GST carveouts

I haven't blogged on Labour's proposed vandalism of the tax system, but I have been busy elsewhere on it. Along with pretty much every other public-facing economist and tax person.

Labour's proposed pulling GST off of fresh and frozen unprocessed fruit and vegetables. It might give $4/week in savings on average, and less than for lower decile households that spend less on fruit and veg.

They've pitched it partially as a response to cost of living pressures. But the income tax thresholds haven't been adjusted since 2010. If you only partially adjusted the bottom tax threshold to account for inflation since 2017, increasing it from $14k to $17k, you'd give everyone $210. Even jobseeker benefits are now above $17k. 

So beneficiaries would get the $210 as well. 

The same $4/week, except everyone gets that amount, rather than more going to those who spend a lot on fresh vegetables. 

And without wrecking GST.

It's so stupid. 

Some roundup, mainly so I can find this all again in a decade when someone's dumb enough to propose it again:

• RNZ morning report. They couldn't find tax expert or economist who supports the idea.  I show up a bit in here.
• Jo Moir at Newsroom points out some of the problems. Marc Daalder says its government by focus group. 
• They're paying for this mess by getting rid of depreciation for commercial buildings. But commercial buildings depreciate. So they're funding the creation of a distortion by creating another distortion. Dumb. Dumber than a sack of hammers. 
• I'd hit some of the problems in Newsroom, when it was just a rumor. And at RNZ. 
• I hit it again after the announcement, noting the obvious alternative of just increasing the bottom tax threshold. 

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.  

These are not serious people

If you believe it to be a good idea to remove GST from food, whether all food or just some food, at least one of three things is true.

1. You have not thought this through or read anything from anyone who has thought this through. Labour's 2018 Tax Working Group showed that, for the same cost to government revenues as a food-sized hole in GST, you could provide a transfer to every household. That transfer would provide twice as much benefit to poor households as taking GST off of food. Please read Paragraph 33 of the TWG report and reconsider your position.  
2. You have tried to think this through but are, in fact, an idiot. You are neither able to do basic math nor to listen to anyone who is able to do math. Not being able to listen to people who obviously know more than you do about a specialist topic suggests you really are unfit for politics. You will do harm to the people you purport to represent and wish to help, through willful stupidity. This will be a general problem across all policy areas, if you have revealed that this is your type. 
3. You are pandering to people who you think are unlikely to think this through, or who you think are unable to think this through. In this case, you are, in fact, evil. You are proposing something to people who you think are too dumb to know any better, that will make them far worse off relative to other policies that cost just as much. 

I can believe that Te Pati Maori have not thought this through and have not bothered to read anything from anyone who has thought this through.

Too much of the rest of their tax policy sounds like Trump promising to build the wall and make Mexico pay for it. 

If Labour goes for this, it's firmly Category 3. They know better. They have time to reconsider. I really really hope they reconsider. 

Susan Edmunds at Stuff asked me for comment on it yesterday; Thomas Coughlin at Herald caught my bit on TVNZ Breakfast this morning.

I'd gone through the absurdities of exemptions a while back; it all still holds. 

Morning roundup

The morning's worthies, on the closing of the tabs:

• Simon Bridges on an odd proposal to stop counting travel time savings when running CBAs on new roading projects. There's a good case that congestion charging is the first-best way of dealing with congestion, but travel time matters. 
• In praise of the Auditor General
• I really hope the final version of the Future for Local Government's reform paper is stronger than is here signalled. 
• Richard Harmon on the GST change that didn't happen. It's such a strange one. You'd have thought they'd have lined up the 'like clean tax' people on the right to have a supporting case ready. 
• If I've read this right, it's setting up some horrible incentives around Tranche 2 "Better off" funding. Projects with local benefits unrelated to water get loaded into the debt taken on by the new amalgamated water services entities?

Afternoon roundup

The tab-closing worthies:

• ACT supports a carbon dividend. Good!
• I had to point a lot of people at this last week on Twitter. The 2018 TWG's advice about GST. Says the same thing as the prior National Government's TWG. Good backgrounder for those needing background.
• Peter Martin worrying that Australia picks up NZ's stupid excise holiday.
• Matt Nolan also doesn't like the excise holiday.
• A helpful reminder that at least some of lockdown's costs were inframarginal.
• The borders are opening. Hope there's more hospital capacity by then, or that visitors are provided with appropriate warnings.
• Rotorua asks to be counted as a Tier 1 City, so it can more easily build houses. It's a fun one to think about. Nothing in the Medium Density Residential Standards rule applied to Tier 1 centres is outside of Councils' ability to do on their own. They could upzone on their own. Perhaps best to think about it as a way of binding to broad upzoning, and avoiding the salami-slices that councillors might otherwise be pushed into?
• Larry Summers worries we're heading for stagflation. I wish I had confidence that RBNZ has the competence to navigate the waters ahead.
• Running urban development through environmental planning processes gives NIMBYs lots of room to veto things. Here's Will Rinehart on how it plays out in California under the California Environmental Quality Act. Sounds a lot like New Zealand's Resource Management Act and its problems. PRI has reform suggestions for California.
• Nobody expects the Royal Society's inquisition. Fortunately, it has now been dropped. 

