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Savings up + GST collections down = GST rate up?

Kiwi households are saving more than at any time since 1995 according to the latest national accounts.

The flip side is with low inflation and lower consumption the Government’s GST take is down.

I’m not an economist but my understanding is even though households may be saving more, national savings overall aren’t necessarily any better off because of the push/pull effect of private savings and tax collections.

This was something the Savings Working Group considered in their report Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity: Final Report to the Minister of Finance published in February 2011.

As a countermeasure the Savings Working Group recommended an increase in the GST rate from 15% to 17.5% over other tax changes because GST is “less distorting than income tax on the saving decision”.

The political challenge with increasing GST to 17.5% is that our rate is already amongst the highest in the world when it comes to basic food, education, healthcare and utilities. Outside of the benefit system there doesn’t seem to be a simple mechanism to compensate low-income households for an increase in GST and this must surely put real pressure on our single rate broad-based regime.


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Election 2014 – your GST vote

This weekend’s New Zealand general election offers some choice in GST policy.

So, if you’re a GST geek like me you might be swayed by what the different parties intend doing about GST.

Here’s what I’ve been able to find out about some of the main parties’ GST policies:

Labour Party – no change to base or rates. Committed to simplifying compliance and supports “one hour, one return, one payment” principle for monthly GST and income tax compliance.

Green Party – no change to base or rates. Propose extra ecological taxes but will leave detail to a commission. Also, propose financial transaction tax. [comment – subject to seeing the detail, the existing GST system could be one way of achieving these new tax imposts].

National Party – no change to base or rates.

Mana Party – propose abolition of GST and replace with “Hone Heke Tax” on financial speculation.

Maori Party – will revisit removing GST on healthy food (fruit and veges) and also increasing GST on sugary drinks.

I couldn’t find any detail from other parties. If anyone knows any more feel free to comment.

Cheers and happy voting on Saturday Kiwis


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Good news for Australian tiramisu lovers

The Australian Tax Office publishes a detailed food list which, over 88 pages, gives their opinion on the GST status of everything from abalone to zabaglione.

Tiramisu was on the list as subject to GST. However, on 27 August the Tax Office removed tiramisu from the list.

This means from now on not all tiramisu products are subject to GST in Australia. Some are “GST free”.

This is fantastic news for tiramisu lovers and no doubt there’ll now be something resembling a gold rush on GST free tiramisu products!

Sometimes I wish we had GST exemptions for food in New Zealand, even if just to give IRD workers the chance to think about fascinating questions such as whether tiramisu is subject to GST.

Our GST system seems so mundane by comparison, but, honestly, would we really want it any other way?


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Fat taxes have support

A NZ Herald/Digi Polls finds support for fat taxes:

To have any real behavioural impact a fat tax needs to be at least 20%:


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NZ First GST policy

Removing GST from food is back on the political agenda thanks to Winston Peters’ announcement yesterday.

Recent calls for GST free food have focussed on the health aspects. This doesn’t seem to be a prime motivator for NZ First but it does appear the policy would not extend to removing GST from fizzy drinks and some other sugary foods.

NZ First’s stated objective is to lower the cost of food for low income households.

Voters need more information on this. Overseas research I’ve seen suggests removing tax on food has an immediate downward impact on prices but it is shortlived. Within several months prices tend to move back close to the levels they were at when the tax applied.

Also, those who benefit most from removing GST on food are those who spend the most, a bigger subsidy for high income households.

Then there are the compliance complexities of different GST rates for different types of food. The overall costs to government (taxpayers) of collecting GST will go up. GST will become less efficient and tax advisors will be busier.

Overall I think there are probably more effective ways to provide relief for low income households but it’s a good debate to have given New Zealand’s comparatively high GST rate on food.


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Fat taxes

“Unhealthy diets are now a greater threat to global health than tobacco” – said UN Investigator Professor Olivier de Schutter to the World Health Organisation annual summit on 19 May.

Professor De Schutter’s suggested solution is a global pact to tackle obesity similar to the UN convention on tobacco control in 2005. The accord should include taxes on unhealthy products, regulation of food high in saturated fats, salt and sugar and restricting junk food advertising.

This debate has been around for a while and doesn’t look like going away any time soon, particularly in NZ during an election year.

Similar calls are made for environmental taxes which are also about discouraging certain consumption or behaviour.

In New Zealand recently the debate on food taxes culminated in a Bill before Parliament from the Maori Party to remove GST on fresh fruit and vegetables, i.e. “subsidising” healthy foods as opposed to taxing the unhealthy, admittedly because a focus of the policy behind the Bill was the cost of food. The Bill did not get Parliament’s support.

It seems to me the “subsidy” versus “penalty” debate is now pretty settled. Plenty of studies have shown subsidising healthy foods benefit most those who already consume the greater proportions of healthy food (which we are told are higher income households). So, those who least need to change their eating behaviour receive the greatest subsidies.

Another issue with healthy food subsidies is they aren’t as effective in changing consumer behaviour. The money saved by high consumers of unhealthy foods tends to be spent on more unhealthy food or other stuff rather than more healthy food, the opposite of what is sought. In part this is because the amounts they save from the subsidy are too small to make a big difference.

