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GST rate – what’s next?

I’ve been thinking about what we might expect to see next in terms of major GST policy reform.

Elsewhere I discuss NZ’s GST rate compared to other countries. A general rate of 15% is not what you’d call high by international standards but it’s certainly not low either.

There are many countries with rates higher than ours. However, every single one of those countries has reduced rates or zero rates for a wider range of goods and services than NZ. None of them apply the tax as broadly as we do.

Phil Goff, leader of the Labour Party Opposition announced they will take GST off fresh fruit and vegetables if elected next time. That’s a massive shift in Labour’s GST policy. Until now they’ve accepted the good sense in keeping taxes like this simple and easy to administer for Governments and taxpayers.

That’s all welll and good when the rate is low, and 10% or even 12.5% is probably low-ish by world standards. But at 15% the pressure must come on for some exceptions to be created and we are seeing that already.

We could well see future Governments carving out items for special GST treatment and we have to remember, that cuts both ways. Just as politicians will be influenced by social and economic arguments to reduce rates on “essential items” they will also be influenced, and tempted, to increase rates for other items. If we have a special reduced rate for some foods then it won’t be much of a leap to have higher rates for “luxury” items like cars, televisions, ipods, mobile phones, alcohol, tobacco, gambling and so on.

Governments around the world are finding GST to be a very effective way to quickly replenish tax revenues which have taken a battering during the financial crisis. It provides instant results. It can also be used as a lever for manipulating consumer spending habits where they consider there are social reasons for doing so. Labour’s new policy seeks to do that.

Life could get complicated in the GST world.

Iain

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