Things that should be common knowledge that seem not to be: Petrol and excise and GST edition

Petrol excise is charged per litre of petrol. It isn't ad valorem. 

That means that excise's fraction of petrol prices have been going down as petrol prices go up. MBIE says it's $0.77/litre, plus another $0.10 in Auckland. Check it for yourself on MBIE's website.

Excise is $0.77. Add $0.10 for Auckland gets you to $0.87. Add carbon costs of maybe $0.20 when carbon is $80/tonne gets you to $1.07. GST on excise and carbon gets you to $1.23. 

GST over the base fuel cost would add more. If petrol is $3/litre all up, then total GST is $0.39. GST on excise and charges is $0.16; GST on the rest is $0.23.

There's good reason not to add GST in here at all, unless you're making a generalised case for abolishing GST.

Consider a family that spends every dollar it earns. If the price of petrol goes up and it's paying a lot more GST on petrol, it's by definition spending less on other stuff. Its GST expenditures on other stuff goes down. Government gets 15% of that family's spend through GST before and after the change in petrol prices. 

Yes, GST on petrol goes up as the price of petrol goes up. But the effect works both ways. Would you argue that excise or GST should increase to compensate whenever oil prices drop? I know I heard some calls for that when oil prices were lower, but those were also stupid. 

Or think of it this way. Cutting excise when fuel is particularly expensive is a tax cut particularly benefitting owners of less efficient vehicles. Does that seem like the kind of thing that is likely to make sense?

And remember that the relatively inelastic side of the market bears the burden or enjoys the benefit of tax changes. When global oil markets are a mess and ordering in more fuel is likely to be hitting all kinds of chokepoints, does it seem likely that fuel supply is relatively inelastic in supply? Would a ditching of petrol excise not lead to a bidding up of fuel prices from the demand side, getting us most of the way back to where we were ex-ante?

Petrol excise (and Road User Charges) go into the National Land Transport Fund. That money gets used to build and maintain roads. Unless you think the costs of building and maintaining roads is countercyclical in oil prices, it is dumb to want them abated just because petrol costs are currently high. For a start, aren't roads made using bitumen? Isn't that an oil derivative that should covary in price with oil and petrol? Don't all the big yellow machines use a lot of diesel?

That's also the simplest explanation of why GST has to be charged on top of excise. Excise covers the cost of providing road services. Imagine if all the roads were privately owned and charged a fee for driving on them. There'd be GST on that fee, right? Same for excise. 

It would be coherent to argue that government raids NLTF for a bunch of stuff that shouldn't be funded out of road user charges. Some people like the idea of funding rail lines or public transit out of there, but the case is pretty weak. 

You could then sensibly argue for a permanent end to that, which would result in permanently lower excise and RUC. 

Except for one thing. 

Central government often also uses general revenues to pay for big highway projects that otherwise have a hard time passing a cost-benefit hurdle. It'll have to stop doing that, if you want to be consistent. And that will make RUC and excise go up again, unless you run a tighter CBA on roading projects. And I have no clue which way that cashes out. 

Here is the defensible argument that could be made. 

The Government's ETS revenues have gone through the roof. Carbon is $80/tonne. The government in 2022 will collect enough money in ETS revenues to give a cash transfer of over $1200 to every family of four in the country. It could even weight the thing so that more money went to households with Community Services Cards, and a bit less to households like mine. Call it a carbon dividend, tell families that they should use it however makes most sense for them in adapting to higher energy costs. 

It's almost surprising that the government hasn't gone for this yet. They're under a lot of pressure over rising petrol prices and rising prices of everything else. Some of that is rising carbon prices. Most of it is RBNZ letting inflation get out of control. But government could announce a carbon dividend, right now, give every family a big cheque, and buy a lot of insulation against complaints about rising fuel costs. 

GST at the border - hitting the big guys

The government looks to be requiring larger retailers shipping goods to New Zealand to apply GST without a de minimis threshold. 

The Government will release a discussion document on Tuesday proposing to make foreign firms levy GST on items valued at less than $400 that they ship to customers in New Zealand from October next year.

The proposal would change the current regime under which most consumer items valued at less than $400 can be bought from overseas tax free. A lower threshold has applied to goods that still attract import duty such as clothes and shoes.

Import duty and biosecurity fees on low value goods will be axed, softening the blow for consumers. Foreign firms that sell less than $60,000 of goods to New Zealanders each year would be excluded from the obligation to levy GST.

In a first-best world, GST would apply regardless of whether goods were sourced domestically or from abroad. But transactions costs will wind up mattering.

I've had two worries around GST at the border.

