Friday, 27 March 2015

A low cost way to help the retailers

Eric asks
If Hartford, or anybody else, is able to come up some better way of processing GST at the border, without imposing undue hassle on either those who might be deterred from exporting to New Zealand or on Kiwi shoppers, and without collection costs that exceed the value of the GST collected, that would be great.
I’ll quibble a bit at the wording, the collection costs should not exceed the value of the improved allocative efficiency from removing a tax distortion, not the revenue collected, which is likely a much tougher hurdle, but either way I’m prepared to give it a go. 

My proposal will not just deal with the distortion that purchases by consumers that are made directly from overseas through on-line retailing receive a favourable tax treatment relative to those that are processed through an importer. It will also deal with a larger distortion in the GST. As it currently stands, the GST applied to imports does not apply to purchases made by New Zealanders while travelling overseas, and similarly the zero-rating of exports does not apply to the sale of services to foreign tourists while in New Zealand. That is, the current GST regime favours overseas tourism by New Zealanders over other imports, and penalises the New Zealand tourism industry relative to other exports.

So here is my proposal: Completely exempt all imports from the GST, and at the same time stop zero-rating exports and require firms to charge GST on all sales, including those to foreigners. Retail New Zealand should be happy, they would no longer be treated in differently from overseas on-line sellers in their tax treatment in New Zealand. And firms selling both overseas and in New Zealand would be happy to no longer have to have separate out sales overseas and domestic sales when filing their tax returns.

This idea runs completely counter to our inner mercantilist instincts, but our instincts don’t cope well with general-equilibrium reasoning. In my experience the greatest eye-opening moment you can give students in economics—the sort of epiphany that has them changing instantly from “this is obviously wrong” to “this is obviously right” is the Lerner symmetry theorem,  which shows that an import tax is exactly equivalent to an export tax. The idea here is that a tax on exports or imports is really a tax on trade. In the long-run, the present value of exports has to equal the present value of imports, as they are just opposite sides of the equals sign in a budget constraint. A tax on exports is a tax on imports, as it shifts resources away from producing for overseas (with the consequent importing from overseas that that allows) to producing for local consumption. (I was told that, during the Muldoon era, Treasury, knowing that it could not pursuade Muldoon to reduce tarrifs encouraged him in his policy of export subsidies, knowing that the latter would counteract the former.) 

In a country with a floating exchange rate, the way that the Lerner equivalence theorem would play out if it were to adopt the change from levying the GST on imports to levying it on exports, would be through a depreciation of the currency by the amount of the GST. So sure exporters would have to put up their prices to foreigners in NZ dollars by 15%, but the goods would not seem to be more expensive to foreigners because of the 15% depreciation. Similarly, the 15% GST coming off imports would be offset by the depreciation. In general, therefore, there would be no change, but with a few exceptions. On-line purchases would become 15% more expensive in NZ dollars due to the depreciation with no offsetting change in taxes. Trips overseas would similarly become 15% more expensive, but at the same time, New Zealand would become a far cheaper place for foreigners to visit, again.

I don’t imagine for a moment that any government would implement this policy. Instinctive mercantilism is too strong in all voters, and only a few have experienced the epiphany of general equilibrium reasoning. But this is not a “modest proposal” in the Swiftian sense. I am deadly serious. 


  1. Agree that your specification on efficiency vs taxes collected is the correct one. I just don't see much in likely efficiency gains in a system that applied GST perfectly at the border and costlessly: I doubt that more than a trivial amount of online importation is motivated by the 15% GST difference. It'll be a few cases at the margin where the extra 15% makes it worth waiting for something to ship in from abroad, but doubt it's a substantial part of the total.

    Not clear to me how this makes retailers happy though, unless the "no tax on imports" applies to any good sold at retail that had been imported. In that case, the retailers would only pay GST on the services they add?

  2. That's right. When you fill out your GST form, you specify total revenue form sales excluding sales directly to overseas, and total expenditure on goods and services from GST-registered sellers. Your tax bill is then 15/115 of the difference. With my proposal, expenditure remitted overseas to pay for imports would be considered the same as expenditure to a GST-registered seller.

