We don't know how lucky we are, GST edition

New Zealand is blessed with one of the cleanest value added taxes in the world, our GST. Every new good is taxed at 12.5% (likely to rise to 15%); the tax provides about a fifth of national tax revenue.

Canada always had problems where basic groceries and kids' clothes were exempt. And so you'd see adults shopping for suspiciously large kids' clothes and nonsense about whether a half-dozen doughnuts counted as a grocery item (untaxed) or a prepared take-away meal (taxed).

A fun Australian case, via the Centre for Independent Studies daily email update, ideas@TheCentre:

You wouldn’t usually expect to find baking recipes in court judgments, but Justice Sundberg of the Federal Court in Melbourne made an exception recently. In doing so, he demonstrated how overly complex Australia’s tax rules are.

Take 67.5% wheat flour, 20% water, 8% olive oil, 2% sea salt, 1.5% yeast, and 1% malt extract. Follow the instructions in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, and what you get is either bread or a cracker.

At least that was the question Justice Sundberg had to answer. A small food importer from Melbourne had been importing Perfetto Mini Ciabatte, an oven-baked Italian flat bread that only culinary philistines – or the Australian Taxation Office – could mistake for an ordinary cracker.

Australian tax law has kept lawyers and bureaucrats busy for a long time over this mini ciabatta. Basic food stuffs are exempt from GST, but other foods are not. Thus, bread does not attract GST but crackers do.

The food importer thought he had a clear case when he claimed tax-free status for his mini ciabatta. He had even flown in Italy’s leading bread expert Giampiero Muntoni to testify in court. Signor Muntoni holds an EU certificate that entitles him to certify whether a product is a bread or a non-bread item for value added tax purposes in Italy. To this infallible bread pope it was clear that if the ingredients are that of bread, if it looks like bread, and if the Italian tax authorities classify it as bread, it must be, well, bread.

This was not good enough to convince an Australian court, though. Justice Sundberg noted that mini ciabatta cracks like a cracker; it’s sold next to crackers in Australian supermarkets; and a chemical analysis revealed similar gluten and protein content as that of crackers. In conclusion, he upheld that GST had to be paid on it.

It would be easy to find this issue ridiculous, but actually it is symptom of what is wrong with our tax law. It is incomprehensible that there should be different taxes for, arguably, very similar products.

Tax simplification may not be a political cracker; however, it is neither GST-free nor painless. But in order to re-establish legal certainty and reduce the amount of red-tape involved, it is worth every effort.

Read that again. The EU issues certificates saying which experts are eligible to determine whether or not something is bread, and that determination is important in both Australian and Italian tax law. Just think of the conversations:

"Oh, what do you do for a living?"
"Well, I'm a bread decider."
"A what?"
"A bread decider. I decide whether or not things are bread."
"But doesn't everybody know what's bread and what isn't?"
"Ah, but think about a mini ciabatta, which is an interesting borderline case."
"But why would anybody care?"
"Well, taxes..."
"And you've not shot yourself yet?"
"Well, I also have a side-gig as a jam decider..."

The deadweight costs of taxation also have to include the costs of all of the bread deciders.

Repeat after me: broad base, low rate...broad base, low rate....