Two policies the government could use to help low-income households are:Here's my draft model answer.
- reduce regressive taxes (eg remove GST from basic necessities such as food and medical services)
- increase transfer payments to low-income households (eg increase the unemployment benefit)
- Explain why GST (Goods and Services Tax) is a regressive tax.
This is a trick question. The GST is not actually a regressive tax, or at least is not one in absolute terms. While it is true that, at any point in time, a poor person is spending more of his income on consumption than is a rich person, all earned income eventually is spent; when the earned income is spent, it is taxed. On a life-cycle understanding, consumption taxes are not regressive.I wonder how the NCEA graders would have handled that....
A progressive tax system is one in which the rich pay a greater fraction of collected taxes than their share of national income; a regressive one is one in which the rich pay a smaller fraction of collected taxes than their share of national income. A flat consumption tax, like the GST, is more regressive than the income tax because the income tax is relatively progressive. If it's the case that rich people spend more while abroad (exempt from GST), then GST becomes slightly regressive. However, GST applies to purchases of newly constructed goods and not to used goods (houses, cars and such); if the tax is not completely passed through to purchasers on the eventual second hand market, and if richer people are more likely to buy new goods rather than used ones, GST becomes slightly progressive.
Bottom line: the GST is only regressive relative to the progressive income tax system. Moving to greater reliance on GST relative to income taxes can be regressive if the income tax reductions are not designed to maintain the ex ante level of progressivity. Further, those moves benefit debtors relative to savers: those with higher levels of savings at the point of the switch in regime are taxed twice while debtors bought goods at low tax rates and get to pay back the debt with income that draws less tax. Since rich people tend to have greater savings than poor people, the move advantages poor people.