This article was published on 13 February 2010. Some information may be out of date.

Wanted: Clear thinking on GST

A lot of nonsense has been spoken about GST since John Key more or less said the government will increase that tax — probably to 15 per cent — and use the money to cut income tax rates.

Such a change would encourage people to save more, to avoid paying tax on their money — at least in the meantime. In the long run, of course, all money is spent, either by the owner or their heirs. But delaying tax is appealing, so our saving rate is likely to increase, which can’t do any harm to the savers or the economy.

There are, though, people who feel the option to save is not open to them. They spend all they earn, and often also “dissave” — spending past savings or running up debt.

Because of this, some commentators, talkback “experts” and people in the street are saying that an increase in GST is an attack on people on low incomes. But this issue isn’t as clear-cut as it seems.

Firstly, government figures show lower income people tend to put a bigger proportion of their total spending into rent or house payments — which are not subject to GST.

Secondly, and most importantly, John Key made it plain that lower income people would be compensated promptly via cuts in income tax rates and increases in benefits, NZ Super and other payments. Some people are sceptical about the extent of this, but because it’s a “hot” topic I expect the government will take care to do it fairly. They will be under scrutiny.

In any case — and this is another important point — the vast majority of people on very low incomes don’t stay that way. Over their lifetimes, many New Zealanders have a turn at being poor and a turn at being better off.

According to the government, about half of the 1.4 million people with taxable income below $18,000 are: young people just starting work; students; the self-employed (many of whom retain profits in a company or offset losses against other income, so they are not really badly off); recipients of Working for Families (thousands of whom own rental properties, and some of whom are millionaires, according to Tax Working Group member John Shewan); or second earners in families on incomes of more than $50,000.

Of the remainder, many are going through a bad patch, but things will come right for them later.

There’s another issue about GST, too, where there’s been some unclear thinking. That’s the suggestion that food should be exempt from the tax, to help out lower income people. There are several arguments against this:

  • It would make GST much more expensive to administer, and who would end up paying for that? Taxpayers.
  • Do we want to encourage someone to buy fatty takeaways rather than running shoes?
  • If we exclude takeaways, do we include cooked chooks bought at supermarkets? If not, do we include raw chooks? Whenever consumptions taxes include exemptions like this, there are always boundary disputes.
  • This would be a blunt instrument for looking after those on lower incomes anyway. The proportion of their income spent on food is only slightly higher than for those on high incomes, government research shows.
  • Finally, if food were exempt, total GST revenue would fall even if the rate were increased to 15 per cent — so there would be no money available for income tax cuts.

I’m not saying “the poor be damned”. We must look after those not in a position to look after themselves. I’m just saying that keeping GST at 12.5 per cent or exempting food are not good ways to do that.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.