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Fin article on food

June 5th, 2008

My article in today’s Fin argues that while suggestions for cuts in petrol excise are silly, removing GST completely from food would relieve household budgets while improving economic efficiency.

With petrol and food prices soaring, it is unsurprising that our political leaders are scrambling to ‘do something’ to fix the problem. It is equally unsurprising that most of the measures that have been proposed are useless or worse.

The Rudd government’s initial response, the Fuelwatch scheme has some merit. Cycles in petrol prices have the effect of increasing search costs, as motorists drive further to check prices. This allows the industry to engage in price discrimination. Those who are willing to search get the low price, while others pay a high price.

Ending this cycle would be socially beneficial, but it would not help everyone. Unfortunately, the losers are those who are most focused on the price of petrol, so Fuelwatch is unlikely to solve the political problem of high prices.

Fuelwatch is mostly harmless. The same cannot be said of the Opposition’s proposal to cut excise or the counterproposal that the excise component of fuel prices should be GST-free. Then there’s the Queensland government’s attempts to rescue its failing $500 million fuel subsidy scheme by making motorists present a state license to get the discount.

In a world of scarce oil and climate change, it needs to be clear to everyone that the price of petrol will rise over time. Throwing revenue away in a futile attempt to slow the process down is worse than useless. In general, the best way to help households deal with rising prices is to give them money directly, through tax reductions or increases in benefits.

There is, however, one measure that could directly reduce pressure on household budgets while improving the efficiency of the tax system and reducing the administrative burden it imposes. The measure would undo the messy compromise under which some kinds of food are taxed while others are not.

This compromise dates back to the decision by the Australian Democrats in 2000 to support the introduction of a GST provided that food was exempt from taxation, as it had been under the old wholesale sales tax. This decision was politically risky, (it contributed to the breakup of the party a few years later) but it was economically sound.

The regressivity of a tax on food far outweighs any benefits from administrative simplicity or from the revenue it generates. That’s why nearly every country that has introduced a GST/VAT has exempted food. The only notable exception is that of the zealots who ran the New Zealand economy (into the ground, some might say) in the 1980s.

The Howard government, eager to maximize revenue, resisted pressure to exempt food. Eventually a compromise, tailored to Democrat sensibilities, was reached. Food was exempted, but only if it was ‘fresh food’.

Defining ‘fresh food’ was a Byzantine nightmare, complicated further by the desire to ensure equal treatment between grocery stores (generally exempt from GST on food) and restaurants (subject to GST). The outcome bears little relationship to any standard idea of ‘fresh’. Freshly made cakes are taxable, but tinned cakes are GST-free. Frozen meals designed to be part of a healthy diet are taxable, but fish fingers are GST free. Anomalies are everywhere.

The simplest solution to the problem would be to make all grocery food items GST-free. This would not resolve all the problems in the existing system, since it would still be necessary to tax take-away food.

A better solution would be to zero-rate food, so that only the service component in a restaurant or take-away meal would be taxed. Some definitional problems would remain, but all tax systems face such problems.

Depending on which of these alternatives is chosen, the cost could range from $1 billion to $2 billion a year. This is only a little more than the amount the Opposition proposes to save drinkers of ‘alcopops’ by blocking the budget measure to tax these drinks as spirits.

The abolition of food taxes will be an important item for the government’s review of the tax system to consider. Initially it appeared that this issue, along with the GST in general, would be excluded from the scope of the review.

One of the few positive results of the populist outburst of the last week is that this position is no longer tenable. Having floated the silly idea of taking GST off petrol, the government can no longer regard the whole question as out of bounds.

Removing taxes on food would not stop rising prices. But it would help households and it would make good economic sense.

John Quiggin is an ARC Federation Fellow, and leader of the Risk and Sustainable Management Group at the University of Queensland.

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  1. O6
    June 5th, 2008 at 14:26 | #1

    Good idea, and why not copy the methodology of one of the other countries that doesn’t have VAT on food? Why make our (hard-working) public servants develop a complex, untried method when good models exist?

  2. jquiggin
    June 5th, 2008 at 14:48 | #2

    Zero-rating, which I suggest, is widely used overseas. To be fair, I think our current model was adapted from the Irish.

  3. June 5th, 2008 at 15:09 | #3

    Good idea, John. But what about removing it from books, too ;)

  4. Joseph Clark
    June 5th, 2008 at 15:15 | #4

    Jason,
    No — an exemption for books would be regressive because richer people read more books.