The first is that collection costs can easily outweigh the amount collected on low-value items - and the particularly worrying collection costs are those faced by consumers. Unless foreign vendors find it worth collecting tax for the New Zealand government in order to have access to the New Zealand market, the hassles facing consumers at the border if they had to run the same drill as they have to run currently for goods over $400 would be a massive non-tariff barrier.

Where GST would be collected by Amazon and remitted to the government, that worry's gone. Amazon will face some costs in submitting GST returns to the NZ government, but that's not particularly different to the costs facing any other NZ retailer - and Amazon's scale is big enough that it's worth it to front the fixed cost of learning how to do that. Not applying import duty or biosecurity fees on low-value goods also avoids imposing that border-barrier. That does mean that there continues to be some cross-subsidisation of biosecurity services from higher-value to lower-value imports, but that's the same under either regime. I'd expect there would have to be some additional cost to Customs in somehow tracking which foreign-based retailers are nosing up on their $60,000 threshold, but it isn't nearly as bad as it would have been if Customs were having to run GST on each package coming through.

The second worry I've had is that requiring foreign retailers to submit GST to the New Zealand government might dissuade smaller ones from dealing with New Zealand at all. Firms hovering near the $60,000 threshold might decide it's not worth the hassle of learning how to deal with New Zealand rather than risk going over the threshold. Firms doing multimillions of business in NZ will comply; smaller internet vendors might not unless they're shipping through an aggregator like Amazon that might handle the tax issues for them.

That worry is still live - but it's an empirical question.

It'll be interesting to see the paper that's released later today. So far it sounds rather pragmatic, but it'll be hard to tell without reading the full paper. The pragmatic version would just get the larger outfits that ship to NZ to comply, keep half an eye out for firms whose shipments become large enough to worry about, and not worry about fringe imports.

I'd have wanted a much higher threshold than $60,000 in shipments, and I worry that could deter some small players - if those firms are making, say, 5% profit on each shipment, then once you're earning $3k per year in profits from shipping to New Zealand, you must learn how to keep track of all your NZ shipments for sending tax to the NZ government. Would the accounting fees for that be less than $3k, if you're based outside NZ?

Overall, it's far less bad than it could have been. No holding goods up at customs pending payment, no separate rigamarole for customers, and no extra customs handling fees. I'd consequently expect only small effects on the proportion of goods purchased online from abroad.

GST and wealth

I thought it was common knowledge that implementing or increasing a consumption tax is a de facto wealth tax.

Suppose you saved $100,000 and expected to be able to fund $100,000 worth of consumption from that saving. If a 10% consumption tax comes in, you can fund 10% less consumption from that saving. The real value of that saving is then 10% lower than it was the day before the consumption tax came in. If that consumption tax then increases to 15%, the real value of the savings drops further.

It gets a bit more complicated if you bundle changes in consumption taxes with changes in other taxes. The 2010 tax shift did a few things simultaneously:

1. It provided an across-the-board income tax cut AND increase in benefits that was matched by an increase in GST. This part was neutral across incomes: you pay less in income tax on next year's earnings (or receive more in benefits), but pay more in GST when you spend from next year's income. The two wash out for those earning and spending in New Zealand.
   
   Those who spend in New Zealand and do not earn in New Zealand - tourists - wind up funding more of the government's budget. The GST switch was, in this respect, a tourist tax. Unfortunately, it's a tourist tax where the revenues accrued to central government while the costs of accommodating tourists through upgraded infrastructure largely fall on local government. Keep in mind that the overall incidence will be a bit more complicated, but GST loads some of the burden of providing government services onto tourists. The more the overall tax system relies on GST instead of income tax, the bigger this effect (well, within reasonable bounds). 


2. It also provided a real tax cut at the top. People on the left who prefer higher levels of government spending should restrict their anger to this part. Part (1) above was neutral, except for the increased tax on tourists. If you think that the overall shift made the tax system less progressive than you'd prefer, focus on adjusting things on this margin rather than messing around with GST. 


3. The increase in consumption tax reduced the real purchasing power of accrued savings. If I planned on withdrawing $10,000 from a savings account next year to fund consumption, I would be able to buy fewer things with that withdrawal. Same goes for using a reverse mortgage to eat my house in my retirement. Before the tax change, I would have paid 12.5% GST on things I purchased, so would have been left with $8,750 in after-tax expenditure; after the tax change, I would pay 15% GST on things I purchased, so I would be left with $8,500. The real purchasing power of my stock of wealth dropped by 2.5%. The GST increase was then, effectively, a wealth tax. This will matter especially for older cohorts running down their capital in retirement: the increase in NZ Super payments compensated for the GST on NZ Super payments, but not for the reduced value of any accrued wealth.