  3. Cute. But wouldn't the retailers still complain that they have to apply GST on their storefront stuff where foreign suppliers don't?

  4. I am sure they, like anyone else, would lobby for policy in to their advantage, but we should ignore that. If Ecuador can get bananas more cheaply than we can produce them ourselves, we should import bananas and it doesn't matter to us whether that is because their climate is different or their tax system is different. Similarly, if Amazon can achieve a lower cost to the consumer than a NZ based store, we should take advantage of that irrespective of whether that is because of true costs of production, or because the US tax system creates a lower cost structure.

  5. Very interesting stuff. I'll read the report in detail a bit later. I'd also point out that the party which commissioned this very interesting and original piece of research into alcohol fuelled behaviour was none other than a private, alcohol selling evil corporation.

    In a similar vein, I saw a report commissioned by a cigarette company which argued that plain packaging had led to a net increase, not decrease, in quantities of cigarettes sold. As counter intuitive as it might seem, it would appear that the targets of these public prohibition campaigns are on some measure turning out better quality research than their publicly funded counterparts.

    I wonder why?

  6. If the objective is to apply GST to some imports is the objective and here people suggest various ways of making it neutral or something then I think the retailers could be disappointed.

    You can buy a nice pocket knife for peanuts through Amazon and even with the hefty transport fee its still competitive with the same item purchased here. Adding GST might make a difference but I'll add the following points..

    All one needs to do is buy a product of greater value (or buy several of the same and either onsell or give as a gift here) and get the transport cost *free*.

    And a big feature for me is the detailed descriptions of products plus dozens of reviews you get at say.. Amazon. I *could* read these and then go buy locally but that ignores the gratitude I've developed for the overseas seller and I'm just as likely to stick with him.

    Also, I get irritated with the mark up here.. I mean.. a local seller could buy online for the same or lower price than me and suddenly there's a fourfold markup here. I might be being unfair but it seems to me I'm dealing with an outdated business practice here.

    In short I don't think the application of GST to online purchases will make the local retailer more competitive because most of us will simply change the way we buy online to negate the effect.


  7. Very elegant. It would definitely tick the box that says "it's not fair that Amazon don't have to pay GST and I do", and in so doing make it very clear that the real problem isn't GST or lack of it, the real problem is cost of retail in NZ.

    I think you've provided exactly what Eric asked for, the question is whether, having done so, it's worth all the change to our tax system to prove something most of us already suspect - that this isn't the real underlying problem. I'd be tempted to say that it is, because if we don't then we have to keep hearing about it.

  8. Hmm, I'm missing something. I'll use Seamus's bananas: all our bananas (say) come from Ecuador. But the ones sold locally have GST charged on them, whereas the ones imported directly (in small quantities) have no gst added. Thus the Revenue misses out. There is some effect on trade, as, after local mark-ups and GST, locals can afford less bananas than if they imported directly.
    Oh, but I guess we'd eat more (NZ) apples instead? But doesn't this further proof that the regressive tax known as GST is horrible to us kiwis in practice?
    I suspect there are many on the green-tinged left who are pleased that GST allows us to consume less.
    Is the "answer" less tax?

  9. What we want is the ratio of prices between any two goods to equal the ratio *to New Zealand* of the marginal costs of those two goods. If bananas coming into NZ can be bought from Ecuador at a particular price, but those that pass through a retailer have GST and those that don't do not, then the GST is causing a (probably trivial) distortion. If on the other hand, the bananas come directly to us through Amazon, or through a retailer, and the GST is applied only to the retail mark-up, whereas Amazon doesn't have a US equivalent, then that is just a source of inter-country difference that is at the heart of the gains from trade. Oh, and the GST is not regressive, and is far better to us kiwis than alternative ways of raising revenue (whether we have less tax overall or not). See

  10. I like it - very neat. I had come to the same prescription from a different angle. GST is 'sold' as a consumption tax, but from the point of view of a company it is basically a tax on wages and profits. That is the 'value' that the company adds. So if you see it as simply an alternative way of raising income tax and company tax, what is the logic of charging it on imports or waiving it on exports?