  5. Tony G
    June 5th, 2008 at 15:27 | #5

    JQ,
    It is unusual for a left wing blogger to be promoting the removal a tax, obviously a brilliant idea.

    While you are at it have a look at housing affordability. In the UK to promote the construction of new housing they Zero-rate new housing and the builder can still claim back his input credits.

    http://www.consignconstructionskills.co.uk/sponsors/Consign%20SpeedBrief%20-%20Golden%20Brick%20-%20Dec%202007.pdf

  6. June 5th, 2008 at 15:57 | #6

    PrQ,
    Surely much more easy to operate (and even less regressive) would be to apply the GST uniformly and lift the income tax free threshold to compensate?

  7. jquiggin
    June 5th, 2008 at 17:43 | #7

    AR: Easier to operate on the GST side, but problematic on the threshold side – raising the threshold would be simple in a world consisting entirely of individuals but is problematic when you have high income families that include part-time workers.

  8. June 5th, 2008 at 18:19 | #8

    Just wondering, if its a bad idea to dilute the price signal for petrol, why is it a good idea to dilute the price signal for food?

  9. TerjeP (say tay-a)
    June 5th, 2008 at 18:36 | #9

    Not the tax cut I’d argue for but wow. John Quiggin argues for a tax cut. As a way of improving household budgets. How wonderful. How simply wonderful. A day to be remembered. John can I kiss you?

    Given the relevant political power I’d personally abolish fuel watch and implement government watch. In order to improve household budgets I’d mandate that the cost of government per capita be frozen in real terms for at least a decade. And to achieve the freeze there would be a mandatory increase in the tax free threshold if revenue forcasts per capita looked like rising otherwise. We could legislate so that an independent body set the tax free threshold according to revenue projections. No more nasty hidden price hikes by the public sector. And those that worry about equity should be happy because the tax system would become more progressive every time the tax free threshold increases.

  10. Ian Gould
    June 5th, 2008 at 18:50 | #10

    “AR: Easier to operate on the GST side, but problematic on the threshold side – raising the threshold would be simple in a world consisting entirely of individuals but is problematic when you have high income families that include part-time workers.”

    Then why not increase the earned income rebate and increase welfare payments to offset a widening of the GST base and a cut in the rate?

  11. Ian Gould
    June 5th, 2008 at 18:51 | #11

    “Just wondering, if its a bad idea to dilute the price signal for petrol, why is it a good idea to dilute the price signal for food?”

    Because if the price signal forces people to leave the car at home the consequences are a lot less dire than if it forces them to skip meals.

  12. June 5th, 2008 at 19:29 | #12

    Because if the price signal forces people to leave the car at home the consequences are a lot less dire than if it forces them to skip meals.

    Sure, but one could argue petrol (oil) is almost as essential to modern life as food, and food has a lot of oil inputs anyway. If you were to remove all taxation on fuel you’d lower the price of food considerably.

    Besides, why make food cheap(er) for rich people when it only costs them some tiny fraction of their income?

    Seems to me a much better way to handle this would be to cut income taxes at the bottom end, and increase welfare to the truly needy.

  13. Salient Green
    June 5th, 2008 at 20:46 | #13

    I have to disagree with dropping the GST on food.

    Those who are struggling to make ends meet are already identified via the welfare system and need an injection of funds to cope with rising food prices, as they do with rising fuel and energy prices.

    There is an important differential between ‘food’ and ‘fresh food’ created by the GST. If you put both on an an equal footing tax-wise, there will be a shift of spending to processed food, with its associated increased energy and resource requirement, as well as generally lower nutrition content.

    I believe that higher food prices will help people to seek out better value and this includes buying local, buying bulk and buying more direct. All this can only be a good thing environmentally and socially with local producers gaining to produce local jobs and local wealth.

    Ian, if high food prices caused people in my town to skip meals that can only be a good thing given the levels of obesity.

    I also believe that removing the GST on food would be more of a windfall for the supermarkets than for the consumer.

  14. jquiggin
    June 5th, 2008 at 21:54 | #14

    #10: At this point, you’ve already lost the simplicity of ARs proposal, and there are plenty more adjustments to come in terms of fixing EMTRs and so on.

    #13 As I mention in the article, “fresh” is a misnomer – the real distinction is between “ready to serve as a meal” and “requiring preparation”

  15. June 5th, 2008 at 22:03 | #15

    Terje wrote:

    Given the relevant political power I’d personally abolish fuel watch and implement government watch.

