Friday, 19 April 2013

Keep it simple. Keep it safe. NZ's GST edition.

Every now and again, some bright spark wants to introduce GST exemptions for their preferred little pet project. It's worth remembering just how awesome our GST is.

Josh Barro serves up a nice counterexample: sales taxes across the US states. He here notes one important problem with requiring internet vendors to remit sales taxes to the buyer's state: too many states have thoroughly insane sales tax codes. Dealing with one state's code is bad enough. Pile fifty of these on top of each other, and well....
The best argument that Amazon and other retailers raise against requiring them to collect and remit sales tax is that doing so is burdensome. Sales taxes are collected by 45 states and the District of Columbia, each with different rates and different rules about what is taxable.
These rules can get incredibly picayune and complicated. See this 1,437-word memo [link added] from the Wisconsin Department of Revenue, providing ten examples of cases in which the sale of an ice cream cake (or a slice thereof) might or might not be taxable. One of the examples hinges on the ratio of ice cream layers to cake layers –in Wisconsin, having too much ice cream in your ice cream cake can lead to a tax liability.
And one state’s picayune rules don’t necessarily conform to other states’ equally picayune rules. Both New York and New Jersey apply sales tax to candy but not to most other food, yet they have different definitions of what “candy” is. A Twix bar is taxable candy in New York, but in New Jersey it’s a non-taxable baked good. An online retailer has to keep up with this morass not in just one state, but in all of them.
More dauntingly, there are over 8,000 local sales taxing jurisdictions in the country, again with their own rates. New tax jurisdictions are created frequently and their boundaries do not necessarily conform to Zip or even Zip +4 boundaries. A few states, such as New York, even allow local jurisdictions to determine their own tax bases. One particularly relevant example for online retailers is that New York State does not charge sales tax on clothing and footwear under $110, but most counties in New York do – and sometimes a city has different sales tax rules than the county it is in.
He gives one way forward for an internet sales tax: administer it among states willing to run a single less-crazy state sales tax code. I expect that inefficiencies caused in the US by the absence of an internet sales tax are pretty second or third or fourth order compared to the gains that could be had by abolishing the home mortgage interest deduction and getting rid of the special tax status of employer-provided healthcare. Heck, getting rid of the kinds of things that make it really hard to implement a national internet sales tax would probably do at least as much good as implementing the national internet sales tax. If it's distortionary that I can avoid taxes by ordering a book from Amazon rather than wandering over to a book-shop, how about the purely within-state distortions that have to be present when you need tax memos on ice cream?

New Zealand's GST is remarkably clean. It's easy to defend a very bright line on a clean tax code without any of this nonsense in it. Down the path some here wish to tread lies 1437-word memos on what counts as an ice cream cake. That's inside-the-asylum stuff. Let's stay outside of the asylum.

Previously:

9 comments:

  1. Eric says :
    quote "
    New Zealand's GST is remarkably clean. It's easy to defend a very bright line on a clean tax code without any of this nonsense in it. Down the path some here wish to tread lies 1437-word memos on what counts as an ice cream cake. That's inside-the-asylum stuff. Let's stay outside of the asylum.


    unquote "


    inside the asylum. we have no GST on rental income from homes , and no GST on financial transactions . Is that clean and tidy for the wealthy or is it not

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  2. There's no GST on house rent for the same reason that there's no GST on second-hand goods: GST was paid when the product was first produced and sold.

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  3. Wow, making me feel bad about where I work and where I live. Kiwis: is there anything you *can't* do? (Besides being able to go four paragraphs without referencing Tolkien. But as flaws go, that's a pretty good one.)

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  4. We cannot adequately respond to earthquakes.

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  5. That makes sense, but why then is there GST on other rentals, like cars, appliances or motel rooms?


    And why no GST on financial services, or for some bizarre reason, gold and silver? http://www.ird.govt.nz/gst/additional-calcs/calc-spec-supplies/calc-exempt/


    After all, Bretton Woods and the gold standard had ended 12 years before GST was implemented, so it's not like it was still "money", like foreign exchange would be.

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  6. I'm pretty sure that I paid GST when I last got a hotel room and when I last rented a car. A rental house will be GST exempt because the tax was paid on the house when built. Financial services - I haven't a good explanation there. I'm sure there is one. I just don't recall it.

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  7. > I'm pretty sure that I paid GST when I last got a hotel room and when I last rented a car.

    Yes of course, that's the analogy.

    > A rental house will be GST exempt because the tax was paid on the house when built.

    http://www.ird.govt.nz/gst/additional-calcs/calc-spec-supplies/calc-exempt/

    According to the IRD it's an exception for all residential rental properties, though, not just those that had GST paid when built. If you actually buy and sell houses, GST rules apply normally (you pay GST if the supplier is GST registered).

    Compare it to a car rental firm that only rents out 15-year-old bombs they bought off private owners. They need to charge GST, but their cars already had GST paid when they were new. What's the difference with the house situation that means one should be exempt and the other isn't?

    If there's a compelling reason, I'm just wondering why it isn't just a natural part of a more general exception, like that for second-hand goods.

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  8. For rental houses and rental cars, the theoretically clean tax would have GST charged on the value-added by the landlord/care-rental-company only, and not on the portion of the price that covers the interest opportunity cost of buying the house/car in the first place. With houses, it will be a very small fraction of the rent charged to the tennant that *isn't* covering the capital cost of the house or that isn't covering intermediate goods (like rates) that have GST included in the price. For car rental companies, that fraction will likely be much higher, hence the best approximation is to go up not down.

    For financial services, the justification for exemption is just the difficulty of defining what is the output. Note that we are talking exemptions, here, not zero ratings, which means that the landlord/financial-services companies don't get to claim back any GST paid on intermediate goods, so the amount of tax lost is small.

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  9. OK, thanks, that all makes sense with regard to houses.

    > the difficulty of defining what is the output

    In that parts of the output are effectively priced into the interest rate itself? That doesn't seem like a reason not to even try to define it, though: even a ham-fisted definition will capture more than a blanket exemption. Some things (like explicit bank and brokerage fees) seem easy enough to define, anyway.

    > so the amount of tax lost is small.



    It's still the total value added by the financial services firm that's being lost, compared to the theoretically clean tax. It's also non-neutral in that it under-taxes financial services compared to other goods and services.

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