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.
