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Tax on healthy food

It looks like Parliament will get a chance this week to debate whether GST should be removed from “healthy food”.

The suggestion is coming in the form of a private member’s Bill from Maori Party MP Rahui Katene.

What a great topic!

Frankly I think it’s about time NZ had a serious debate over this. You’d be hard pressed to find another country with a VAT or GST which taxes basic food as highly as we do. Some feedback here would be fantastic. What do you think?

There are a whole lot of issues: how should it be done (exempt or zero rated?), how is “healthy food” defined? where will the lost revenue come from? what about the compliance costs for business? will consumers really modify their buying habits? will there be real savings for consumers or will lawyers and tax accountants be the main beneficiaries?

A lot of these are design or implementation issues. The first hurdle has to be the principle, should tax be used to manipulate behaviour by having different taxes on different products?

Well there certainly is a strong precedent in the form of “sin taxes” on alcohol and tobacco. My understanding is the policy behind those taxes is to recover costs for the damage they cause and, certainly in the case of tobacco, discourage use.

As a policy lever it seems to me GST can be pretty effective. Some countries reduced GST/VAT rates temporarily as one of their responses to the global economic crisis to stimulate spending. The results can be quite immediate compared to tinkering with income tax rates which tend to take some time to wash through the system.

A compelling economic argument was considered a sound basis for reducing VAT/GST rates. Other compelling economic (and behavioural) arguments are now being used by several governments to support increases in GST/VAT whilst reducing income taxes. We’re told one benefit will be to encourage people to save more.

To my way of thinking there’s no point of principle which demands uniformity across GST rates. If there are compelling health reasons to do so then it simply becomes a question of whether the particular method suggested will actually work.

I’m going to take the policy objective for granted and assume there is a compelling case for encouraging NZ’ers to buy more “healthy food”.

Having got that out the way, let’s talk about whether a GST rate reduction or exemption is the best way to achieve this objective.

Watch this space…………..

Iain

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