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Taxing times

June 27th, 2003

In the Thursday comments thread “Factory” writes,

One thing I didn’t get about the GST was that it was generally seen as a issue that was owned by the right, but similar tax regimes seem to be the norm in Europe.. hmm..

As I explained here, the reason for this, and for the unpopularity of the GST was that

the Australian advocates of a GST/VAT have tied this change to logically unrelated proposals for a change in the tax mix to give more weight to indirect taxation and for the removal of existing exemptions, notably for food. It is rather as if the advocates of metrication had suggested that the metric system was not worth having unless we also made French the national language and introduced the guillotine.

With the exemption of food, and the associated introduction of the Australian Business Number, the GST has improved the effectiveness of the tax system. The associated income tax cuts made the package as a whole regressive, but not nearly as much so as the previous proposals for a GST (Fightback! and Option C)>

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  1. derrida derider
    June 28th, 2003 at 21:50 | #1

    I’ve just never seen why everyone’s so keen to exempt food. Sure, exempting it makes the GST/VAT slightly (income) progressive rather than slightly regressive, but it’s the overall incidence of a tax and transfer system that matters. As the GST on food would only be a very small part of that system, you could easily offset it by a very modest extra income tax cut pitched at lower incomes – which the extra revenue from GST on food could fund. And there are allocative efficiency and administrative complexity losses from exempting food from the GST.

    It’s amazing how loosely people think on these issues. The Catholic bishops pronounced that taxing the food of the poor was sinful – but presumably saw nothing wrong with taxing the income that buys the food!

  2. Homer Paxton
    June 28th, 2003 at 21:51 | #2

    How does exenpting food make the tax system more effective.

    That Queensland sun is getting to you. If you compare the NZ and OZ indirect tax regimes then if one is in business NZ is much more effective!

    My memory has the Fightback compensation package much more generous. Is it wrong?

  3. June 29th, 2003 at 12:31 | #3

    Homer I think you’re right.

    The churches are not the best people to listen to on economic policy (or much else). They are representative of the ‘Soft heads and soft hearts’ brigade just as reactionary conservatives are representative of the ‘soft heads and hard hearts brigade’ whereas what is needed is ‘hard heads and soft hearts’.

  4. John
    June 29th, 2003 at 12:59 | #4

    I’ve gone over the food issue in detail, for example in my book Taxing Times. Any attempt at compensating for the regressive impact of taxing food would involve substantially more progressive income taxes which would have greater efficiency costs than the exemption. I showed this for Fightback at the time, and played a minor point in Hewson’s decision to exempt food in Fightbakc Mark 2. The admin costs argument is also a red herring. There are dozens of goods and services requiring special treatment in the GST system, and the admin costs of any one of these exemptions is similar to that of the exemption for food, which is much bigger in terms of dollars of expenditure affected.

    I’m happy to be corrected on all this, but repetition of the conventional wisdom of the 1980s, unsupported by actual analysis, doesn’t wash with me.

    As regards the churches, I think it’s dangerous to generalize. The Brotherhood of St Laurence, for example, has done excellent work, to the extent that they could make a fool like Hollingworth look good when he was titular head of the outfit back in the 1980s. And some of the Catholic social policy organisations are also strong.

  5. June 29th, 2003 at 19:40 | #5

    DD – taxing the income that buys the food is not equivalent to taxing the food, since the incidence is different. That same income buys lots of things, and food availability won’t suffer nearly as much with the income tax variant in the worst cases.

    That said, the worst cases are rare in this time and place, so it makes little difference. The bishops are most likely just carrying forward something that applied in other circumstances.

    Even so, those worst cases are real people and do exist. Those real people aren’t paying income tax. Does it make sense to tax their food and subsidise them some other way? That’s what JQ’s research was looking at, if I take his point correctly. (And his answer was, exempt the tax on food.)

  6. Homer Paxton
    June 29th, 2003 at 21:26 | #6

    Let me tell you fom a business perspective the NZ tax runs all over the Oz one.
    It seems to me pretty silly to make adjustments to an indirect tax to help make it more progressive. You should merely boost the compensation to lower income people as I thought Neil Warren and Ann Harding advocated.

    You look at the overall tax system to make it progessive , which by the way is needed. If this logic persists you will be changing every tax in the forlorn hope of making it progressive.

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