New Zealand budget 2009: Is increasing GST the solution?

In New Zealand we are currently concerned about a downgrade from S&P.  They want us to be running operating surpluses from 2014, and we aren’t quite sure how to do that in the face of a massive global recession.  The suggestion I have is to increase GST rates from 2011.

Now, if we believed that Ricardian equivalence was holding in its entirety any solution with taxes would be silly – as higher taxes would merely lead to higher private borrowing.  As S&P is truly concerned about our national debt position this wouldn’t help.

However, pure Ricardian equivalence does not hold – especially in the face of a highly uncertain and credit constrained economic environment like the one we have now.

If the government can commit to increasing GST rates from 2011 they can both:

  1. State that they are increasing taxes in a way to fill the budget hole – taking us back to operating surpluses in our forecasts and preventing a downgrade (which would have a similar cost except that all the money would be heading offshore),
  2. Reduce the relative price of spending now compared to the future – increasing “aggregate demand” now at the cost of demand in the future.  Given that prices are sticky in the short-term, and the increase in GST rates enters firm and household expectations of future prices, we only really care about movements in “aggregate demand” in the short term – so this seems super.

The main concern would be that a lift in GST would increase long-run taxes.  However, if the economy moves back to potential (output) and the tax take becomes too large we can just can personal income taxes – thereby flattening the tax base and reducing the tax on savings.  Sounds good to me.

  • “The main concern would be that a lift in GST would increase long-run taxes.”

    I think that just about hits the nail on the head.

    And no matter what economists say, it would appear to the public to be a tax on the poor. Yes I know all the arguments, but putting more tax on food at the moment would be a political step too far.

  • FreneticMonkey

    You know what i want to see canceled? That ridiculous independent earner rebate or “Working for people without families”. It fails to deliver to those most in need or address marginal tax rates.

    Although most on the left would oppose an increase in GST i would support it for the same reason you are concerned, an increase in governments share of GDP over the long run ;-). The likes of Obama with his campaign promise of “tax cuts for 95% of american families” is being fundamentally dishonest, you cant build a social democracy just by soaking the rich.

    What we really need to do is demolish the poverty trap by discarding WINZ, Working for Families and universal super and replace them with guaranteed basic income.

    The debate around working for families really frustrated me because it was criticized for paying out to people too wealthy to need assistance and for the high effective marginal tax rates it imposed.

    To maintain egalitarian public institutions we need universality to ensure the political will to support them. It’s the universality of our pension that makes it completely untenable for any party to support lowering the level of payments.

    So lets put GST up to 25%, pay off our public debt, and move towards a universal basic income.

    But, of course, we are both just fantasizing about what we think government SHOULD do, in reality GST is not going to be increased because to do so would guarantee a Labour win in 2011. You think all the working class voters who didnt bother turning up in 2008(second lowest turnout since the 1978 election, and the third lowest since 1902) are going to stay home when their taxes go up while yours go down Mr Nolan?

  • FreneticMonkey

    Just look at the comments over at KiwiBOG

    “i pay a tonne of tax so im gonna be all over this. at least with national they wont discriminate against people earning over 80k

    will it include underfloor insulation as well? like that expol stuff? that would be swell :)” – Dime

    Even the Tories will rally together behind government spending if they get a slice.

    Universality FTW 😉

  • The problem is that GST is a regressive tax system so therefore increasing GST hurts the poor more than the rich.

    If it was to be increased then basic items should be excluded from GST altogether.

  • @jarbury

    GST being regressive is an urban myth:

    http://www.tvhe.co.nz/2007/07/30/gst-taxes/

    Think of it this way – savings are deferred consumption, so when you go to spend them they get caught by GST.

    Furthermore, if we are increasing GST in the future we are effectively taxing savers (it is like cutting interest rates) – so that is where it hits

  • @Bill Bennett

    Well there is a difference between sensible policy and policy that occurs I guess 🙂

  • @FreneticMonkey

    “You think all the working class voters who didnt bother turning up in 2008(second lowest turnout since the 1978 election, and the third lowest since 1902) are going to stay home when their taxes go up while yours go down Mr Nolan?”

    Why would an increase in GST rates make my taxes go down? I like to think that I consume as well 😉

    The fact is that the government is not willing to cut spending, and faces a potential credit downgrade. Committing to increase taxes in the future will both fill the budget hole and spur consumption in the middle of a recession. The GST rate was an example – you could do it with income tax as well.

  • FreneticMonkey

    “Why would an increase in GST rates make my taxes go down? I like to think that I consume as well ;)”

    National cut income tax. Surely you noticed? Surely you are working MUCH HARDER at your job now as you are paying a lower tax rate 😉

  • @FreneticMonkey

    Given the size of the increase in the ACC levy I didn’t see much of a tax cut 🙂

    However, what has that got to do with anything – the fact that they HAVE cut taxes in the past doesn’t mean that a lift in GST wouldn’t be an increase in taxes, it still is.

