“Mobility of labour” is not a reason for favouring GST

There has been a bunch of good stuff written out there about the trade-offs between using GST and a (flat) income tax to raise government revenue.  However, there is one point I think has been slightly exaggerated – the mobility argument for a lift in GST.  An example of this comes from an excellent article by Vernon Small.

Put simply, since people can leave or  go elsewhere – and so can investment  dollars – they should be taxed the least.

On the other hand, local consumption – which attracts GST – can by definition only happen here.

Now the first paragraph has a lot of truth in it.  But in reality the idea that “people can leave” in the face of tax and the idea that “consumption can leave” in the face of tax are equivalent.

Why?  People value their income only insofar as they can buy things with it.  As a result, if someone is forced to either stay at home or move overseas then a GST rate of 25% is equivalent to a tax of 20% on labour – as both taxes drive a wedge between what an employer is paying and what real goods and services a employee is receiving.  This point was also raised by the Tax working group.

So remember, it is not true that switching a “flat” component of income tax to a GST rate will necessarily lead to fewer New Zealanders going overseas.  If it does anything it will change the timing – leading to more New Zealanders staying around to save up income, and then moving overseas to spend it.

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  • Rob

    “Put simply, since people can leave or go elsewhere – and so can investment dollars – they should be taxed the least.”

    That’s right man, if you want the money to stay in your circle you better be considerate to the tax payers.

  • As a result, if someone is forced to either stay at home or move overseas then a GST rate of 25% is equivalent to a tax of 20% on labour – as both taxes drive a wedge between what an employer is paying and what real goods and services a employee is receiving. This point was also raised by the Tax working group.

    This is a very helpful piece of information. Thanks for the info. I now better understand GST and other such stuff.