4. If your wealth is held in assets that pay taxable interest or dividends, then the tax on the returns to that wealth dropped because of the reduction in income tax. The real value of your stock of wealth dropped, because of (3) above. But the real value of the flow of earnings from your accrued wealth will depend on your marginal tax rate. If you were previously paying less than the top marginal tax rate, then this effect is a wash, for reasons stated in (1). If you were previously paying the top marginal tax rate, then you get a real tax cut on the flow of your dividend or interest earnings. The net effect between (3) and (4) will then depend on the extent to which you're living off the earnings from your savings, or eating the capital. 


5. There were other base-broadening changes that disproportionately affected richer folks. They're complicated, and harder to turn into soundbites than the leftie "But poor people spend all their money and don't take foreign holidays where they don't pay GST on their expenditures (and I'll conveniently ignore the increase in tax paid by rich foreign tourists)", but they're still real. 

So what to make of the whole she-bang? John Creedy and Penny Mok ran some microsimulations to look at what the changes would be expected to do to labour supply and income distributions. They found increases in hours worked because of the cuts in income taxes, and basically zero change to income distributions. Like, folks can shout "the tax change was regressive, the tax change was regressive" all they like, but here's what Creedy and Mok found:

Caveat: it's ex ante microsimulations rather than ex post work. But it's the best guess I've seen about the overall effect. Since there was basically no change in the Gini coefficient in after-tax incomes between the two systems, it didn't really affect the overall progressivity of the tax system. 

So, some bottom lines:

• It is stupid to hate GST for being regressive. In the first place, it's better to think of GST as being neutral over consumption over the life-cycle. That's what the Tax Working Group said too - maybe a bit regressive over current income, but neutral over life cycle in consumption. But that's the minor point. The major point is that GST is part of a tax system. Combining GST with a progressive income tax allows you to achieve any level of progressivity that you damn well want - with the added advantage that tourists pay GST but don't pay income tax. This isn't some right-wing-economist thing, it's a maths thing. At least at current margins. You could imagine pushing it far enough that the lowest income tax rate would have to go negative to compensate, but we're not anywhere near there. 
• It is stupid to hate the 2010 GST/Income tax shift as being regressive. See Creedy & Mok, above. The overall effect looks pretty flat. 
• It is not stupid to object to the part of the cut in the top marginal income tax rate that went beyond maintaining neutrality and did provide a real tax cut at the top. That's a point of fair debate around how progressive the overall tax system should be. You could have run the 2010 changes but with a smaller cut at the top and still have a better tax system than we had in 2009. I like the overall package they put through in 2010, but whether the top marginal tax rate should be 33% or 35% - that's more of a value judgment about what tradeoffs are worthwhile. If you think the tax system should be more progressive overall, do it by increasing income taxes at the top end rather than messing up GST.

Update: Mike Reddell, in comments, reminds me that the depreciation changes more than offset the drop in the company tax that also came in 2010. I didn't really hit on the company tax changes here since the imputation regime means that that just flows through into changes in the accompanying tax credits and then folks getting dividends wind up paying at their marginal rate anyway. But it would affect foreign beneficiaries of distributions who aren't able to use the tax credits. But, it's more than offset anyway by the depreciation changes. 

Retail innovation

New Zealand retail's problems are deeper than a 15% GST-at-the-border levy. Here's what Amazon is doing. Marvel at the innovation.

This all said, I believe that Amazon is the most defensible company on earth, and we haven’t even begun to grasp the scale of its dominance over competitors. Amazon’s lead will only grow over the coming decade, and I don’t think there is much that any other retailer can do to stop it.

The reason isn’t the bullet-point moats that are talked about in headlines, and it isn’t the culture of innovation or Bezos’s vision as CEO (though I do think Amazon’s culture is incredible and Bezos is the most impressive CEO out there). It’s the fact that each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.

I remember reading about the common pitfalls of vertically integrated companies when I was in school. While there are usually some compelling cost savings to be had from vertical integration (either through insourcing services or acquiring suppliers/customers), the increased margins typically evaporate over time as the “supplier” gets complacent with a captive, internal “customer.”

There are great examples of this in the automotive industry, where automakers have gone through alternating periods of supplier acquisitions and subsequent divestitures as component costs skyrocketed. Divisions get fat and inefficient without external competition. Attempts to mitigate this through competitive/external bid comparison, detailed cost accountings and quotas usually just lead to increased bureaucracy with little effect on actual cost structure.

The most obvious example of Amazon’s SOA structure is Amazon Web Services (Steve Yegge wrote a great rant about the beginnings of this back in 2011). Because of the timing of Amazon’s unparalleled scaling — hypergrowth in the early 2000s, before enterprise-class SaaS was widely available — Amazon had to build their own technology infrastructure. The financial genius of turning this infrastructure into an external product (AWS) has been well-covered — the windfalls have been enormous, to the tune of a $14 billion annual run rate. But the revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered: By carving out an operational piece of the company as a platform, they could future-proof the company against inefficiency and technological stagnation.

Read the whole thing. Amazon is amazing. There's a reason that you can parallel import things, as a consumer, for a much bigger price discount than the 15% GST gap.

