Desperate bleg: GST

I need you guys to answer a question for me.  Bill English said:

If you want to stop people spending more, put GST up, but of course that has a big impact on people, particularly on lower incomes, so it’s not a straightforward issue.

Now the first bit is a bit dodgy – putting up prices doesn’t really make people use fewer dollars, but I think I can see what he is aiming for.

But my question is “why does an increase in GST hurt low income people more”.  Try as many reasons as you can, and then one day we can look at them.

12 replies
  1. Eric Crampton
    Eric Crampton says:

    Usual argument runs as follows. Suppose initial position is 10% tax on low income, 50% on high income. One guy on 10K, other on 100K. And start by assuming all income is spent. $51K collected in income tax. To get that in GST, you need a 46% GST. Rich guy moves from $50K in tax to $46; poor guy from $1K to $4.6K. Of course, that can be neutralized by having some low income rebates.

  2. Matt Nolan
    Matt Nolan says:

    @Eric Crampton

    @Eric Crampton

    I completely agree here – the movement from a progressive to a flat tax is the argument I would have run with as well (as we assume we have a given level of progressivity BECAUSE the proportional loss of income hurts lower income people more).

    I’m interested in seeing if there are any *additional* arguments regarding how a GST increase could hurt people on a low income more.

  3. Bill Bennett
    Bill Bennett says:

    The argument I saw when GST was introduced in Australia is poor people tend to spend a higher proportion of their after tax dollars on things that attract GST. In contrast, rich people who can save a proportion of their money don’t have to pay tax on that proportion.

    I’m not saying I buy that line of logic.

    But there is another more plausible argument. A seriously rich person like James Packer probably doesn’t pay any GST because most of his purchases are, somewhere along the way, GST deductible. This wouldn’t apply to Kenny who cleans the toilets on Melbourne Cup day.

  4. Nick Rowe
    Nick Rowe says:

    Following from Bill Bennett:

    If we define “poor” as people having low current income (as opposed to low permanent income), then the poor will have a higher average propensity to consume. GST taxes consumption, whereas income taxes tax current income.

    The logic is good, given the definition, but I’m not sure I would buy the definition.

  5. Samuel Konkin
    Samuel Konkin says:

    The problem with Bill Bennett’s analysis is that saving is deferred consumption, and there are numerous studies that show, over a lifetime, consumption of income is largely constant as a percentage regardless of total income.

  6. Eric Crampton
    Eric Crampton says:

    @Matt: Best next argument is that the rich disproportionately spend money abroad, where it does not attract GST. The money you spend on holidays jetting out to Hawaii, etc. Not the airfare, of course, but the money you spend while there. Or, that the rich just enjoy sitting on piles of money that they never ever spend (muhwah hahahahahaha, etc).

  7. Keith Ng
    Keith Ng says:

    Diminishing marginal utility of money? Say, a reduction in purchasing power of $500 for someone on $20k may cost them a pair of shoes, two GP visits and a Christmas hamper (cheap Christmas hamper? I dunno how much they cost), while $2500 for someone on $100k may mean no new laptop or a crappier hi-fi.

    It’s an issue with flat tax rather than GST specifically, but there you go.

  8. steve
    steve says:

    yes ,def diminishing marginal utility of consumption. richer consumers pay relatively less tax (in terms of utility) under a GST only scheme. i.e. the drop in utility by increasing GST is greater for lower level consumers because their marginal utility is higher. therefore it punisheds the poor. that’s a great argument for a progressive tax over a flat tax (like GST), thanks keith.

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