Cut GST for fruit and veg?

Over at Kiwiblog, Mr Farrar noticed a newspaper article on removing the GST tax from fruit and veg. I agree with him on both his points,

1) that the response of consumers to a 12.5% reduction in the price of fruit and veg will likely be small (items that only take up a small part of your household budget are inherently price-inelastic), and

2) that it is better to have a flat GST rate, as you are ensuring that the relative price of goods remains the same and minimise the cost of implementing the policy

However, the Massey Researchers also have a point (there is something I never thought I’d say 🙂 ), and it has to do with situations where the second point doesn’t hold, specifically when we don’t want the relative price of the goods to stay the same. This occurs if we have an externality.

The externality that the Massey researchers are talking about is interesting, they say that if we eat more fruit, we will be less of a burden on society, and so their is a positive externality. In this case we want to subsidise the eating of fruit, as at market prices consumers are consuming less than is socially optimal.

Ok, so this idea makes sense, but should we be cutting GST to do it? From what I remember about fiscal policy, one instrument for one problem. GST should be flat, as it is a way of raising government revenue. If we make exceptions then we create inefficiencies in the market place, which worsen the dead weight loss problem of the tax. However, in this case the market is already inefficient, and the change in price actually improves welfare. In accounting terms I would prefer any ‘subsidy’ to make fruit and veg more popular to be separate from the GST rate, so that the policy goals of the given policies remain clear, and can be adjusted optimally by the creaking government bureaucracy.

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  • Isn’t the instrument here the price, though? So any mechanism that works through the price to encourage consumption of fruit and veg is equivalent to a cut in GST on those goods. I’m not sure why you advocate a separate mechanism for subsidising consumption. If it’s entirely on the basis of bureaucratic ineptitude then what reason do you have to trust any government intervention to be welfare improving?

  • “I’m not sure why you advocate a separate mechanism for subsidising consumption. If it’s entirely on the basis of bureaucratic ineptitude then what reason do you have to trust any government intervention to be welfare improving?”

    True true, we are just introducing a subsidy which is the equivalent to a lower tax. The main reason I want GST and incentive taxes to be separate is just to keep the accounting of them separate. By recording them separately we can easily keep track of what is going into the general fund, and what is being spent in order to achieve a specific social goal. If a new government then wants to remove it, its just needs to take off that tax.

    It would be best if we could collect it in the same way as GST (just add a tick box or something to the form) but then keep the figures separated in accounting terms.

    I think the people that create the policy and the people who implement the policy are different. I’m pretty much calling those who implement it incompetent (eg WINZ, good damn them) but keeping faith in those that create the policy.

  • Richard

    I suspect that complicating the tax code would would be a effective way of making government bureaucracy creakier!

  • “I suspect that complicating the tax code would would be a effective way of making government bureaucracy creakier!”

    🙂 yes. But if you are going to go full out and introduce an incentive tax, you should do it in a way the most simple to administer and transparant fashion (unless there is a tradeoff between these two factors, in which case we just have to make it up).