, and easier to be rich

* A universal basic income could be a better option for New Zealand … or it might not****

Cameron Bagrie wants GST lowered to boost the economy.

You'll pay GST on almost all goods and services, with very few exemptions.

If a business isn't turning over more than $60,000 a year, it does not have to charge GST on the items or services it sells (but some do).

If you donate things to charity that are then sold, there's no GST applied to the sale. You also don't pay GST on rent, penalty interest or some financial services.

For everything else, there's GST.

IS IT REGRESSIVE?

Politicians have suggested we exempt fruit and vegetables from GST.

Economist Shamubeel Eaqub said GST was regressive 'but it's meant to be. That's the whole point of a flat tax. People on a low income are spending a higher share of their expenditure on tax.'

A paper prepared for the Tax Working Group in 2018 noted that GST looked regressive because it affected households with lower income more than those with higher income.

'The reason for this result is because higher-income households have higher savings rates and, as a result, consume less in the current period as a proportion of their income.

'However, there is debate about whether current income is the best measure to assess progressivity. In particular, a person's income will generally change over their lifetime as they save for retirement. They will generally consume more than their current income while young, less while over their working life and consume more than their current income when retired.'

The New Zealand Initiative chief economist Eric Crampton said progressivity should be evaluated at the level of the tax system, not by looking at GST alone. 'You can get any overall level of progressivity you like by combining a proportional sales tax with a progressive income tax.'

Eaqub said the solution lay in the welfare system. 'The tax system doesn't exist in isolation.'

Even if it was regressive, an efficient tax system could collect money that could then be redistributed to those who needed it through other credits and support.

SHOULD WE HAVE EXEMPTIONS?

Many countries offer sales tax exemptions for things that are seen as necessities rather than luxuries.

New Zealand First and Labour have each campaigned in the past on removing GST from fresh fruit and vegetables in New Zealand.

Researcher Jess Berentson-Shaw said suggestions that New Zealand exempt fresh fruit and vegetables from GST reflected how much people cared about people living in a society where healthy food was easy to access as the 'default option'.

'As opposed to what we have now where the default is not that. So there are lots of policy options, and GST comes up as one. There are pros and cons and most of them rest on arguments of how practical people think it is to implement. In principle whole food, unprocessed foods, fresh fruit and vegetables especially should be exempt from GST, as cost is a major barrier for families who are locked into poverty in terms of accessing food to keep them well.'

But Crampton said New Zealand's system was 'about the best in the world' because it did not have that complication.

'Because it is not riddled with politically-driven exemptions, it can collect a lot of revenue at a relatively low tax rate. Exemptions always beget additional exemptions and draw heavy legal costs in trying to make products fit into an untaxed category.'

Eaqub said people needed to look at what exemptions sought to achieve. Nothing was as useful to struggling families as unconditional cash payments, he said, and help from the welfare system would be more efficient than changes to GST.

In many cases an exemption for fruit and vegetables would only make a price difference of cents.

Tax commentator Terry Baucher said, in countries where there were exemptions, shops and manufacturers pushed up against them.

In the UK, VAT is added to chocolate-covered biscuits but not chocolate-covered cakes, which led to a long dispute about whether Jaffa cakes were cakes or biscuits. 'The boundaries get pushed.'

The GST rate of 15 per cent was not out of line with international standards, he said.

The Tax Working Group said an exemption for food and drink would have a proportionally greater impact on lower-income households but would give more money back to higher-income people.

'Such an exception would benefit a decile one household by $14.58 a week and would benefit a decile 10 household by $53.03 a week.'

SHOULD THE RATE BE LOWERED?

Economist Cameron Bagrie wants GST lowered to 10 per cent as a temporary fix in light of the economic circumstances New Zealand is facing.

Reducing GST would proportionally benefit lower-income households more, which could encourage them to spend more money and stimulate the economy again.

It would give the right message to New Zealanders that they needed to spend, he said.

Eaqub said it was not clear what problem that would fix. 'Right now it's not the price of things that is affecting consumers or business. We are dealing with a cash crunch and confidence loss.

'A cut in GST is not going to fix either … It will be a benefit spread across many, while the businesses at risk right now are concentrated. My preference is to focus on solving the immediate priorities of preserving jobs and averting business failures. This is better achieved by providing things like wage subsidies, paid sick leave and Iines of credit. Wider reform packages should come in May budget, including rejigging taxes if we want to.'