Leave GST alone

New Zealand's Finance Minister keeps sending signals that Labour's preparing to break GST. 

Vernon Small pointed to the GST guff as evidence that we're now deeply into the silly season, where no policy can be expected to make a lick of sense and everything is targeted at the election. 

In any case, I tilted at it in Newsroom last week, just walking again through the reasons that this is an extraordinarily bad idea. 

Stupidity here doesn’t just mean something I don’t like, or something economists in general don’t like. A policy is stupid if it is a terrible way of trying to achieve any reasonable objective, if it is incredibly costly relative to other available alternatives, and if it wrecks other important objectives along the way.

Taking GST off food generally, or from fruit and vegetables, is stupid.

Yes, other countries do not impose GST on food or have other exemptions for worthy-sounding goods or services. But those kinds of holes in GST come at substantial cost. They make it harder for the government to raise revenue for the things voters want, while imposing insane administrative costs.

And remember the excellent old post by Stephen Gordon over at Worthwhile Canadian Initiative on the Nigel Tufnel approach to tax economics. 

No matter how thoroughly you explain that a consumption tax can be partnered with other taxes and transfers to achieve whatever tax system progressivity someone might want, the idiots will just keep saying, "But GST is regressive." 

The NDP has never been a fan of the GST, and persuading Canadian progressives of its merits is a never-ending variation on the theme of "but these go to eleven:"

Progressive Person: How do we raise the tax revenues we need for the social programs we want to implement without tanking the economy?

Economist: Consumption taxes. Theory says that consumption taxes such as the GST are the least-disruptive way of generating tax revenue, and available evidence appears to be consistent with the theory.

PP: But consumption taxes are regressive!

E: Yes, but we can correct for that using targeted transfers to low-income households so that they aren't worse off; that's what the GST rebate is for. And there will still be lots left over to fund those social programs.

PP: But consumption taxes are regressive!

E: I know. But they introduce fewer distortions than the alternatives, and we can recompense low-income households for their lost buying power.

PP: But consumption taxes are regressive!

E: I'm not disputing that point, but there's more to the analysis than that. Okay, let me explain the effects of the various forms of taxes...

<15 years later>

E: ...and so we see that a consumption tax accompanied by direct transfers to low-income households is the most effective way of generating the tax revenues you want.

PP: But consumption taxes are regressive!

Clearly, that's a dramatisation: in real life, it would never have occurred to a progressive to ask an economist how to finance social programs without tanking the economy. But below the fold, I'll try to summarise once again why the NDP should abandon its traditional antipathy to the GST and start to view it as an important instrument in advancing its agenda.

These kinds of debates ought to remind us just how lucky we are that tax decisions are generally delegated to experts and kept far away from voters. Policy could be so much worse than it actually is. As bad as things are, it could always be far far worse.