Monday, 27 October 2014

Tax on Tax

I'm not a fan of taxes, but GST should be levied on top of other taxes where those taxes are levied to cover service costs. Maybe it's a tax on a tax, but that's not self-evidently bad.

Suppose that there are some goods that could be provided by City Council, but aren't necessarily best provided by Council. For instance, mowing the lawn on the verge in front of your house. Pretty simple for you to do it yourself while you're mowing everything else, but there are also some efficiencies in just having the Council mower go over it. Some places provide verge-mowing; others leave it to homeowners. If you're a homeowner paying somebody to mow your verge, you pay GST on the service. If the Council mows the verges, you pay for it in your rates; there's GST levied on top of your rates. There's then no tax advantage to Council-provided services over privately provided services.

If instead there were no GST levied on rates, there would be a set of services currently best provided by the private sector that would flip into being Council-provided because of Council's tax advantage.

Petrol levies cover road maintenance and construction, at least in part; the service should be taxed. Excise levies are meant to defray some kind of external cost associated with consumption of excised goods; those costs should also be subject to GST. Sure, we're then heavily over-paying on tobacco, where tobacco excise is multiples of tobacco's cost to the Ministry of Health, but that's a problem with the excise rate, not with the GST. You also don't get the GST back on the amount by which you overpay for something at auction.


  1. If the service fee is only part of the rates, and the rest is something else (overhead or hardship fund or something), would you levy GST on only part of the rates? Doesn't that create a bit of an administrative nightmare?

  2. This is a perennial favourite of grumpy Letters to the Editor and never gets traction for a couple of good reasons:

    1. NZ's consumption tax works because it is simple: no exceptions. Anyone can file a return using literally just pen and paper. Once we start exempting common transactions like vehicle registration we will end up like the UK with an army of VAT bookkeepers and endless litigation.

    2. The argument never goes beyond the catchy headline. I am yet to hear anyone make a compelling argument about the special nature of tax and why taxing a tax is wrong. It's not like the government aren't going to raise the same amount of revenue one way or another so we are talking tax incidence here not overall quantum.

    Rates are a good example where the argument breaks down immediately. About 90% of every rates bill pays for services of direct benefit to the ratepayer: roads, water supply, wastewater, drainage, parks, sports facilities, libraries. All of these services can be and are replicated privately: a DVD store or Netflix subscription is not wildly different to a public library; when you go skiing you pay a toll to use a private road and so on. So councils must operate on the same basis as their private equivalent.

    I can think of few examples of council expenditure where you could argue you are not paying for a benefit to the individual ratepayer: councillor remuneration, community grants, district plan development. But the GST on these specific items is just noise on a rates invoice. Hardly worth putting the whole GST regime through the complicator for.

  3. It would be a nightmare. Levy it on the whole she-bang. As Donald points out, it isn't like the government wouldn't just hike taxes elsewhere to make up the difference.

  4. In any event, if there were no administrative costs and you wanted to make it a theoretically pure GST, the only distortion would be if councils were spending on direct transfers to individuals; overheads are GST-relevant as they are a cost of running the business providing civic amenities. (And councils shouldn't be in the game of transfers, that is properly a function for central government.)

  5. 100% agree and that is how overheads are treated in council budgets as chargebacks to the service-delivery accounts. As far as I recall the only true transfer payments are community grants (surf lifesaving clubs etc) and the Mayoral Relief Fund which are just froth in the context of the total budget.

  6. Well, I'm convinced. Let's tax the whole shebang.

    Related: one election, I remember this being literally Peter Dunne's only policy. He had a giant billboard on Aotea Quay bellowing "IT'S A TAX ON A TAX!". I was uninterested in politics at the time, but it still seemed weirdly specific and irrelevant.