From the Worthwhile Canadian Initiative, I see that the both the right-leaning Conservatives and left-leaning New Democrat Party in the Ontario provincial elections are campaigning to remove their equivalent of the GST from home heating and electricity. This is, of course, an economic nonsense. Liveo di Matteo from WCI attributes it to the dead-hand of mediaeval thought concerning the “just price” still resonating in the voting public’s consciousness. He may well be right on this, but it is noteworthy that political parties from opposite sides of the spectrum are promoting the same nonsense, so I suspect that there is more at play here.
The trouble is that the argument against favouring home heating and electricity in Canada is much harder to make than the argument against removing New Zealand’s GST from fresh fruit and vegetables. The reason for this is that Canada messed up its GST from the start by zero-rating basic foodstuffs. The transactions costs that are created when moving from a clean GST to one with exceptions are already part of the Canadian system, and the argument against favouring some goods over others, while still valid, loses its power if the system is already riddled with such judgements.
The main cost of introducing a new exception is the greater difficulty of defending against the next exception and then the next and so on. If we are not going to put the GST on home heating and electricity, why not apply the same logic to clothing, to home repairs, to … In fact, why not remove the GST from everything except luxury boats?
New Zealanders continue to owe a huge debt of gratitude to the 1984 Labour government for giving us a clean GST, but eternal vigilance is required to keep it that way.
You seem to be operating under the false assumption that NZ has a clean no-exception GST system. We don't. Financial products, including bank fees, interest earned and interest paid are exempt from GST, as is domestic rental. Land transactions between registered parties are now zero-rated if the property isn't to be used primarily as a residence. These property exceptions make mixed-use cases challenging and time-consuming.
ReplyDeleteYou're correct in saying that exceptions increase transaction costs, but it's false to believe that NZ has a no-exception GST policy.
In terms of efficiency the underlying question should be "is there a reason to subsidise heating by at the rate of GST".
ReplyDeleteIf that isn't the appropriate target of some policy - then arbitrarily zero rating heating is nonsense. If only that was the logic that policymakers would stick to.
"Financial products, including bank fees, interest earned and interest paid are exempt from GST, as is domestic rental. Land transactions between registered parties are now zero-rated if the property isn't to be used primarily as a residence"
ReplyDeleteThe justification for that is the idea that we want to tax the final use of income with our consumption tax - taxing rental or interest income is equivalent to taxing the rate of return, not a final product.
Matt Nolan, that's a strange way of looking at it. Domestic rental, just like financial products, are indeed consumption of products by end users. I'm not sure what you mean by "taxing the rate of return" - why doesn't a widget manufacturer get the same concession, being they calculate return rates based on profit margins?
ReplyDelete@ Mike
ReplyDeleteI would say we have a clean GST not a no-exemption GST. As I noted in an earlier piece, financial services are exempt (not zero rated), as the transactions costs of trying to define exactly what constitutes value-added are too high.
As I will note in a later piece (waiting for the end-of-semester rush to finish here), domestic rent is in fact taxed by the GST, although the route that that happens is not direct.
I don't know the details on the treatment of land transactions between registered parties. It maybe that this is indeed an example of a muddying of the GST to achieve some social objective, but I doubt it. It seems like a technical issue administered without political fanfare to address some technical issue.
I stand by the claim that we have avoided all temptation to complicate the GST in order to pander create the appearance of satisfying some social objective.
"Domestic rental, just like financial products, are indeed consumption of products by end users. I'm not sure what you mean by "taxing the rate of return" - why doesn't a widget manufacturer get the same concession, being they calculate return rates based on profit margins?
ReplyDeleteTaxing the yield on any investment is a "tax on interest" - the income is taxed coming in when it is earned, and taxed when it goes out on consumption itself.
In terms of housing, we tax the consumption value of housing as far as we can by putting GST on the final value of constructing a new house. This way we treat rental and direct home ownership equally - otherwise we would have to tax the implied rental on all property. And then we would probably be taxing housing more than other assets.
I'm still a little confused by this. Why should rental payments be exempt from GST? The property owner or manager is providing a service which the tenant is paying for. I don't see how they are any different to a sparky. If I get my wiring looked at I pay a GST component on the bill for the service provided. Similarly if I stay in a hotel/motel for a couple of nights I pay GST. Why would longer term rents be different? A landlord is running a business, so why can't they be registered for GST?
ReplyDeleteThe present discounted value of all future rental earnings are capitalized into the price of the house when it is first sold; GST is charged on top of that. Charging again on rent is double-counting.
ReplyDeleteAre you saying that when I buy a house part of the cost of the house is the possible rental earning potential, whether I intend to live in it as my primary dwelling or not? If so, then I want a refund on the GST component of income I've paid for but not received.
ReplyDelete@Lats: the rental services provided to you by your house are as valuable as they would have been to a tenant. In both cases, GST was paid on that rental flow (implicit or explicit) when you paid for the asset that included the capitalized value of that rental flow.
ReplyDeleteYeah, I'd already guessed that. I suppose I should have added a ;) to make it more clear I was being a tad sarcastic :) Thanks for clarifying that though Eric, as always you have been a tower of economicness.
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