Monday, 19 April 2010

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....


  1. I used to have a milk and cream graders certificate many years ago, but that was purely to assess the compliance of incoming milk from the farm against quality standards. We were all pretty sure that it actually was milk, so it seems ludicrous that a tax system should be sufficiently unwieldy that it necessitates the certification of such food "deciders".
    I have on occasion applauded the intent of the Australian scheme exempting certain staple foodstuffs. Sadly it seems it creates more costs than it prevents. Surely a better approach would be to do away with the exemptions, and offset the impact with a tax break for everyone. Or maybe just for lower income households if thats the way the Aussie govt wanted to play it, but that seems unecessary to me.
    This is an aside, but am wondering about the efficacy of providing something along the lines of food stamps as part of our welfare system rather than 100% money payouts. Any thoughts? Obviously there would be those who would find a way to abuse such a system, but am wondering if data shows it would cause more problems than it might solve. I figured if anyone had their hands on such data you would :)

  2. @Lats: One basic rule of economics: if you're worried that poor people can't afford X, then you do better by giving more money to poor people than mucking around with the price of X. If you think that poor people are basically competent to judge what's good for them.

    If we think poor people are prone to making bad decisions with money (and we'd have to have some way of measuring what counts as bad from their own perspective), then you have to weigh the short term benefits of paternalism against the potential erosion of longer term ability to make their own decisions.

    I lean towards straight cash payments. I'm even fairly sympathetic to arguments for scrapping the entire welfare and benefits system in favour of Friedman's negative income tax.

  3. Ha, your hypothetical conversation is good'n.

    There was a similar high profile case in the UK involving Jaffa cakes (a biscuit sized entity), and whether they were cakes or biscuits.

    Another thing we can thank Roger for. Where's his heroic sized bronze statue again?

  4. @Matthew: I'd chip in $100 for the fund to build one...

  5. @Eric Hmm, looked at Friedman's NIT, interesting idea, seems fairly straightforward in principle. I doubt something so simple would be able to be put in place without some well-meaning twit fiddling with it.

    As for "poor" people, I'd say many make decisions based on short-term objectives. Why this might be is up for debate, but I'd suggest that for many it is simply because they lack the intellectual sophistication to think beyond the immediate future. Sure, some will be forced by circumstances to make compromises, but the few folks I've known who I would classify as genuinely poor have been, quite simply, a bit stupid and did make bad financial and personal decisions. I know this probably makes me sound like a bit of a pompous git, but as the saying goes, opinions are like a**eholes, etc. :)

    I hope Steve our esteemed GM is following this, he would have a unique insight into this given his occupation...

  6. Lats, be careful that what you're observing here isn't just a higher future discounting rate amongst the poor.

  7. @MP OK, I'm not an economist, as my contributions here no doubt amply confirm, so would you be so kind as to explain this concept a little further? Cheers.

  8. @Lats: Where you were saying it's lack of intellectual sophistication that has poor people weighing the present more heavily, Matthew rightly notes that it's also possible that poorer folks weigh the present more heavily for reasons unrelated to intellectual sophistication. If your life expectancy is lower, you'll weigh future consumption as being worth less relative to present; it may be optimal to rely only on government superannuation rather than accumulate savings and so on.

  9. @Eric Thanks for that. Looking back I realise that rather than refer to intellect/stupidity I should perhaps have said poorly educated. It is closer to the meaning I intended to convey. It still sounds a bit elitist, and my liberal leftie background shrinks in horror at my apparent discrimination :)