    Terje, given the relevant political power I’d implement libertarian watch. If you break the rules you get sent to libertarian hell where every aspect of your life is regulated and taxed. You couldn’t wipe your own bum without the government telling you how many sheets you could use and taxing you by the sheet.

  16. Ian Gould
    June 5th, 2008 at 23:43 | #16

    “I also believe that removing the GST on food would be more of a windfall for the supermarkets than for the consumer.”

    But I’m suggesting getting rid of the prepared/unprepared food distinction by taxing fresh food – and using the revenue raised to cut the rate of GST on all goods.

    Then too, there’s a very good question which was asked again here recently and for which I’m still waiting for a convincing answer.

    To parpahrase: why is it that a 10% tax on fresh food is an abomination but a 17.5% tariff on children’s clothes is perfectly acceptable?

  17. June 5th, 2008 at 23:52 | #17

    Great idea. When I do the shopping, I am told the GST is always higher, but in relation to the total bill it is still negligible, so I am not sure it represents a real cost offset for the household budget.

  18. Ernestine Gross
    June 6th, 2008 at 01:33 | #18

    Re 16: “why is it that a 10% tax on fresh food is an abomination but a 17.5% tariff on children’s clothes is perfectly acceptable?”

    Ian, the idea of ‘non-distorting taxes’, which underlies your argument, belongs to the idea of a ‘level-playing field’ of the 1980s. One of the roles of taxes is to change relative prices. This may be a good thing or a bad thing, depending on the circumstances. Why else would you agree with a carbon tax, either direct or indirect via cap and trade?

  19. Tony G
    June 6th, 2008 at 05:33 | #19

    Carbonsink said;

    “you get sent to a living hell where every aspect of your life is regulated and taxed. You couldn’t wipe your own bum without the government telling you how many sheets you could use and taxing you by the sheet.”

    Sounds like a place where ‘public servant’ university vice chancellors get paid $1.99 million p.a
    http://news.theage.com.au/national/university-vice-chancellors-earning-big-20080603-2l1u.html

  20. jquiggin
    June 6th, 2008 at 06:39 | #20

    #16 Ernestine is correct in general terms, but as a matter of fact I don’t support the tariff on clothing imports, partly because it raises the price of things like children’s clothes. In general, taxes on clothing aren’t particularly regressive, but that’s one example where it is.

    I’d prefer direct assistance to the Australian industry, to support workers incomes and adjustment.

  21. TerjeP (say tay-a)
    June 6th, 2008 at 08:29 | #21

    #20. Steady on John. Thats now two taxes you want to get rid of in the same thread. Next thing you’ll be calling for an end to payroll tax.

  22. jquiggin
    June 6th, 2008 at 08:37 | #22

    #21 You read my mind, Terje, though in fact I have advocated the end of payroll tax many times already, most recently here.

  23. Ian Gould
    June 6th, 2008 at 11:46 | #23

    Terje, MOST economists support the elimination of tariffs, payroll tax; stamp duties; excises and a bunch of other minor taxes.

    What we don’t support is a massive blow-out in the public debt via unfunded income tax cuts or leaving people to starve in the gutter by gutting the welfare system (which would be the real world result of your proposal to freeze taxation in real terms).

    See that’s what happens when you don’t approach the question with the assumption “Government is evil and taxes are evil”

  24. Ian Gould
    June 6th, 2008 at 11:48 | #24

    Erenstine @18 “One of the roles of taxes is to change relative prices. This may be a good thing or a bad thing, depending on the circumstances.”

    Yes, my question is why anyone would think its a good think to make one essential item which poor people spend a large part of their disposable income on relatively more expensive than another.

  25. Ernestine Gross
    June 6th, 2008 at 12:29 | #25

    Ian, # 24. I don’t think a lot of ‘poor people’ spend a large part of their disposable income on childrens’ clothing (eg pensioners, single people who sleep in the streets, people who don’t have children and low income people whose children have grown up don’t spend a large part of their disposable income on the item in question). My casual observations on shopping trips lead me to the conclusion that there is a dual market for childrens’ clothing: very expensive and quite cheap – it depends where you go. I don’t know whether this holds outide metropolitan areas.

    In my opinion, the content of paragraph 2 in your item # 23 is more interesting. You write: ” What we don’t support is a massive blow-out in the public debt via unfunded income tax cuts or leaving people to starve in the gutter by gutting the welfare system…”

    I would agree with the paramount importance of starting off with a clear specification of the objectives of a taxation system. I am confident in saying that there is more than one taxation system which achieves one specified goal. Hence looking at items in isolation is not necessarily helpful.

