Labour's past and present ally

These three all agree. GST off food - no way!

None other than Don Brash (former Reserve Bank governor and leader of the National Party) has rushed to the Labour government's defence over their refusal to remove GST off food.

But will Don do Labour more harm than good? In his opinion piece in the NZ Herald he reveals how he worked with the Labour government of the day to implement this flat tax.

He claims that New Zealand has one of the best GST schemes in the world. The best for who? This clumsy champion of the rich and privileged gives us the answer by pointing out how businesses don't actually pay GST, only the end consumer.

What he’s worried about, of course, is that removing GST off food may undermine this major policy plank of neo-liberalism and lead to calls for GST to be scrapped completely. He may be right on that one.

Don Brash: Abolish GST on food? No way

30 April 2008

Abolishing GST on food would be a seriously stupid thing to do. Yes, I know, I was the chairman of the committee which designed New Zealand's GST back in the mid-80s, and so may be accused of being biased.

But 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.

People make the mistake of assuming that GST is like a sales tax, only levied on goods and services when they are finally sold to consumers. If this were the case, then it might be feasible to exempt some goods from the tax, though even in that situation there would be an increase in compliance costs.

But GST is not like a sales tax. Rather, it is a tax levied every time a product or service changes hands, and it is designed that way to reduce tax avoidance.

When a retailer buys goods from a wholesaler to on-sell to his final customers, he pays tax on those goods; when the wholesaler buys goods from the manufacturer, he pays tax on those goods; when the manufacturer buys goods from the farmer, or miner, or power company, he pays tax on those goods - and each one of them then claims that tax back as an "input credit" because GST is intended to be a tax only on final consumption spending. Claiming back the "input credit" is a very simple process when all the retailers' goods are liable to GST. He simply adds up the cost of all goods and services purchased, divides the total by nine to calculate the GST paid (at 12.5 per cent), and deducts that from the amount due the IRD for GST collected on sales.

The same process applies to every stage of the production process. But if some of the goods the retailer sells are exempt from GST that simple calculation goes out the window.

He has to start working out how much of his power bill is attributable to the sale of the exempt goods (because no input credit is available on that part of the power bill). And how much of his shop rental is attributable to the sale of the exempt goods; how much of his office stationery costs are attributable to the sale of the exempt goods; and so on. The time and cost involved in filing a GST return for everybody involved in providing the GST-exempt goods increases exponentially.

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.