GST: Do we need to compensate “low income people”

No matter how much I bang on about it, it seems that no-one wants to believe me that GST is a neutral tax and so any increase in GST that is match by a decrease in income tax WITHOUT changing the degree of progressivity will not impact on low income people per see (ht Kiwiblog)

Changing the GST rate hurts people who are currently net savers, and benefits people who are currently net borrowers. If we think that people with low incomes tend to be net borrowers then such a change is actually likely to benefit them.

Now, for a full discussion of this issue (and links to about a million other posts on tax) go here 🙂

  • My opinion is that instead of compensating the low income group, why not do it for the hardcore poor? By doing the latter, it can help increase the middle group in the society, thereby achieving a better balance. 🙂

  • Volany

    Let us not contemplate intergenerational wealth transfer the more wealthy are able to deliver to their children and thereby negates your argument that all are effected equally by GST over the long term..

  • Yeah, you have a point. I’ve read an old article about GST cut, it’s canadian but the essence its the same, here: http://www.policyalternatives.ca/Editorials/2006/04/Editorial1333/

  • @Volany

    But that “wealth” will be taxed when it turns into consumption. As people leave bequests because they value their offspring, and because the consumption of the bequest is taxed, this is still consistent.

  • @GiDi

    Thanks for the link. I think the argument is slightly different though (it is about levels rather than composition).

  • If we bring a unity in income plans ( in near future that is not possible) if it implements in our community then it can help increase the middle group in the society, thereby achieving a better balance

  • Volany

    @

    Matt Nolan
    Remind me of that fact after I receive the tax free half million in financial assets alone when my olds go…

  • @Volany

    Well if the assets aren’t getting taxed on income, then a higher GST tax would increase your tax bill – as you will be taxed when you CONSUME from that income.

    It isn’t having the money that counts – its what you can do with it.

  • FreneticMonkey

    hurrah for GST

    you are right of course, however i am very pessimistic about National preserving the degree of progressivity of income tax ;-(

  • Stafford

    “GST is a neutral tax”
    ah… is it not a regressive tax

    an “any increase in GST that is matched by a decrease in income tax…hurts people who are currently net savers, and benefits people who are currently net borrowers”
    ah… isn’t it the other way around; as those who are saving spend less of their income and therefore pay less tax.

  • @Stafford

    “ah… is it not a regressive tax”

    No, it is a neutral tax. It is an urban myth that it is a regressive tax.

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

    “ah… isn’t it the other way around; as those who are saving spend less of their income and therefore pay less tax.”

    Net savers are people who have saved some money. This is deferred consumption. By unexpectedly increasing the tax on consumption we are increasing the tax on these savings in the future.

    So if someone saved some money, and then the govt lowers income tax and increases GST then the person that has saved effectively gets taxed twice.

    “Net savings” is a stock measure, the savings you are discussing is a flow.

  • @FreneticMonkey

    That is indeed what we need to remember isn’t it!! Hopefully they can keep this in mind.

  • @Matt Nolan
    No, I still don’t believe you that it’s a neutral tax, sorry. But I like that you’re not afraid to fight against the tide of opposing opinion 😉

  • @rauparaha

    Tide?

    It is neutral in the same sense as a flat income tax – as all income becomes consumption.

  • Matt, please would you answer this argument – or if you’ve done so previously, link me to your answer?:

    Not all savings are consumed, partly because there is uncertainty about the length of a life (you’d look pretty silly consuming all your lifetime income by the age of 85, only to live to 90), and partly because people like to leave some assets to their descendants. The result of these two factors is that a lot of people save or invest money which they never consume, but instead bequeath to others. If the bequeathed investments were originally GST-free (eg company shares, freehold houses, term deposits), then the investor never paid GST on this portion of their income. If people with a high lifetime income end up bequeathing a higher proportion of it in GST-free assets than those with a low lifetime income, GST is therefore lifetime regressive.

  • Your answer to Volany above addresses the issue, but appears to confuse individual lifetime income with household lifetime income. Please clarify.

    (Sorry – I tried to put this in as an edit to my above comment, but my connection speed is such that the time expired before the edit form loaded.)

  • @fibby

    @fibby

    Hi Fibby,

    The bequest only matters insofar as it has value for consumption. Sure rich people leave more for bequests, and the bequest wouldn’t be taxed during their lifetime when there is only a GST rate – but the fact is that it WILL be taxed when it turns into consumption.

    A flat tax is just a tax where, no matter your income, you get taxed the same proportion of income as everyone else. If we had only a GST rate this would be the case.

  • steve

    it is neutral only if all future consumption has GST paid on it. Perhaps those who have higher incomes are more likely to be able to purchase products where there is no GST to pay. i.e. rent on a nicer house for example… therefore you are correnct if ALL consumption has GST paid on it. But not all consumption does have GST paid, so it is a regressive tax.

  • @steve

    I completely agree. If there are distortions in the tax system then the tax would not act like a flat tax.

    However, I would say that this is an issue with the set up of the tax system, not a GST rate per see.

  • Even if all consumption is ultimately taxed (a fair assumption, in infinite time), the question is who pays the tax. In the case where a person bequeaths some proportion x of their income in GST-free assets, they paid GST on only 1-x of their income. The GST on the other x is ultimately paid by the recipient(s) of the bequest, so to discuss progressivity it’s necessary to compare that with the recipient(s) income. If they continue with the same income and investment patterns as their benefactor, they, too, will pay GST on only a proportion of their income. As a result the effective rate of GST on their income will be less than 12.5%.

    A person who consumes all of their income pays exactly 12.5% of their income in GST – a person who avoids consuming any portion of their income pays less than 12.5% of their income in GST.

  • @fibby

    Hi Fibby,

    I think what matters here is how we view the bequest. Specifically, I see the spending of future generations as “implicit consumption” by the current generation.

    As you say, this depends on the concept of infinite time – I am effectively assuming that the major motivation for providing a bequest is because the person values the lifetime happiness of their offspring/future generations. As this satisfaction is the result of consumption the current generation is implicitly consuming after their death, implying that it forms part of their tax burden.

    The tax is flat because all income will be taxed at the same rate, even if the taxation does not occur during their lifetime.

  • In that case, this is now a purely semantic disagreement. GST is flat by your definition and regressive by mine. Thanks for clarifying 🙂

  • @fibby

    Seems fair enough to me 😀

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