Monday, 8 September 2014

A Policy A Day: Abolish GST

In the lead-up to the election, we are going to examine one policy per (working) day. We've selected policies to be as balanced as possible across a range of policy areas and across the political parties. The idea is to explain the background, analyse the policy to investigate the pros and cons, and give a verdict on the policy at the end. Inevitably, some opinion will make its way in and we make no apology for that - after all, we're voters too. Also, I say 'we' because this series will feature some guest posts from other young people, to share their thoughts and ideas as well. A list of all the articles is available hereEnjoy!

Today we look at the MANA Movement's policy of abolishing GST. They expect to fund this move from introducing a Hone Heke (or Robin Hood) Financial Transactions Tax, but we won't focus on that part of the equation for now. The statement from the MANA Movement's Economic Justice Policy is:
- Abolish GST which hits low-income earners hardest

Background
Goods and Services Tax (GST) is a tax that is paid on most things in New Zealand. It's a consumption tax because we pay it for consuming things. It was introduced back in 1986 (by a Labour government) at 10%. Since then, it has risen to 15% since 2010, which makes it a significant determinant in the pricing of goods and services in NZ. It was originally introduced to offset the impact of reducing personal income tax rates (which were as high as 57% at the time), and subsequent increases of GST have usually been timed with further decreases in personal income tax. There are only a few items that are exempt from GST - rents collected from residential rental properties, fine metals (gold, silver, platinum), donated goods sold by non-profit bodies (e.g. opshops), financial services, and certain imports and exports.

GST is collected at the point of sale, and then paid to IRD. There are tricky rules surrounding GST for businesses, exporters, and non-profits (with varying allowances to claim back GST or get refunds), but for the average person they don't have to worry about that. Essentially, everything is 15% more expensive than it could be, and that extra 15% goes to the government. Thankfully, that is a reasonably simple system to understand; in other countries it can get very confusing very quickly - for example in the US, every state has different sales taxes (+ the occasional municipal or city sales tax), and sellers generally quote prices without the sales tax, forcing the buyer to figure out the sales tax themselves.

Analysis of the Policy
The main benefit of GST is that it allows the government to decrease income taxes while maintaining the same level of expenditure (or provision of services). GST is supposed to be more attractive than income taxes because it taxes a wider pool of individuals that benefit from government-funded services and infrastructure like police, roading, and education even if they don't have an income (in NZ, so this includes tourists). Lowering the income taxes increases individuals' disposable income, giving them more choice to spend the money on what they choose, even if everything is a little bit more expensive. It taxes people for spending rather than earning. It is intended to complement our progressive taxation system, where individuals who earn more money are proportionally taxed more than those who earn less. By taxing everyone based on their consumption as well, it helps spreads the burden out so that more people contribute to government revenue. It additionally rewards savings (which New Zealanders are notoriously bad at) because those people get to keep more of their money from lower income taxes if they don't spend it.

One of the strongest criticisms of GST is that while it intends to be "fair" to everyone because it is proportional to consumption, in practice it is a regressive tax that unfairly impacts lower-income individuals and families. This is because even though actual consumption increases as income increases, the proportion of income that is used in consumption decreases. To illustrate this, we can imagine Household A and Household B with some made-up numbers. Household A earns $40,000 a year, while Household B earns $200,000 a year. Household A has barely enough money to pay the bills and put food on the table, so their annual consumption ends up being roughly $35,000 a year. Household B has a bit more money to splash around with, and they can send their children to private schools and buy a nice car, so their annual consumption could be $120,000 a year. While the actual consumption of Household B is $85,000 more than Household A, as a proportion of their annual income the consumption of Household B is 60%, but for Household A it is 87.5%. Even though in reality Household B is paying more GST in actual dollars, for Household A it means that they are less able to afford the basic necessities that they need, and the GST impacts them more. For Household B, the 15% does not have a big impact on the household's ability to survive, while for Household A it could (theoretically) be the difference between paying the electricity bill or buying groceries. 

In fact, if we take away the hypothetical numbers, John Minto says that "The poor pay about 13 per cent of their income on GST, the wealthy pay 5 percent of their income on GST" [citation needed]. Even though increases in GST tend to be accompanied with decreases in income tax (which increases the amount of money that individuals have for consumption), these moves disproportionately benefit higher-income individuals because they get more money from their income but are not as severely impacted by the increase in GST. It leads to increasing income inequality and makes it harder for lower income individuals and households to break out of the poverty cycle. Is this fair? Is this the New Zealand that we want to live in?

However, with the existing income tax structure, GST plays a vital role in bringing in government revenue. After refunds, the GST take for the year ending in June 2013 was $15.2 billion, or 24% of all revenue. This is a very big amount/proportion, and if GST were to be entirely abolished then it would leave a very big hole in the government's books. The MANA Movement proposes to create an alternative tax on financial transactions to meet the shortfall, but the details have not been fleshed out properly and insufficient analysis has been done on the behavioural changes and impacts it would have on our economic competitiveness internationally. The fact that one policy is contingent on the other means that everything becomes a lot riskier, and I'm not convinced that a financial transactions tax would be A) received particularly well in the local and international business community, B) immune to the types of tax evasion and loopholes that are already manipulated by higher-income individuals and companies, or C) allow NZ to continue competing in the international markets without significant detriment. Abolishing GST is a very dangerous move if not accompanied with an increase in income taxes to meet the shortfall, and relying on a very radical (large) change just seems like a bad idea for New Zealand. What hurts the whole country will also hurt the lower-income segments of our society.

Some other parties have had some in-the-middle approaches that emulate European models where food, as a basic necessity, is "zero-rated", meaning that it does not have any GST (or Value-Added Tax (VAT) as it is called in Europe). In 2011, Hone Harawira said "Labour's GST cosmetic elimination off fresh veges and fruit says everything about their current state of mind - timid and uninspiring." This year, Labour dropped the policy altogether, leaving MANA as one of the only parties with a policy like this (for the sake of completeness, the Alliance party also supports this move, but they're hardly relevant these days (so does NZ First)). At the other end of the scale, this idea to abolish income taxes and replace it entirely with a higher GST was debated and reasonably soundly rejected at the Internet Party's policy incubator.

Verdict: GST may contribute to income inequality, but abolishing it is probably not the right move. GST is now such a critical part of the New Zealand tax system that suddenly removing it would lead to undesirable consequences. However, I think I am personally more in favour of a compromise, such as removing GST from fruit and vegetables, which provides a positive benefit for the right target groups. The loss in revenue would have to be covered somehow, but it is far easier than covering for the total abolishment of GST.

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