Increase GST Rates, Decrease Income Tax

Should we raise GST by 2.5%

Yes, but only if

  • Benefits are increased accordingly, perhaps 2% more
  • Income tax is decreased accordingly, perhaps 2% less

Why?

  • The poor will have more disposable income
  • The rich will have more disposable income
  • The government will collect more revenue (from tourists and imported goods)
  • A consumption tax helps the environment
  • A consumption tax encourages saving and investment.

 

Why will the poor have more disposable income when income tax is only reduced less than GST increased?

There is no GST on residential rent, therefore, low income earners would actually win with the suggested scenario, unless they pay very low rents in comparison to their income. For example below, a person on $600/week, paying $200 rent per week. They save $12 on income tax, but pay upto $9 more on GST, so in total $3 or more better off under the new scheme.


Old

New

Inc Tax Rate 20.00% 18.00%
GST Rate 12.50% 15.00%
Income 600 600
Inc Tax Amt -120 -108
Rent Fixed -200 -200
Net Income 280 292
GST Spent -35 -43.8
Total Tax Paid -155 -151.8

NB: Tax rates above assumed flat without teirs, merely for illustration that the 2.5% need not equal 2%, because rent or mortgages are likely to cost 20-40% of a low waged weekly income, thus the 2% income tax saving is typically more beneficial for the individual than the 2.5% gst increase.

 

But the rich will have even more disposable income?

Yes, subject to how much the rich consume, they will have more disposable income in this scenerio, and this is the reason why many people don't like the change. But consider the other arguments on this page, then consider that rich people, in dollar terms, earn more, rich people save more, rich people spend more, rich people pay more tax. It's pretty hard to think of a scenerio where rich people don't win...

 

So how will the government collect more tax revenue if rich and poor are paying less tax?

The government reduces the income tax take on people who earn an income in NZ, but charging more GST broadens the tax take to all the products and services consumed by tourists purchasing accommodation and tourist services in NZ, and tourists purchasing products consumed or used within NZ. GST is only deducted on items exported as new.

In addition to the tourists, New Zealanders who consume imported goods will also be contributing more to the tax take. Even though we consider that it is individuals who pay tax on their incomes and purchases, please consider for a moment the government perspective. Lets take the example of buying furniture made in NZ, versus furniture made overseas. Currerntly 12.5% of either purchase is GST. But approximately 25% of the the NZ made goods price is made up of income taxes. This amount was paid in small amounts, throughout the production line, from growing the tree, to processing the wood, to constructing the item, to distributing the item. Where as for the imported good, perhaps 5% was made up of income taxes where the sales person made a 20% markup and paid income tax accordingly. So as the world moves to a more free trade environment, where people export/import more, then the government needs to spread the costs more widely. We can't pay for better schools and universities if everyone is importing goods.

GST is also a very easy tax to collect, and very hard to avoid. A company has a very simple rule set for how it collects and pays GST to the government. From a company perspective, GST is the fairest way to pay tax as each company pays it's fair share. Compare this to income tax, where there are so many ways to avoid paying it.

 

How does a consumption tax help the environment?

Consumption tax increases the cost of all things, must most significantly, the costs of petrol at the pump. A 2.5% price increase will reduce demand ever so slightly, but this helps reduce the overall consumption of petrol and improves our carbon footprint. Consider again also how little income tax the government collects from petrol sales.

A consumption tax lets people choose how much they want to spend on that tax. If they consume less, they pay less tax. If you consume less, then less needs to be produced, less needs to be packaged, less needs to be tipped in the land fill.

If you grow your own food, you pay less tax.

 

How does a consumption tax encourage saving?

Because apart from your basic needs, you can choose how much of your weekly income you want to spend on GSTable items. Everytime you choose to pay off debt, or save, or invest, then are paying less tax, and making yourself more financially secure.

 

In summary

At the end of the day, it doesn't matter if you sit on the left or right side of the fence, GST increases are good very everyone, so long as the changes are mostly tax neutral for the average working person and beneficiaries are compensated. We should avoid the silly arguments in the media that only consider a GST increase alone. Tax changes should be considered as a package.

 

Posted: Wednesday 24 February 2010

Comments

  • I like what you said about considering the changes in tax as a package, however its easy to see that your perception of the package is rather really quite vacuous at best. Why? you ask; Answer: you haven't considerd or even botherd to look at the effect on the credit creation process of the banking industry in NZ. Less money is being lent out as more people save, this in turn creates a huge loss in production in ther economy, we lose a lot of businesses and then this means a lack of competition and prises then will rise in the long term. Everyone is actually worse of. I suggest you take a class in economics that way your opinion might actually be valid rahter than missinforming the public
    Posted: 2010-10-05 13:07 by Econ Student    
  • zero tax on income up to $70k Company tax/trustss flat 20% Gst increase to 20 % beneficiery gets tax back on their benefit ie $10k = $1450 increae.. gst increase is only $850
    Posted: 2010-05-06 18:48    

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