On GST and regressivity
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.
Matt – Thanks for the thoughtful post. Taking your points in order:
It is true that construction of a new house attracts GST, but if you look around, say, all the expensive houses in places like Kelburn or Parnell or Cashmere owned mainly by high income folk, you will see they are usually old houses, built long before the advent of GST. The land value of even new homes is also GST free in most cases, I believe, although I am happy to be corrected on that point. More importantly, you note that costs of home ownership do not rise proportionally with income through the deciles, taking this as evidence of GST progressivity. That may be true if your baseline for measuring progressivity is total expenditure, but it is not necessarily true if the baseline is income (which, for reasons I state in the book, is my preferred baseline). If the money that high-income folk are no longer spending on mortgages etc (possibly because they have paid the mortage off, for example) is saved rather than spent on other G+S in the current period, then it contributes to GST regressivity, in period 1 at least. More on that in a moment.
Agreed.
I think it is drawing a pretty long bow to say that GST is neutral with respect to lifetime net savers person A because any lifetime savings of person A will attract GST when spent by person A(jnr), after person A has died. Do you really believe that person A experiences the disutility of being taxed from beyond the grave when person A(jnr) buys something? Or that people feel today the full disutility of taxes their descendants may pay many years or decades into the future?
In the same section of the book that we are discussing (p36 for anyone reading along at home), I set out my reasons for preferring current period exposure to GST over lifetime exposure as a measure of the tax’s progressivity. I would be interested in your take on my reasoning there, too.
On housing, the flow of services from all housing, whether rental or owner-occupied, primary or secondary, is implicitly subject to GST since, unlike other investment, houses are subject to GST when constructed, which is capitalised into resale values. So this aspect is neither progressive nor regressive. But note that owner-occupied housing is not subject to income tax, so to the extent that richer people ate more likely to own, the GST replaces a regressive aspect of the income tax.
On overseas travel, it is not obvious how to even measure progressivity, since going overseas avoids domestic sales taxes but then incurs foreign taxes. Frankly, I think Rob is clutching at straws on this one.
On bequests. You ate absolutely right Consider the following reductio Most of my income is spent on my children. In effect, I give the money to them. As a result I avoid GST but not income tax. They incur the GST but not the income tax. If poor people spend a greater percentage of their income on children than do rich people (which I suspect is true) does this make the GST progressive?
“Do you really believe that person A experiences the disutility of being taxed from beyond the grave when person A(jnr) buys something? Or that people feel today the full disutility of taxes their descendants may pay many years or decades into the future?”
What utility does person A(snr) get from their savings if they don’t spend them? (Bearing in mind that any income generated from these savings will be taxed).
Swan asks: “What utility does person A(snr) get from their savings if they don’t spend them?”
Like people who have insurance, Person A gets positive utility from the security of knowing they are protected from unexpected mishaps. Person A’s utility is further enhanced through the knowledge that this security is savings-based and has not come at the expense of having to contribute, in expectation, to someone else’s profits.
I guess the question then is, how do we value this peace-of-mind for tax purposes? And should we also be taxing people for having an education, having a supportive family, having good looks? These things also contribute to security and peace-of-mind.
In any case, I would have thought this insurance value would be substantially less than the goods and services that could be bought with the face value of the savings. Bearing in mind that each additional dollar of savings has less and less utility as insurance for mishaps. 15% (i.e. the rate of GST) of 1% is not a big number.
I dont understand the second part of your response but it sounds very subjective.
All good points everyone. I will be sure to post more on the issue in the future – as its good fun – I just don’t have time to respond to comments properly at this moment.
One thing I would add, we need to treat the questions of “what are the trade-offs” and “what is efficient” with the first brush, then armed with that knowledge we can add subjective stuff on what trade-offs we are willing to make given our view of what some sort of “implicit social welfare function” looks like. When having these discussions lets try to make these issues clear, so we can discuss them transparently 😉