  • FreneticMonkey

    I mean that if you look at the tax changes OVERALL, include the income tax cuts and a possible GST increase then the folks at the bottom will rightly say that THEIR taxes have gone up while ours have gone down.

    While i am a fan of good natured pedantic criticism, i would have appreciated a more substantial response to my post 😉

  • @FreneticMonkey

    Indeed – their tax as a proportion of income has probably gone up. However, people on higher incomes are still paying proportionally more.

    If that is the issue, then we could change this to a committed increase in income taxes instead of GST rates, sure. However, if they refuse to really touch spending and the Treasury forecasts are accurate then they need to look into a lift in taxes in the future.

  • FreneticMonkey

    “Indeed – their tax as a proportion of income has probably gone up. However, people on higher incomes are still paying proportionally more.”

    So if National make our tax system more regressive you can defend this by saying it is still somewhat progressive. I can assure you the issue will not be framed in that manner anywhere outside the ACT party.

  • @FreneticMonkey

    But it is true.

    Furthermore, the relatively “regressive” change was the income tax cuts. The increase in GST, which is independent, is an income neutral change.

  • FreneticMonkey

    It is ‘true’ that our tax system would still be progressive but most voters (have you checked the median income in NZ lately?) would prefer it to be more progressive. If we have a regressive tax decrease and a neutral tax increase then the two would not be seen by the public (or interpreted by the media) as independent. Lets not quibble about your latent desire for class warfare, the majority of my post was about universality vs means testing public services.

  • @FreneticMonkey

    I wasn’t disagreeing with your first comment – but I was discussing what I felt was your criticism of my initial post.

    I’m not saying how progressive the tax system should be – if we want it to be more progressive then fiddle income taxes. The tax system IS progressive – I don’t know if voters want it to be more progressive or less, but I hope that the democratic process will help lead us to the outcome society wants.

    My point was that if we don’t want to cut spending we need to increase tax rates – and committing to do that in the future has benefits. That is it – as I said, if we also want to increase progressivity then cool, do that. But the progressive nature of taxes is not the target of my post – the idea of committing to an increase in the future is the goal of the post.

  • However, if the economy moves back to potential (output) and the tax take becomes too large we can just can personal income taxes – thereby flattening the tax base and reducing the tax on savings. Sounds good to me.

    Problem is, governments never reduce tax rates (we’re probably going to see some proof of that today).

  • FreneticMonkey

    And you didnt respond very well to MY quibble, are YOU working harder now that your marginal tax rate is lower?

  • @Luke H

    Governments do decrease tax rates – otherwise we would have a 90% top rate at the moment 😛

  • @FreneticMonkey

    Quibble? I felt it was a slight side track is all as my post has nothing to do with prior tax cuts, which were the result of a democratic election (which should represent social preferences to some degree).

    However, as I said earlier, my marginal tax rate is virtually unchanged as the ACC levy also rose.

    Personally, I do not believe that labour supply is that responsive to EMTRs anyway (but don’t tell my brother that 😛 ) – I think the more important reason for cutting EMTRs is to drive investment and savings rather than labour supply.

    But to reiterate – I am not trying to debate the value of progressivity here. I have written posts supporting progressivity before, even on efficiency grounds, as demand for skilled labour is relatively inelastic.

    When I discussed the GST rate increase I could have also discussed an increase in income taxes, or externality taxes – ultimately I just wanted a tax that would fill the spending hole (which I assumed would not be cut) but I didn’t want it introduced straight away because of the belief that we are in a “demand deficient” recession. Putting a tax in the future MIGHT actually help us pull out of the current recession as well as preventing a credit downgrade.

  • FreneticMonkey

    I love GST, i would love to see GST go up. You cannot separate an increase in GST from the decrease in income tax that has already taken place. The two would inevitably be interpreted by the media and the public as an attack on the progressive nature of our tax system.

    “I think the more important reason for cutting EMTRs is to drive investment and savings rather than labour supply.”

    So you think a tax cut program funded by cutting kiwisaver is a good thing?

    Increasing GST just is not politically viable. So while we are fantasizing about what the government SHOULD do what do you think about universality vs. means testing and a basic income?

  • @FreneticMonkey

    “So you think a tax cut program funded by cutting kiwisaver is a good thing?”

    Yes.

    “So while we are fantasizing about what the government SHOULD do what do you think about universality vs. means testing and a basic income?”

    Universality – yes, as targeting through means testing is atrocious. However, I can accept that there can be a case for means testing.

    Basic income – very much agree. I feel that it is part of our social contract as a society to provide a basic living standard to people. If this is the case we should do it directly. I can understand when people don’t agree with me on this though.