I've been a skeptic about arguments for applying GST at the border, mostly because the main methods for doing so amount to non-tariff barriers: holding goods up at customs pending GST payment. I also think that if there's a distortion favouring imports because of the GST issue resulting in some allocative inefficiency, we should also consider that competitive pressure from those fringe parallel imports may make prices for domestic consumers more competitive as well.

But if Amazon does become increasingly dominant, that does simplify things a bit - if Amazon were willing to collect GST on its shipments to New Zealand.

Tax and trade barriers

Trump's potential incoming Commerce guy, Wilbur Ross, has a bizarre take on sales taxes. And it might mean that New Zealand should rethink how we treat imports and exports in GST. 

Ross co-authored an economic policy paper that proposed renegotiating NAFTA and included a call for combating the use of foreign consumption taxes that render American-made goods less competitive. Trump echoed the paper’s views in campaign speeches.

The document argued that foreign countries offer a sales-tax rebate on their own goods shipped abroad, but then tax incoming products from the U.S., which does not have a value-added tax. The net effect, he said, is to invite U.S. companies to relocate.

“Like many countries, Mexico has shrewdly exploited the (value-added tax) backdoor tariff to further its competitive advantage,” Ross wrote in the 31-page paper, co-authored in September with University of California business professor Peter Navarro.

“It is thus not surprising that U.S. corporations want to move their factories offshore and then export their products back to the U.S.”

Canada's GST is a mess, but even then it's tough to see how the heck this works. If a US manufacturer makes things in the US and sells in the US, no GST applies because the US has no GST. If it exports to Canada, GST applies on sales in Canada. If the plant moves to Canada and sells in Canada, GST applies on sales in Canada, but not on exports to the US - exactly the same as if it were US-based.

So the whole thing is nuts.

But that's not a constraint on Trumpist economics. And so what should New Zealand think about this? We have a clean GST that's charged on a point-of-consumption basis: imports draw GST (barring the GST-free threshold for low-value imports), but exports are zero-rated.

If a Trump administration thinks that's a trade barrier, they're nuts - but their being nuts doesn't much matter. It can take the WTO a long time to slap back stupid things the Americans decide to do, and who knows whether Trump would agree to pay whatever penalties they'd impose anyway.

But there is a workaround that solves another problem at the same time.

Last year, Seamus found a beautiful solution to local retailer complaints about GST on imports. The retailers association gets real mad about the de minimus threshold for imports. In their view, it makes an unfair playing field. The 15% GST difference is absolutely trivial relative to the cost difference between local retail and direct-to-consumer imports in way too many cases for the de minimus threshold to be distorting things, but doing away with it would serve as a big barrier against imports because there's no clean way of applying at the border without wrecking direct-to-consumer imports.

Except for Seamus's solution.

Seamus reminded us of Lerner symmetry. A tax on imports (like GST) is identical to a tax on exports - they're both taxes on trade, effectively. Long run, imports match exports. So flipping from taxing imports to taxing exports causes a one-off drop in the exchange rate equivalent to the tax, but doesn't mess anything else up. And so he argued that New Zealand should shift to zero-rating imports, which are tough to police at the border anyway, and apply GST to exports. The price of all exports would go up by that 15%, but we face world prices: that means the value of the dollar drops. I'll quote Seamus in full here:

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.

It's a clean solution for the online GST / import issue, but seemed politically difficult. If the incoming US administration thinks that zero-rated exports are some kind of trade distortion warranting sanction, though, we could flip to zero-rating imports and taxing exports. Ta-dah. Trump's inner mercantilist will love us for it, and we know it makes no difference. Like Seamus's example on Muldoon.

I thank @TrevorTombe for the pointer. He's a convert to Seamus's beautiful tax idea. You should be too.

@EricCrampton I'll admit: didn't read whole thing. ;) Just did now, and... outstanding point. Must let sink in, you changed my thinking.

— Trevor Tombe (@trevortombe) December 1, 2016

GST on services

The discussion documents on GST on services seem far less crazy than they could have. But there is one huge potential fishhook.

On the good side, the government at least is indicating a bit of realism about the likelihood of getting foreign suppliers to act as tax collection agents for the New Zealand government. That's why they're soliciting comments about a threshold: suppliers doing less than some amount of trade in services with New Zealand customers wouldn't need to collect tax. It looks like they're intending on hitting the larger ones that might find the fixed costs to be manageable.

But there's one huge potential fishhook. Paragraphs 7.14-7.16 lay out what can happen for consumers who try to pretend that they're business customers to get an ex-GST price. Businesses buying intermediate services from abroad would just claim the GST back anyway when charging it on the final sale here. People pretending to be GST-registered businesses are engaging in tax evasion and should have the usual tax-evasion stuff happen.

