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October 4, 2010 | by  | in Opinion |
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Taxation and the food pyramid

Back in May, National revealed its tax switch in the 2010 Budget, but with the GST increase having been implemented last week, the story found itself back on the agenda, re-energising those on both sides of the debate. There continues to be little consensus on how the tax switch will affect people’s purchasing power and consumer habits. National has asserted that, on average, people will be slightly better off, and Labour says the opposite—that once inflation is accounted for, people will be significantly worse off.

This is in part because Labour is predicting that the GST increase will boost inflation more than National have accounted for, especially if retailers raise their prices by more than the 2.5 per cent increase. Q+A’s Guyon Espiner used the example of one cleaning company that is increasing its prices from $75 to $80, representing a significantly higher 7 per cent increase.

The key problem is that GST is a regressive tax—that is, a tax that takes a smaller percentage of income as income rises. Or put another way, a tax that disproportionately hits the poor. Simply put, this is because the poor have to spend their whole income to survive. Thus, every dollar they earn, they spend and get hit with an extra 2.5 per cent of tax, and any extra inflation associated with the increase. Those at the other end of the spectrum, on the other hand, can cut back on luxuries and can save. This means that they have relative control over how much tax they pay, by controlling how much they consume, and are therefore the people who actually reap any tangible benefits of an income tax cut.

There are potential benefits for society that can’t be ignored though. The International Monetary Fund (IMF), has simulated this tax switch, and has concluded that higher savings rates, higher investment, higher employment growth and higher real wage growth are a plausible result. Professor Robert Buckle, chair of the Tax Working Group outlined this in an interview with Salient earlier this year: “Those who are unemployed will benefit by stronger employment growth, (and) those on salary and wages will benefit from higher labour productivity and real wage growth.” However, in the very words of Finance Minister, Bill English, “this is about some short-term pain and long-term gain.”

So, the tax has been implemented, and for better or for worse, New Zealanders are going to have to adjust. Labour has floored another option though. While it was discussed back in May, when the tax switch was revealed, Labour has now committed to a promise that, if elected, they will completely remove GST from fresh fruit and vegetables. Despite all the hoopla surrounding the logistics of this, it is a relatively simple proposal with the key word being ‘fresh’, and the system has been proven to work in Australia.

The benefits are once again heavily contested, with Labour leader Phil Goff asserting that “a typical family of two adults, an adolescent and a five-year-old spends at least $42 a week on fruit and vegetables. They will save about $6 a week, or $300-$400 a year.” English on the other hand, refutes this, claiming that the proposal would only save the average New Zealander $1 a week, and would be much lower for lower income families.

Still, New Zealand’s standing in the world’s obesity rankings surely makes this an avenue worth pursuing. The Economist magazine recently revealed that New Zealand is one of the most obese nations in the world, and when one takes into account the health costs in combating this epidemic, the tax lost from GST on fruit and vegetables is of little consequence.

The sheer amount of times the National party has referred to the $250 million New Zealand is borrowing each week to stay “afloat”, might lead one to assume that they were, in fact, an opposition party. Regardless of the effects of the recession, doesn’t that figure at least somewhat reflect their performance in government? Yet English has pulled it out once again to assert that Labour’s proposed policy would further increase the public debt. However, if the incentives play out the way Labour foresees, the long-term benefits of healthier diets could quite conceivably see the drop in tax revenue offset by a health budget that is less strained in fighting obesity.

Further to this, there were a number of options National left off the table in their tax switch that would more than make up for tax-free fruit and veg. Options like a capital gains tax, which was recommended by the Tax Working Group, could offset the loss of GST, and would simultaneously see a fairer tax system with the regressive GST being offset by a capital gains tax aimed at the wealthy.

According to the latest Colmar Brunton/One News poll, the National party currently enjoys 49 per cent support, while Labour are polling significantly less at 35 per cent. With a Labour victory in 2011 hard for even the party’s most optimistic supporters to rely on, New Zealand might be waiting a long time for such a policy to see any real debate.

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  1. Richard says:

    This kind of argument annoys me:

    “The Economist magazine recently revealed that New Zealand is one of the most obese nations in the world, and when one takes into account the health costs in combating this epidemic, the tax lost from GST on fruit and vegetables is of little consequence.”

    There is nothing about changes to tax law exemptions that are simple. The IRD here is remarkably efficient in comparison with most places, and even so tax compliance is sufficiently hard that nearly every business uses professional accountants to do their year end tax.

    GST is one of the few good things there are about tax. It is simple and straightforward to calculate and easy to budget for. Most small businesses are easily capable of handling their own GST.

    While the regressive nature of GST as it stands is true, this is simply because it is implemented in a regressive form – see concepts like the FairTax prebate to see how GST can be made progressive.

    In the end, keeping GST simple is valuable. Simplicity and transparency in taxation reduces pointless paperwork for people out there creating products, services and jobs. While the idea that removing “one simple thing” is tempting, the slippery slope law applies and lobbyists will see an opportunity to increase the range and types of products included. Over time this will erode efficiency.

    Worse, the gain is simply not worth it. Government mechanisms for manipulating price on products for health grounds already exist – Tobacco and Alcohol for example. These mechanisms could be used similarly to apply to fresh food, and the budget for doing so could be made equivalent to 15% of the purchase price if desired.

    Even better, the same money could be spent on interventions that are actually likely to succeed, rather than simply playing games with the price and hoping that it improves population obesity issues. These issues are dominated by factors other than cost: culture, advertising, habits and tastes ingrained since childhood, stress, lack of exercise, medication, lack of time, motivation or knowledge to prepare food from ingredients, etc.

    In summary: don’t mess with GST, it’s not broken. Look elsewhere.

  2. Paul Smith says:

    I’m not even sure if GST is regressive in a relevant sense. It is true that the rich can avoid paying it by saving, but then they can’t use that money. If they do use it (through spending it) then they pay GST. So the only way the rich can avoid GST is to never ever spend their money, and if that’s the case then they aren’t even benefited by having it.

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