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GST Be Gone!

September 30, 2010 Leave a comment Go to comments

An interesting political debate has recently erupted here in New Zealand. It involves our goods and services tax, GST, and whether it should be universal or not. The tax was originally conceived by the 1984 Labour government which revolutionised New Zealand economically – and not necessarily for the better. That government was very ideologically driven and the tax (originally 10%) was to be applied to everything. And it has stayed that way ever since (except, inevitably it has increased to 12.5% and soon will be 15%).

The new policy from the current Labour opposition is to make certain healthy food free of GST to encourage people to eat more healthily and reduce obesity and other medical problems associated with poor diet.

Naturally the current conservative government and its ideological partner, Act, are totally against the idea, although one partner in that government, the Maori Party – was the group which first suggested it.

There are several questions which have arisen over the issue. The first is: should GST be kept universal simply because that is a neater and simpler idea. Second is: are there practical expenses relating to having some goods free of GST. Third is: will there be ridiculous situations where rules about which foods are GST free and which aren’t make little sense. Fourth is: will decreasing the cost of healthy food make people more likely to eat it. And finally: is this just a political game rather than a serious proposal.

So let’s look at these issues. First, having GST universal is neater and simpler so, if all else was equal, that would be a preferred option. But other tax rules are hideously complicated because they have been designed to achieve certain outcomes. Why not use a relatively simple fine-tuning of GST in the same way?

What about the expenses relating to implementing the scheme? There would be some involved for sure but they are unlikely to be much worse than what is involved with changing the current rate from 12.5 to 15 and the same type of scheme works fine in Australia, so again it seems that the potential positives outweigh the negatives. Of course the retailers don’t want the bother – it would be surprising if they did – but they have a very narrow focus on the subject.

So moving on, what about inconsistent application of the rules? Limiting the zero rate to fresh fruit and vegetables is arbitrary in some ways. Critics have pointed out that imported fresh fruit will be covered but local frozen vegetables won’t (and frozen veges are just a nutritious as fresh) so that does seme inconsistent, but I think it’s a good start and might be extended to other foods in the future. And, as I said before, there are plenty of other inconsistent and arbitrary laws. If we let that act as an absolute rule against anything we would have no rules or regulations at all!

But a more critical question might be this: will it work anyway? Will healthy foods being cheaper encourage people to buy them? According to Labour, a university study showed that removal of the current 12.5% tax would result in an 11% rise in consumption. According to a government minister a tax working group found it would have no effect. Personally I would have more confidence in a university study that the opinions of a tax working group but obviously this point is disputed.

Finally, is this just a political game anyway which Labour is using to boost their flagging popularity? Well maybe it is, because all political decisions in a democracy must be partly motivated by this requirement. But even if it is, does that mean it’s a bad idea? I don’t think so. I think the idea should be examined on its inherent merits, not the possible political reasons behind its origins.

The current government has done nothing for most New Zealanders. They have cut income tax but increased GST. Someone on the minimum wage will receive $3 per week extra through the tax cuts (which will be gone several times over after other increases hit) but the minister of finance will receive $300 more. Is that fair? Of course not, but that’s what National governments are all about: the old reverse Robin Hood maneuver (giving to the rich while taking from the poor!)

There are some negative aspects to having zero GST on some foods but I think the positives outweigh them. First, it will reduce the cost of living for the poorest part of the population, and second it will improve the overall health and that will benefit everyone. The right wing ideologs should use a little bit of common sense for a change and implement this policy themselves. That way we will get a small amount of much needed fairness in our tax system.

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