It's the other category that could pose the problem. Customers could pretend to be resident elsewhere to avoid GST. When I'd first read this, I thought about, say, somebody hiring a kitchen design expert from abroad for some expensive home renovation while pretending to be based elsewhere. That would pretty clearly be tax evasion. Paragraph 7.15 talks about people supplying incorrect information to avoid being charged GST; this seemed the natural kind of read.

But Ben Craven points out that IRD could choose to interpret this as also including folks using VPNs to access foreign content. If IRD thinks you're doing that to avoid GST, rather than to get three times the content, then the tax people could shut down parallel importation of digital content in ways that rights-holders here have thus far mostly been unable to do.

And if that's the case, it might time for pitchforks and torches.

GST import threshold - a few principles

Since the government is looking set to lower the threshold for GST application at the border, or at least will be releasing a discussion paper on it next week, a few principles to keep in mind:

• Were it possible to collect GST at the border seamlessly and at low cost, it should be applied at the border.
• There are two classes of losses that obtain where GST is not collected at the border on lower valued imports. 
• First, we have allocative inefficiency where slightly too many goods are imported relative to a first best. The 15% GST-based price difference may induce some extra imports at the margin, and this is inefficient.
• Second, we have effects on the overall tax base. This is separate from the allocative efficiency issue. Suppose that each and every import currently undertaken is one that would also have happened if GST were applied at the border and that there is zero distortion. There remains erosion of the tax base in that world - the government is less able to rely on consumption taxes and consequently has to rely more heavily on other, potentially less efficient, taxes. The deadweight costs of having to rely on less efficient taxes will also here matter. 
• That said, one thing that absolutely and emphatically does not matter is effects on the domestic company tax base or domestic income taxes. It potentially matters for thinking about fiscal incidence, but not for efficiency. Think of import leakages through online shopping here no differently than we think about import leakages when we buy cars that are built abroad. We do not, and should not, complain about lost company tax revenue where there isn't a domestic car manufacturing industry in New Zealand. Resources that would otherwise have been used making cars instead are put to other and better uses. Similarly, resources that would be put to use in domestic retail can be put to other better uses when consumers can more efficiently engage in direct-to-consumer imports from abroad. To count effects on domestic company tax base is to adopt mercantalism. 
• In assessing where the threshold should be, we need, in the first instance, to think about the effects on efficiency. And that will depend entirely on how you set up the collection mechanism. If you can collect GST at the border in a way that imposes no greater cost than collecting GST on domestic purchases, then there's no allocative inefficiency tradeoff to be made and the optimal threshold is $0. As soon as the collection mechanism is costly, you start having tradeoffs. And recall that these costs are not just the costs on Customs or IRD for running the system: it's also the hassles that some systems would impose on those wishing to buy goods from abroad. When I say costs, it's inclusive of all of that. What's the tradeoff?
• If the import threshold is set at some arbitrarily high level, you will induce way too much importation of high value, low shipping cost goods relative to a first best. That's an allocative inefficiency. 
• If the import threshold is set at $0 and there are fixed costs in collecting GST at the border - say a fixed processing charge, or hassles for consumers, or hassles for foreign shippers, you will deter a lot of efficient imports. 
• As you increase the threshold from $0, the allocative inefficiency from the fixed collection cost starts being trumped by the allocative inefficiency from too much higher valued import. At that point, you stop and set the threshold. What's the right threshold? I do not know, but it is endogenous to your collection mechanism.

And so we come to the absolute importance of picking a non-stupid, non-wishful-thinking GST collection mechanism.

Here are some things I believe count as wishful thinking. 

• That foreign suppliers other than the very large ones would have any interest in registering with IRD to pay tax on goods shipped to New Zealand.
• That foreign suppliers other than the very large ones, and perhaps not even the very large ones, would have any interest in putting a tax stamp on boxes being shipped to New Zealand indicating to Customs that tax had been paid on those shipments. 
• That you can run this through the credit card companies, when the credit card companies cannot tell whether a good purchased abroad on a NZ credit card was for consumption in NZ or for consumption abroad.
• That New Zealand shoppers would not bear any cost worth mentioning if their goods were held up at customs for days while waiting for them to get a note from Customs advising that the goods were there waiting for tax payment. 

Now I understand that there is talk about some big international agreement where shippers would register with some central agency and that outfit would make it relatively easy for those suppliers to ship goods to any foreign country. To the extent that that is successful, that counts against my first point. But consider too how many American retailers are already unwilling to ship goods abroad because of the hassles - that's why YouShop exists. That problem will not get better if we start thinking that foreign retailers are going to be happy to incur hassles in order to ship on to tiny tiny New Zealand.

Recall that there are a few classes of benefit from being able to access direct-to-consumer imports. Consumers doing the purchasing benefit from lower prices. Consumers continuing to purchase from domestic retailers very likely benefit from lower prices that come when domestic retailers have to compete with foreign websites. And, consumers get access to a broader range of niche goods that are not otherwise available in small markets. That last bit would be killed by proposals requiring foreign niche sellers to figure out how to get tax stamps to put on their packages. They'll just stop shipping the couple hundred items a year they might each ship to New Zealand. 