  26. Father Mercy
    June 6th, 2008 at 16:22 | #26

    Tony G (#5), are you suggesting that on one of those numerous and important fact-finding-missions undertaken by our alleged politicians they missed that fact. The well worn trail that attracts our pollies is Paris, Rome, Vienna, London and New York. While in London I guess they were attending the premier of Indiana Jones and the Nasty Fuel Cartel instead of actually discovering facts.

    As for food shopping I’m sure that many of us have heard about 5, 6, 7 or more families shopping as a group and saving money. I saw it in operation today at Flemington Markets (Sydney). Two women pushing shopping trolleys full of fresh produce. Not 500g of carrots but a full 10kg bag of them. I counted 8 cauliflowers in their trolley, a full box of apples, a full box of mandarins etc. I helped them push one of their trolleys over a drain and made a joke by saying “I hope you didn’t buy everything�. They explained that they got the idea from Today Tonight about 1 year ago and decided to ask their neighbours if they were interested. She told me they save more dosh by buying in bulk. Each person in the ‘co-op’ has a turn at doing the shopping at the markets.

    We all need to be smarter when shopping. Yes, I know not everyone can do it but if you can go for it.

    For those in the Parramatta area, fresh produce markets are planned to open in front of the Parramatta Town Hall on 28th June (check the council for any late change).
    I don’t want to turn this into a commercial site but for those who like myself are a bit sick of paying supermarket prices for cleaning products you can save some dosh (save big on clothes washing detergents) at Suds ‘n’ Stuff, 4/99 Kurrajong Ave, Mt Druitt (ph 9677 0491).

    Let’s all help each other as much as we can.

  27. wilful
    June 6th, 2008 at 17:07 | #27

    The price of supermarket fruit and vegies shocks me – I spend about $30 a week on fruit and vegies at the footscray market, reckon it’d be easily more than double that at the local Coles, for same or worse quality, and far worse/no service.

    I can see merit in the proposal, but it doesn’t simplify things. As a matter of elegance/simplicity, I would prefer to see a standard GST that covered all food, with appropriate rebates or other assistance for low income families. And the price shifting from fresh to prepared food that would happen with any change to treat them equally would require adjustment – education?

    I wonder what proportion of fresh food is imported? Very low I expect, rice and garlic, a few out of season fruits… And what proportion of processed food? Higher, surely? In which case, more pressure on the trade deficit (or a current hidden protection if you want to see it that way).

    Also, sardonic comments about Quiggin or ‘teh left’ proposing a tax cut are a) boring, but b) illuminating. Some of you really don’t seem to get it, centralist views of the role of government and taxation are pragmatic, real world and evidence based, not like most of the Libertarian and Right wing agendas, that are ideological, theoretical approaches that do nothing to improve efficient government while having savage impacts on the poor.

  28. TerjeP (say tay-a)
    June 6th, 2008 at 18:48 | #28

    So John you want less tax on food, less tax on clothes and no specific tax on payroll. How is a tax cutting radical like you going to pay for all this extremism. ;-)

  29. Ian Gould
    June 6th, 2008 at 22:01 | #29

    Tariffs are negligible in the Australian budget.

    In 2006/7 tariff customs revenue was $5.6 billion and $2 billion of that was excise of cigarettes, tobacco and fuel.

  30. Ian Gould
    June 6th, 2008 at 22:03 | #30
  31. Ian Gould
    June 6th, 2008 at 22:12 | #31

    “Ian, # 24. I don’t think a lot of ‘poor people’ spend a large part of their disposable income on childrens’ clothing ”

    It’s somewhat dated now but back in 2000, approximately 12% of Australian children were living in poverty.

    http://www.sprc.unsw.edu.au/reports/ChildPovertyReview.pdf

  32. Mark Picton
    June 6th, 2008 at 22:27 | #32

    Why no love for the refundable sales tax credit? Sure, taxing food is regressive and taxing different types of food at different rates is distorting, but it still would have been a better idea to tax all food and counter the regressive impact with an indexed refundable sales tax credit. That those arguing against the broadest possible coverage at the time are now arguing that the quarantined food exemption is distorting is a bit rich. Indirect taxes are bad at distributional goals because they are indirect – they don’t take into account ability to pay. If you are worried about distribution use direct taxation and refundable credits, but keep the base as broad as possible.

