Tuesday, 3 April 2012

Wishing for the New Zealand tax code

It's easy to forget just how excellent the NZ tax system is relative to those in other countries. But we are the envy of the world. Two datapoints for this week:

Tim Harford wishes UK VAT reform would move to a system like New Zealand's, where everything attracts GST: we tax food. After listing the absurdities of the UK system, where Jaffa Cakes are tax advantaged over "chocolate digestives" and whether a sausage roll is taxed depends on whether it's been heated. Harford asks what should be done, then answers his own question:
The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.
Harford wants the VAT to apply to everything, not just to sausage rolls.

Other than the tax-free threshold, that sounds an awful lot like the New Zealand system, where GST applies comprehensively and where, in 2010, the National government reduced tax rates across the board while increasing the GST.

Item the second: Frances Woolley makes the case for taxing food in Canada. The only place where I'd quibble with Frances's analysis is here, and it's only a minor quibble. Frances writes:
When the case for taxing basic groceries is presented in these simple terms, the assumptions underlying the argument become apparent. The equation of choice with happiness rules out any paternalist arguments for exempting basic groceries from taxation. For example, at present soft drinks are subject to sales tax, but milk is not. A tax on milk would be expected to decrease milk consumption and increase soft drink consumption, all else being equal. Those who would argue for taxing basic groceries would respond in one of two ways: first, that we should respect people's choices whatever they are; second, so many of the basic goods exempted from sales tax at present are teeth rotting, IQ-lowering sugary junk anyways that the paternalist argument has little force.
All of this is true. But the current equilibrium also involves a government-enforced dairy cartel that forces up the price of milk relative to soft drinks. Abolish the dairy cartel while imposing GST equally across all food items and the price of milk would drop, not rise. Especially for a GST as low as Canada's, and a dairy cartel as noxious as Canada's.

Again, Frances wishes that Canada had a system that looked a lot more like New Zealand's.

It would be awfully nice if Labour and the Greens here stopped trying to score populist points by hacking on one of the world's best consumption taxes. Labour, in office, recognized the GST's advantages and refrained from wrecking it for a decade. Too much populist nonsense in Opposition might force their hand in a future government.

Do visit the GST tag for Seamus's excellent prior posts.


  1. I'm in favour of leaving the GST as it is. Labour's policy of messing with it put me off. This policy would not have decided my vote, but the sort of thinking it gave evidence of had me wondering about their overall credibility.

  2. Eric. thanks for this link and also for the comments on WCI.

    Actually, I'm not nearly as convinced by the econ case for taxing food as a lot of people seem to be - I think there is a good case for trying to persuade people to buy more milk and fewer soft drinks. Though when I go shopping and see the junk that people buy I'm tempted to throw up my hands and figure what's the point, it's too hard to draw the line between good food and bad food.

    Your point about the Canadian dairy industry and the artificially high price of milk is an excellent one.

    1. If folks want to put in fat taxes and the like, it's better done as an explicit tack-on after GST rather than by GST-exempting healthy stuff. GST is just so much simpler, administratively, when it's clean all the way through. Retailers charge GST on everything and claim back the GST on all inputs.

      I have a hard time seeing the externality-based case for fat taxes - have seen some work showing that lifetime health system costs for the obese remain lower because they die relatively early and consequently don't stress out nursing homes as much. And I'm always nervous about "for your own good" taxes.

    2. Frances,

      Not only is it administratively easier to use direct taxes and subsidies to change the relative prices of different food types (if that is what one wants to do) rather than using zero-rating, there is also no nutritional rationale for making the change through GST rather than direct taxes and subsidies. Sugar doesn't suddenly increase in nutritional value just because it is an intermediate good in a restaurant meal or fast-food product, fruit and veg don't lose their nutritional value when sold in restaurants, etc.