James did an excellent post discussing tax issues recently. After this, he obtained a copy of the book, and dug out the three ways that Rob Salmond had noted GST was regressive. It is good to see Rob put some thought into it and found measurable reasons why regressivity exists – but I also need to point out where I disagree.
In essence, of the three reasons for regressivity I believe that only one is regressive (and by less than we may expect), that one is neutral, and that one of the reasons actually makes GST a progressive tax.
The reasons Rob outlines are:
- Some savings are spent on acquiring multiple properties, which do not attract GST
- Some savings are spent outside of New Zealand, which also do not attract GST
- Some people do not spend all their savings before they die. That is, they are lifetime net savers.
Importantly, all of these forms of GST-exempt dispersal of savings are more likely among wealthy people than among poor people.
My response (with a bunch of arbitrary notes thrown in) was:
- The construction of a house attracts GST, so it is just the rental and “owner occupied rental” that doesn’t. As rich households tend to spend a lower proportion of their income on rent this is progressive. Remember in turn that this “rental” price is also related to the replacement cost of the house … part of the reason for not including rent in GST is the impression that we would be double taxing it!
- [Note on this first point – I wrote it with regards solely to the ownership of a house, not multiple properties – as that is how I read the initial question. Even so, it isn’t clear that implied rental expenditure as a % of income rises by decline – I will have to investigate. [Huzzah, investigation done, the share of expenditure on housing of total expenditure falls as the income decile rises.]]
- Having GST rather than income tax leads to a one off increase in the price level, which lowers the value of the New Zealand dollar. This pushes up the cost of goods and services overseas in the near term – given convergence towards the PPP level. Overall, I still think this will be a regressive element though.
- [Note: Looking at the HES data, spending overseas as a % of total spending is surprisingly constant among income declines … making it seem like a pretty neutral impact at present.]
- Although more wealthy people will leave proportionally larger bequests, bequests only have value in so far as the next generation buys goods and services – as a result, they will be taxed, and this is neutral.
I would also note that, even if all of these elements were “regressive” we would need to look at representative baskets by income groups to get an idea of how much of an impact that would make – and given that GST exists, this will be exaggerated by the fact that people are choosing volumes to consumer based on the “lower relative price” of anything where the GST burden does not fall.
Comments and discussion welcome – tax is a huge issue, with fascinating equity and efficiency considerations running through it.