Source: Radio New Zealand
Happy birthday, GST. You probably pay it every day – 70c or so on a bottle of milk, $150 on an airfare.
But did you know the tax, which is applied to almost everything you buy, has turned 40?
This December marks 40 years since the law changed to allow Goods and Services Tax (GST) to be introduced in New Zealand. It took effect the following October.
Alan Bullot, a GST expert at Deloitte, said there was a lot to celebrate about the tax.
“New Zealand certainly wasn’t a trailblazer, but the GST legislation we brought in in New Zealand is seen universally as almost being best practice from a tax design point of view.
“It has a broad base that has very few exceptions and it just gets on with the business of what the tax is supposed to do, which is collect some money for the government to go off and do what the government needs to.”
He said when GST was first introduced in New Zealand, about 30 or 40 countries had a similar tax.
“Now, it’s the vast majority of countries other than America that have a national GST or VAT regime.
“Governments just love GST or VATs because they can forecast its collection a lot better because it functions over the whole economy. It’s a test of what the economy is doing.
“If you think about company tax, if I make a profit Inland Revenue can say ‘you made a $100 profit in the company and 28c is coming in’. That’s great, but if I’ve made a loss for two or three years, even if I made a profit of $100 this year the government might not get anything because I’ve got to go through my loss that’s in there.
“It’s much harder for the government to forecast exactly how much money will be coming in from income tax.”
More change coming?
Over the years, the rate has lifted from 10 percent to 12.5 percent to the 15 percent we now pay.
Bullot said it had also had to keep up with technology.
GST now applied to almost all international purchases imported into New Zealand.
“If you think about 1985, you might have heard of a CD. You may have seen a CD, that would be the pinnacle of music. You would have had a Walkman, you certainly weren’t able to download endless amounts of songs from overseas, you couldn’t download any movies.
“If you wanted to order anything online you couldn’t. If you wanted to order something from overseas that would have been pretty difficult… it was just so different in terms of the way that things would operate.
“The fundamentals of GST haven’t changed, but it has had to keep adapting to the economy it operates in.”
Every so often, there are calls for GST to be taken off things like public transport or food. Bullot said that was possible, but there would be drawbacks.
“Every time you do that, you add a bit of additional complications for businesses that are having to deal with it. And more to the point, if you’re not collecting it here, where are you collecting it?”
Bullot said Australia had more exemptions than New Zealand, but had been discussing whether to increase its coverage.
Treasury recently calculated that if nothing else were to change, GST might have to increase to 32 percent to cover the cost of an ageing population.
Bullot said another option would be not to have income tax but to charge a much higher rate of GST.
“Would people accept the doubling of GST?”
He said he could not see a future where GST was not a very significant part of the tax take.
“I think that it will stay that way. I think it is unlikely for it to increase from this rate from a practical political perspective. I think it is much more a case of we just need to keep making sure that it’s fit for purpose.”
He said Inland Revenue should change the rules if GST was not working as intended over time.
“I think Inland Revenue needs to be able to use that power perhaps a little more frequently sometimes rather than us going into sort of long technical debates… Sometimes we should just say what’s best for ‘New Zealand Inc’ and let’s move on.”
Roger Douglas, finance minister at the time GST was introduced. TVNZ
He said it was notable the level of GST tax debt had also increased recently and the government would need to continue to take action on it.
“I think it really needs to be a focus, because GST isn’t working if we’re getting information on returns but no cash. GST’s job is to collect large amounts of money in a consistent manner for the government, for the government to do the government’s programmes with the least amount of economic damage to the country in terms of compliance costs, uncertainty…
“Businesses can work around odd rules as long as they can see that they’re going to be there and they’re not going to flip and change.”
Is the tax regressive?
A major criticism of GST is that it is regressive because lower-earning households tend to spend more of their money, and spend more of it on things that attract GST.
Bullot said when the tax was introduced, benefits were increased to help cover the cost. He said the tax might not be as regressive as some people worried.
“When you look at what people in the lower incomes are spending their money on, a lot of it is residential rent, which is one of the big aspects that doesn’t have GST charged on it.
“Whereas if you are going out and you’re lucky enough to be in the financial position to buy a new house, for instance, when you’re buying that new house off the developer and say that was $500,000, you’re paying them $75,000 GST on top of that.”
Financial services and rent were some of the few things exempt from GST.
Could we introduce a tax like this now?
New taxes tend to be politically difficult. Bullot said the environment was different in 1985.
“It was coming in as part of a range of things… the floating of the New Zealand dollar, deregulation, we had a wage price freeze not many years before that, we’d had carless days and the GST coming through was just another one of those things.
“There was some pushback ,but not massive amounts, and there were significant cuts in the top rate of income tax.”
Infometrics chief forecaster Gareth Kiernan. RNZ / Rebekah Parsons-King
Good sales pitch
Infometrics chief forecaster Gareth Kiernan said it helped that the tax replaced other complicated sales taxes, and happened alongside income tax cuts.
He said income tax was almost 75 percent of the tax take in March 1986, and that had dropped to 69 percent in June this year as the share of GST lifted to 24.4 percent.
The top income tax rate dropped from 66 percent two years later.
“The pre-MMP political environment was such that large changes could be made relatively easily, whereas political policy now is often very much about compromise between the various parties in the governing coalition.
“Interestingly, the yearbook also notes reviews in 1967 and 1982, both of which recommended greater reliance on indirect taxes, with mention also being made of the need to reform existing indirect taxes – so it wasn’t like GST was something that came completely out of the blue.
“I can’t comment on the sales job that Labour did around introducing GST in the 1980s, but it must have been reasonably good, given that the party was re-elected in 1987.
“Perhaps an analogy can be drawn with the current (longstanding) debate about capital gains tax. From an economist’s point of view, a move to tax profits on property more fully is a positive, because it means that person who has lots of money and assets would then be taxed more fully than currently, compared to the low-asset wage-earner who doesn’t have the ability to tap into these tax-free gains.
“It seems to me that the problem is in the sales pitch, which for the last six years has been ‘here’s a new tax’, rather than ‘this tax change will enable us to reduce income tax for the 80 percent of the population who aren’t property investors’.
“But even with its recent announcement, Labour was finding new ways to spend money from the additional tax, rather than just looking to make the tax system fairer.”
Economist Shamubeel Eaqub said he thought it would be possible for a government to do something similar with a tax on capital.
“It will happen with the political calculus of bankrupting our grandchildren forces us to.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand