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Savings Group recommends raising GST to 17.5%

The tax cut that took effect for most taxpayers from 1 October last year achieved a seismic shift in the burden of taxation (from income to consumption and from high to low thresholds).  While you can quibble with the fairness of raising consumption taxes by 20% to pay for what was essentially a tax cut for the wealthy, there is no denying that the change addressed certain distortions that had crept into our economic system as a result of high marginal rates.

Adopting the recommendations of the Savings Group would be a further step in the right direction.

Some of the recommendations from the report seem straight forward and sensible (e.g. aligning RWT and PIE taxation).  Others, while sound from an economic perspective, would, I believe, result in unwieldy legislation and additional complexity (e.g. indexation of interest income and asset bases to reflect the rate of inflation).  The recommendation that has grabbed the most headlines, however, is the suggestion that the Government further raise GST to 17.5%.  This would bring GST in line with the rate set in many European countries (where, admittedly, there are usually exemptions for basic items like food).

Raising the rate of GST is, in one sense, the obvious answer.  If you want NZers to save more, and spend less, then you should raise taxes on consumption and use the money to provide a tax subsidy for saving.

However, there is an almost charming political naivety in the suggestion that the Government ought to risk electoral suicide by raising the rate of GST again.  This is kind of answer that could only have come from the rarefied theoretical world of economists where inconvenient truths can be assumed out of existence.  I am reminded of the joke of the economist who finds himself washed up on a deserted island amongst the flotsam of hundreds of cans of tinned peas:

“Ok guys,” he tells his fellow shipwreck survivors “so let’s assume we have can opener”.

If we are going to pay experts to make recommendations to Government – lets have recommendations that a Government could actually implement.

The risk here is that the media will be distracted by the (theoretically sound but practically silly) suggestion that the Government raise consumption taxes by 40% before the next election – and not focus on those aspects of the report that deserve serious consideration.

One Response

secret accountant on February 1, 2011 at 4:32 pm

I’m impressed! A lawyer who is good with percentage changes!

spoken from an accountant and bush lawyer!

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