Call to keep GST simple
Food exemption would reduce tax take by 20pc
NEW ZEALAND’S GST is the best value-added tax in the world and should be protected from any exemptions that undermine it, according to Treasury secretary Gabriel Makhlouf.
The rate was increased from 12.5 per cent to 15 per cent in October 2010.
However, OECD countries have an average VAT rate of 18.5 per cent and it is 20 per cent in Britain, and one of the reasons it they are so high is because of a variety of exemptions, Treasury says.
Speaking to the International Fiscal Association meeting in Queenstown yesterday, Makhlouf said New Zealand’s tax system was overall ‘‘in pretty good shape’’.
‘‘By international standards we stack up well,’’ he said.
Makhlouf also ruled out a ‘‘Tobin tax’’ on financial transactions, but says the Government is looking at removing tax concessions for some sectors, such as mineral mining, as a way of rasing more tax revenue.
This week, Labour leader David Shearer said they were ‘‘rethinking’’ election-time proposals to exempt fresh fruit and vegetables from GST.
Makhlouf said New Zealand’s GST was a simple tax that raised a large amount of revenue, with minimal distortions.
‘‘Using GST to promote particular policies comes at great cost,’’ he said.
Removing GST from food would see the tax take from GST drop about 20 per cent.
The compliance costs, uncertainty and complexity of bringing in exemptions and multiple rates ‘‘are overwhelming compared with the asserted benefits’’.
There were far more effective ways to promote social outcomes than by ‘‘fiddling’’ with the con- sumption tax on a good or service, and far more effective ways to redistribute than taking GST off swathes of goods and services.
‘‘GST remains our best designed and more efficient tax,’’ he said.
There had been 17 VAT increases in the European Union in the past two years, with a 20 per cent rate in Britain. ‘‘One reason these countries have higher valueadded taxes is because they exempt all sorts of goods and service,’’ Makhlouf said.
Countries looking for ways to raise more revenue should follow the advice of the OECD and ‘‘tidy up their tax codes to remove tax expenditures’’ which typically favour higher income taxpayers, so more money could be raised without increasing tax rates.
Tax ‘‘expenditure’’ – short for tax concessions or exemptions to particular industries or groups not available widely, were just subsidies ‘‘by another name’’, Makhlouf said.
‘‘Work on tax expenditure is focused on identifying such expenditures in the interests of transparency’’.
With a broad-base, low rate approach and a comprehensive GST system, New Zealand did not have many ‘‘tax expenditures’’, but they have been listed in the Budget since 2010, he said. The aim was to get a complete tally of all the implicit and explicit subsidies the government awards, ‘‘so they can be appraised on their merits’’.
‘‘It is clear that some tax expenditures we do have, like the concessionary treatment of specified mineral mining, need to be looked at, and are being looked at as part of the tax work programme.’’
A mining company can deduct all exploration and development expenditure in the year it is incurred. Meanwhile, Makhlouf said the idea of a ‘‘Tobin tax’’ was seen by some people as a way to combat shrinking government revenues. A Tobin tax is thought of as a tax on foreign currency exchanges, or a more general financial transaction tax. The original idea was to reduce speculation in currency markets, which James Tobin considered dangerous. ‘‘The Tobin tax is a solution in search of a problem and we do not see a role for any such tax in New Zealand.’’