The least bad way I've thus far seen for imposing GST on goods shipped into New Zealand is the one Bronwyn Howell proposed. The domestic leg of shipment in New Zealand has to collect the GST and can compete to find the best way of doing it. It still needs careful assessment and somebody has to talk with the shippers about feasibility, but I can see its working where other mechanisms wouldn't. It doesn't require wishful thinking about credit card companies' willingness or ability to come to the table, or about foreign suppliers caring enough about the NZ tiny market relative to the hassles the NZ government thinks they're willing to bear for the privilege of selling to us. 

But we still have to sort out better ways of handling the customs and biosecurity extra levies that would absolutely kill low value imports if they were levied at the same time as GST on low-value goods. And we have to figure out what the domestic shippers would charge customers for having to act as tax collectors. I do not know whether the Howell proposal passes cost-benefit, but it seems the one most likely to do so if any of them will. To the extent that domestic retailers lobby for mechanisms that are more costly to implement, you might wonder whether they are really trying to impose a trade barrier.

GST as non-tariff barrier?

Shoppers are sceptical that taxing low-value imports is a hot idea.

The NBR reports on a new Horizon poll. In this first set, respondents pick all answers they think should apply.

I'd have gone with the plurality response here (plurality rather than majority as respondents can choose more than one answer, and sum of answers is around 120%).

In the absence of a mechanism that would cheaply and efficiently apply GST at the border, we should likely stick with the status quo. If we can set up a system that works through the shippers to apply GST to imported goods at minimum cost to importing consumers, that could make sense - subject to feasibility and cost-benefit assessment.

I'm a bit curious about why second-hand items from abroad should be exempt from GST. The usual argument for second-hand goods' exemption is that tax was paid on them when they were new, but that wouldn't apply to imported used goods.

Respondents were then asked which policies they'd prefer if the tax difference resulted in closed shops or job losses, support for the status quo dropped:

The point of applying GST at the border isn't to protect domestic jobs, it's to avoid creating a distortion in favour of direct-to-consumer imports and to avoid erosion of the tax base. 

On the first count, if collecting GST at the border introduces hassle costs for consumers equivalent to or greater than the 15% GST, then it's a distortionary non-tariff barrier; this isn't hard for low-value goods. 

The second one is harder. Suppose that NZ retail is hopelessly inefficient and that everybody shifts to purchasing online from overseas for anything other than groceries because they can save 30-50% pretty easily. The effects on the tax base could be pretty substantial. You then have to weigh the distortions caused by GST on low-value imports against the deadweight costs of other forms of domestic taxation, and I have no strong priors which way that would come out. But the relevant consideration is deadweight cost of a lower GST threshold against the deadweight cost of higher income taxes; we might also worry about the effects of reduced competition in the tradeables sector.

Retail NZ's Greg Hartford didn't seem to like the respondents' urging that retail become more competitive:

“Retailers are working really hard to make sure they can deliver their products. The reality is that New Zealand is a small market and retailers are very small compared to international companies. We just don’t have the scale to be able to negotiate discounts the way Amazon can, for example,” he says.

If that's true, and if consumers can more effectively buy directly from overseas, then domestic retail should shrink.

It's worth keeping an eye on GST proposals that come up. There are some that might not be terrible; others would impose unnecessarily high costs on consumers.

Get your NBR subscription and read the whole thing. Total online retail sales are now three times what they were in 2010, and the international component has risen from about 35% to about 45%. It would be surprising if there weren't more solid proposals coming out around GST on low-value imports in the next few years.

GST at the border

Bronwyn Howell kindly walked me through what seems the least hassle-ridden way of collecting GST at the border (other than Seamus's proposal): offload it onto the domestic end of the good's shipment. The mechanism, if I understand it properly, would work as follows, with all confusions being mine.

When you order something online from a foreign shipper, they have to get it to you. Whoever they're using for the international leg has arrangements with a domestic shipper to get it to your door. And there aren't that many courier companies running the domestic side of things here, plus NZ Post.

On the local delivery agent getting a heads-up that a package is on its way, it would also have to get a heads-up on the goods' stated value. The delivery agent would then be liable for GST on the shipped item.

That agent would then contact the recipient of the good seeking payment - when you order something online, you're giving them an email address anyway. When you get the email, you'd go to another website to pay the tax so that the shipment could get to you immediately on landing in NZ. If you don't get around to doing it before the product gets here, or if it gets lost in your spam filter, you'd have to pay the courier when the item gets to you or pick it up from the courier office and pay there. In a competitive shipping market, we'd expect the shippers to figure out easy ways to facilitate payment, like keeping your credit card details on file (if you agree) so that you can be automatically billed for any future GST charges without having to get an email.

So, in a best-case world, if you'd already paid GST once through that shipper and hadn't changed credit cards since, you'd just get an email noting that the shipping company was going to charge your card GST on a shipment that's coming through, with opportunity for you to object if something didn't make sense.