    I don’t know where the idea that most economists support abolition of payroll tax comes from – I thought the standard view was that it had similar effects to the GST. To be sure, it’s origin- rather than destination-based and it has firm-size distorting effects because of thresholds – but isn’t it otherwise the same?

  33. rog
    June 6th, 2008 at 22:57 | #33

    re#28

    Terje, it is more about offsetting increased taxes on fuel with reduced taxes on food.

    This wont help those that take the effort to prepare meals from raw ingredients.

  34. Ikonoclast
    June 7th, 2008 at 08:16 | #34

    The tax and welfare systems need to be rationalised and integrated. Looking at it logically, tax is negative welfare and welfare is negative tax. This indicates we need not two systems but one system.

    Currently the tax and welfare systems often interact badly and create double withdrawal situations. By double withdrawal situations I mean where a welfare recipient earns some money and both pays some tax on it and gets his/her welfare reduced because of it.

    In the past this has resulted in withdrawals (effectively a marginal tax rate) on a low income earner of up to 70%. I’m not sure of the exact current dynnamics in this area but I doubt they are much improved.

    The effective answer would be to have one sliding tax/welfare system. At zero or low earnings the system contributes to the person. At higher earnings, the person contrubutes to the system. It works on a sliding rate based on the lowest tax rate.

    The adminstrative method for this system would be simple. All adults in the country receive a single payment equal to the current single rate pension for their entire lives (indexed for inflation). There would now be no need to ever apply for unemployment benefit, pension or invalid pension. Nor any need for the government to grant, cancel and assess payments except for grants at age 18 and cancellations at death.

    Now for the rider. As soon as a person gets a job, his/her tax rate is assessed appropriately by the single tax/welfare system. It is a given that they are getting a full welfare payment. This then is withdrawn on a sliding scale. For a person on a full time job, it is all withdrawn plus no doubt some real tax payed on top. This system is the essence of simplicity and the “churning” of such a system is a simple computerised accounting exercise. Very low cost on the administrative side.

    The first complication arises with the self-employed. The second complication arises from those owning shares, businesses and investments. However, these complications could be handled by tax/welfare law and administrative arrangements still far less complicated than the current law and arrangements. It would make this post too long to detail the ideas here.

    In addition, the removal of negative gearing and the many subsidies for corporations and the rich would balance the books for such an exercise.

    Any thing less than a measure like the above does not deserve the title of radical reform.

  35. June 7th, 2008 at 12:47 | #35

    ‘This system is the essence of simplicity and the “churningâ€? of such a system is a simple computerised accounting exercise. Very low cost on the administrative side.’

    And if you believe that, you may well believe that a GST inherently has low administrative and compliance costs. Suuure…

  36. Ikonoclast
    June 7th, 2008 at 22:33 | #36

    Sorry, a snide aside is not a refutation. You’ll have to do better than that.

    If you understood the proposed model you would understand that welfare compliance (at least for pay-tax-as-you-go employees) is as automatic as is current tax compliance and would come under the same adminstrative and cost head. There’s no extra cost there except a bit more “bit-flipping” in the computer systems. I also indicated, in shorthand, the concomittant compliance and cost savings in the welfare system.

    Extra administrative and compliance costs for the self-employed and capitalist-rentier classes could be more than offset by removing great swathes of complex tax law whose only purpose is to ebdlessly open, close and re-open the myriads of loopholes designed for and/or found by these classes and their hired guns in the accountancy, finance and legal professions.

    The main problem with the idea is that it requires some imagination to step outside the current paradigm; a quality sadly lacking in the excessively conservative who think only what is already bequethed by tradition to date is feasible. I’m not sure how such conservatives think progress ever occurs.

    Or perhaps the main problem is that it might challenge a portion of the self-interest of the small but powerful capitalist-rentier class and the rusted on support of a great gaggle of sycophants.

  37. TerjeP
    June 9th, 2008 at 07:16 | #37

    tax is negative welfare

    Amen!

  38. wbb
    June 10th, 2008 at 15:56 | #38

    What is the reason we have a fuel excise? What point is it anymore?

  39. jquiggin
    June 10th, 2008 at 16:47 | #39

    Broadly speaking, a fuel excise is a substitute for pricing road use. A proper system of road pricing would be a big improvement, but it’s nowhere in sight (most existing tolls actually make things worse, not better).

  40. wbb
    June 11th, 2008 at 21:16 | #40

    I see. Thanks, John.

    Is the point of the pricing to ration road use? Seems that the price of oil can do that on its own these days. I can’t see any reason to retain the excise.

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