Fin article on food

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.

40 thoughts on “Fin article on food

  1. 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.

  2. 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.

  3. 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. 😉

  4. 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.

  5. 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?

  6. 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.

  7. 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.

  8. ‘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…

  9. 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.

  10. 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).

  11. 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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