Increasing taxes on unhealthy products can be effective. Tobacco is a good example. Various trials with taxes on sugary drinks in the US and Ireland and a 2013 study in Norway indicate small tax increases are hardly worth doing. Real behavioural change comes when the tax is at least 20%.

The big problem with extra taxes on food is their regressive impact, i.e low income households end up paying a higher proportion of their income on the tax than better off households. Supporters of these taxes will argue this is exactly why they can be so effective (i.e. the tobacco example).

Reportedly lower income households are more highly represented in poor health statistics. One reason we’re told is that unhealthy food per calorie is cheaper than healthy alternatives and, therefore, low income households tend to consume proportionately more unhealthy food resulting in poorer health outcomes. Thus, supporters of fat taxes would argue they may be “regressive” but their outcomes are “progressive”.

If countries follow Professor De Schutter’s advice and those arguing for fat taxes New Zealand could well find itself grappling with how best to tax unhealthy food.

The tobacco model would suggest some sort of excise tax.

Personally I think GST has to be the preferred mechanism for implementing this sort of policy. Sure it flies in the face of our “pure” GST system, of which we have every right to be very proud. It’s the most efficient VAT/GST in the world. However, it just makes sense to me. Why add another tax to businesses and the IRD when they already have a collection system that they’re quite used to?

Yes, there’s complexity with having a higher GST rate for certain products but that’s going to arise whatever mechanism is used for any fat tax. The legislation is going to have to be very clear on what’s in and what isn’t. As long as that part is got right the added complexity for most businesses will be no more than businesses all over the world already deal with.

The problems with differential rates in VAT/GST systems arise mainly from definitional issues. What items are caught by the higher rate? Any legislation taxing unhealthy foods would have to find a clear, scientific way for identifying those items. Provided that can be done I think the best way to impose any such tax is to have a higher GST rate for those items.



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“Australia should follow NZ GST”?

NZ’s GST is certainly the most efficient form of VAT in the world.

The “VAT Revenue Ratio” is used by the OECD as a measure of VAT efficiency. The average in the OECD is about 50%.

The least efficient is Turkey’s VAT at about 30%. NZ ranks top at a little more than 95%, followed closely by Luxembourg.

Australia’s VAT Revenue Ratio is around 45%.

The Australian Treasury Secretary thinks they can learn from NZ’s GST and argues for a further shift in Australia from income taxes to GST. See:

If efficiency is the goal then the evidence seems compellingly in favour of the Secretary’s argument.

However, political realities seem to pull most countries in the opposite direction.

Yes VAT is spreading around the world as the tax of choice for governments but, increasingly those governments are voting for multiple rates, exemptions and zero rating when designing their version of VAT.

When the GFC hit we saw governments making greater use of reduced rates to stimulate activitiy. There is now a growing trend to use penal VAT rates as policy tools to discourage certain “undesirable” consumption (e.g for environmental reasons). Policies like these make a VAT system less efficient but they also make it more politically acceptable and relevant.

Perhaps the questions are: how long can NZ resist these political pressures and is it more likely we will follow the Aussie lead?


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Eating Australian style

The Australian Tax Office has updated their GST Food List.

The 86 page Food List details from ‘A’ to ‘Z’ the GST treatment of hundreds of food items. It is necessary because in Australia some foods are subject to GST and some are not.

For example, a fruit bun with a sweet filling is subject to GST but a fruit bun without a sweet filling is not.

Another interesting example is, a “bird’s nest nutritional supplement” is subject to GST but a “bird’s nest with sugar” is not. Yes, seriously.

The latest update clarifies the treatment of a host of products like pizza rolls, baked puddings, various indian foods, combat rations, dukkah and hampers, to name a few.

Check out the complete list at

It’s fascinating to see the work that’s created by tax exceptions.


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GST exemption gaining momentum?

Today’s presentation of a petition to Parliament for GST to be removed from food shows debate around this is only going to intensify leading up to the election.

It seems there’s support coming from Maori and Mana Parties and the Greens. With Labour’s stated policy to remove GST from fresh fruit and vegetables there is growing public sentiment which National may find hard to bat away should they be forced into tough post election negotiations to stay in Government.

Of course it’s not just low income households which would benefit. The biggest spenders would save the most. So it could be a real vote winner.


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“Fresh fruit and vegetables”

So the Labour Party has confirmed their policy to remove GST on “fresh fruit and vegetables”.

This is new ground for NZ’s GST policy and it will be interesting to watch the debate unfold as producers strive to get their products within the concessionary rate.

For my part, if there were tangible evidence the policy will benefit low-income households with consequential health benefits for the country then I think I could live with the added complexity it will undoubtedly bring.

However, two things concern me most.

1. Overseas experience suggests the retail price impact of a reduction in VAT tends to be short-lived. The UK reduced their VAT rate in November 2008 and while there was an immediate reduction in consumer prices the following month a UK Government report found by February 2009 prices had returned to their pre November 2008 levels. So who really benefits from a GST rate reduction? Some evidence at least suggests it won’t be consumers.

2. If we go down this path the precedent will be set for future governments to use GST rates as a lever to influence consumer behaviour. The ice will have been broken and lobby groups with the most influence will more easily persuade politicians of the merits in lower or even higher rates for different products. There’ll always be a public interest component which politicians could find hard to resist having succumbed this once.