Why the income to GST shift isn’t pointless

There is a feeling out there that the increase in GST would be pointless if completely compensated.  I’m not sure I agree.

Even with a fully compensated scheme, and even given some welfare costs, there are reasons why we may want to shift the burden from income to consumption:

  1. Consumption tax is easier to enforce (self-reinforcing) – therefore it will be cheaper to implement and have less avoidence,
  2. On a similar note, with a consumption tax it is easier to ensure that the tax falls equally on all income,
  3. Given income tax also hits interest income, a consumption tax treats current and future income equally while an income tax promotes current consumption, (note that this does imply that the baseline rate must be slightly higher

Now, having it set up in the fully compensated way does imply that effective marginal tax rates are unchanged – and therefore so are labour supply incentives.  When thinking about “productivity” and the such the changes to the top tax rate, and to taxes on property, will be more important – but we won’t know about that until May 😉

  • I think having it set up in the fully compensated way does imply that effective marginal tax rates are unchanged, and therefore so are labour supply incentives.