Thursday, 10 June 2010

The land of 15% GST

John Keys other New Zealand flag

by Vaughan Gunson
Tax Justice campaign coordinator
10 June 2010

On 1st October a long black cloud is going to descend on the lives of grassroots New Zealanders. GST will increase from 12.5% to 15%, making everything more expensive. The new rate puts New Zealand in the top bracket of countries with equivalent taxes on goods and services (see

On the same day, the National government’s other tax changes will come into place, including across-the-board lowering of income tax rates.

For low-to-middle income people the small improvements in take home pay resulting from the tax cuts will be mostly wiped out by the increase in GST on food, electricity, clothing, rates charges, and other items that must be accounted for in weekly budgets. As has been widely reported, it’s the rich and wealthy corporates who get the most out of the tax cuts.

A banquet for the rich

On paper the calculations look like this. Someone earning $15 an hour will be $4.13 better off from the tax changes, while someone earning four times as much - $106,080 annually - will have $43.08 more in their pay packet. Your average CEO earning $265,200 will be richer by a whopping $153.92 a week (Source: Bill Rosenberg, Council of Trade Unions economist and policy director).

These figures will be even more skewed in favour of the rich, because they actually don’t spend all their money on goods and services. They’re able to save and invest a lot of their income. They therefore pay less GST as a proportion of their total income than the rest of us. As a result of National’s tax changes the rich will have more money to save and invest, allowing them to get richer, thus increasing the already terrible wealth divide in New Zealand.

Continuing the same bias, National has also lowered the company tax rate from 30% to 28%. Local and overseas companies operating in New Zealand will be paying one of the lowest tax rates in the world.

Is it fair that the Big Four Australian owned banks, who currently make between them over a billion dollars in profits a year, should pay less tax? The answer from grassroots New Zealanders struggling with mortgage and credit card debt would be no.

And the lower rate of company tax will see wealthy people manipulate their income streams to take advantage of a company tax rate 5% lower than the top income tax rate of 33%.

Wider context tells a worse story

Even by the government’s calculations the tax cuts are a banquet for the rich, while the rest of us get a tiny morsel. But that’s not the full story. It gets worse, because the tax changes made by John Key’s government exist within a wider social and economic context.

Let’s look firstly at inflation. Over time prices for a range of goods and services in a capitalist economy will rise. At times, as a result of various economic forces, prices for particular items rise sharply. This has been the case with food prices in the last few years.

So here’s the rub. National's tax trade-off, which would see workers on low-to-middle incomes paying a few dollars less tax a week, assumes that wages will go up at the same rate as inflation. There’s no guarantee this will happen.

Public sector workers, for example, are struggling to get pay rises that keep up with inflation. And in the wake of the economic recession it’s widely known that many workers in small-to-medium sized businesses have been without pay rises, or worse, have taken pay cuts.

And here’s betting that many bosses are going to take advantage of the cuts to income tax to pressure people into accepting small or nil pay increases this year. That’s the opinion of Unite Union national secretary Matt McCarten, who in his post-Budget column for the NZ Herald (22 May), wrote: “anyone who doesn’t realize that many employers won’t pay their employees a wage increase next year on the grounds that they’ve had a tax cut doesn’t know how life really works.”

If wages remain stagnant relative to inflation, then the tiny improvement in take home pay from the income tax cuts will soon be swallowed up by rising prices.

We’ll be hit from another direction as well. The Key government’s tax cuts for the rich will mean less tax revenue, which means public services like education and health are going to be squeezed. We’re likely to face higher healthcare costs and school fees, just two examples. And we’re going to suffer an eroding quality of services from a range of cash-strapped public services. Early childhood care is already going to get more expensive as a result of funding cuts made by National.

John Key spins a lie

In his statement immediately after the Budget, prime minister John Key claims the tax changes have created “a fairer tax system”. All the evidence points the other away. As web columnist Gordon Campbell says: “Raising the level of GST – which will those on low incomes the hardest – and offering in compensation a package of tax cuts that will reward those on high incomes the most, is a very strange definition of fairness.” (See On the trade-offs in the Budget, 21 May.)

Key makes another false claim in his statement. He describes the rise in GST as a “one-off”. This political spin is simply untrue.

The GST hike is no one-off increase in price, because it’s going to be always there. Every time we buy something, and as prices rise with inflation, we’re always paying the extra amount in tax. The cost of a block of cheese on 1st October and a year later will be 15% more expensive than it would be without GST.

The other way in which Key’s claim that the GST increase is one off is deceiving, is that there’s no guarantee that politicians won’t try to increase GST again in the future, further skewing New Zealand’s tax system in favour of the rich.

Last year John Key got a lot of media attention for his pen drawing of what he thought a new national flag for New Zealand should look like. He drew a silver fern. John Key should have drawn something that better reflected what his government had in store for grassroots New Zealanders.

Tax Justice campaign

Enter the nationwide campaign for tax justice launched by the Alliance Party and Socialist Worker on 22 May. The focus of the campaign is a petition that requests parliament to 1) Remove GST from food; and 2) Tax financial speculation.

Taking GST off food would deliver a tax cut that wouldn’t be unfairly tilted in favour of the rich. A family spending $200 a week on food after 1st October will be paying GST of $26.09. Take the GST off food and you’ve got a tax cut more substantial than most of us are going to get from National’s tax changes. And as prices rise overtime the benefits would be lasting.

To then ensure sufficient government revenue to fund public services we need to tax the financial speculators, the individuals and organisations who between them shift hundreds of millions of dollars around the New Zealand economy everyday.

It probably comes as a surprise to a lot of people that there are currently exemptions to GST, with the main one being financial services.

Inland Revenue lists the following financial services as exempted from GST: dealings with money; certain dealings with securities; provision of credit and loans; provision of life insurance; provision of non-deliverable futures contracts and financial options; the payment and collection of interest, principal and dividends; and issuing securities such as stocks and shares.

Who are biggest consumers of financial services? The big corporates and the rich, of course. While food gets the GST treatment, wheeling and dealing in money goes tax free. This injustice has to be changed.

An effective way to do it would be to introduce a small percentage tax (perhaps 1% or less) on financial transactions. A Financial Transaction Tax (FTT), or Robin Hood Tax as its been called by a popular campaign in Britain, would easily compensate for the loss of government revenue resulting from removing GST from food. The tax burden could then be shifted off us and onto the moneymen whose financial activities are destabilising the world economy and causing untold pain to grassroots people.

Another way we could do it is by introducing a Financial Activities Tax (FAT) on the excess profits of banks and other financial institutions. A “Fat Cat” tax, as it’s been dubbed globally, is being advocated by the NZ Council of Trade Unions in their draft Alternative Economic Strategy document. This tax could work in tandem with a Financial Transactions Tax, also promoted in the CTU’s strategy.

There’s a growing consensus emerging from the union movement and political parties in and outside of parliament that we must shift the tax burden of grassroots people, not make it worse, as the John Key government has done. This growing call for tax justice is encouraging.

To provide a popular spearhead is what we’re attempting to do with the tax justice petition. Early feedback on the street is that the campaign is connecting with heaps of New Zealanders. We want to see that black cloud lifted.

To help in the early stages of the campaign for tax justice contact myself. Email Vaughan Gunson or ph/txt 021-0415 082. 

For more information on the campaign go to

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