That would be pretty hassle-free, after the initial hassle of having to set up accounts with the different shippers.

I note, though, that UPS in Canada always managed to charge us about $40 for the service of paying the duties and tax on our behalf at the border. Note that these fees are over and above any actual taxes collected. One hopes that New Zealand's domestic shipping industry is sufficiently competitive that that wouldn't happen here, but I doubt that the shippers would agree to become tax collectors for free either.

I also wonder whether the process might provide a mechanism for griefing shippers and others, if anyone were so inclined: ship a thousand envelopes each with a very high customs valuation for a photocopied picture inside to a bunch of unwitting recipients. The automated systems would either charge them automatically for the GST on something they'd never ordered, or would trigger collection and confusions, or would require the shipper to send back the envelopes while explaining to Customs that no GST was collected on the items. Maybe there are no griefers out there who'd try it though.

We're then weighing up the transaction-deterring hassle costs (albeit perhaps smallish in this case), combined with the extra cost imposed on consumers by turning the shipping companies into tax agents, against the allocative efficiency gains from removing a tax distortion and the prevention of the erosion of a part of the tax base. And, at the same time floating around in the background, the expectation that if the system does wind up doing too much to deter consumer-led parallel importation, domestic retail prices would likely go up proportionately.

The system seems worth IRD's investigation. But assessing the benefits of it really shouldn't begin with the numbers in the ISCR report commissioned by BooksellersNZ. The report has a lot of good stuff in it - it's where I saw the scheme noted above, and why I got in touch with Bronwyn.

But the report does have a few ...issues.

1. The report gives, as one option, requiring foreign sellers to register with IRD. While I can buy that a lot of large online retailers would find it worthwhile to sign up to the kind of multilateral system they describe, I doubt that that is also true for lots of the smaller online US retailers. For many of them, any international shipping already seems a hassle: that’s one reason YouShop was set up, right? To forward on packages from US retailers who don’t want the hassle of international shipment?


2. The report suggests that, under the system where foreign firms would register with IRD, local firms would have to pay taxes to the US on shipment there through some OECD coordinating mechanism. But wouldn’t that kind of system, for shipping to the US, be next to impossible absent the US sorting out its mess of local sales taxes? I mean, they’ve not yet been able to sort things out for internet sales taxes within the US; there was some talk a couple years ago about having a set of states that agree to a reasonably common base also agree to collect sales taxes for each other, but I don’t think it’s gone anywhere, has it? There are thousands of local taxing jurisdictions in the US with really divergent rules over, for example, what precisely counts as an ice-cream sandwich (and what doesn’t) for sales tax purposes.


3. They suggest a few methods for evaluating whether shifting the regime would be a good idea and argue that a social welfare maximisation approach is strongly preferable to a government-centric approach in calculating the appropriate de minimus value or in setting other parts of the collection regime. I agree, but have a couple of worries on this front.


1. Absent a system that is able to collect these fees pretty seamlessly, from the consumer’s perspective, we need to watch for spots where we might impose fixed costs on purchases from abroad that do not obtain for shopping domestically. For example, it seems likely to be pretty distortionary and welfare-reducing if customers are deterred from buying from abroad because of a few days’ processing lag at the border, or because of a requirement to go pick up the item at a NZ Post Office across town and there pay the duties, or an additional step when shopping requiring you to go buy a customs stamp from a Customs website.


2. There's no note of that easy ability to parallel import from abroad can serve as substantial constraint on price-setting in domestic retail markets. That magnifies that harm that could be done if we unduly deter customers from using foreign shopping options due to expected hassle-costs. Sure, it's a second-best-worlds consideration, but we'd need some accounting for it in a social-welfare-maximisation setup.
4. I’m really not sure that the elasticities they're using from Einav et al, for example, would really apply here - they're there used to estimate how much change there would be to shopping patters with the 15% GST being applied on international low-value purchases based on tax elasticities across US states. Shipment from different US states, from the point of view of the consumer – there’s really not much difference other than price. Whether you buy in-state or from out-of-state, you’ll have whatever you ordered in 2-5 days. Here, that’s not quite so: domestic shopping is far more immediate than shipping in from abroad. Since they’re not nearly as close of substitutes for one another, the price elasticity of demand between foreign and domestic should be lower, right? Further, because the NZ market is much thinner, there are plenty of products you just can’t get here: again, this lowers the expected price elasticity and means that you might be overestimating the effects of the de minimus thresholds.


1.  On this one, I’m really willing to put money on it with any of the authors. If a seamless collection of 15% GST at the border is implemented, I am willing to bet that the decline in demand for Book Depository in New Zealand is less than 20% (they predict 45-60%). It’s range of products and ease of getting the books that’s driving demand for Book Depository, as well as price differences well in excess of 15%; an extra 15% charge is trivial – or at least that’s my bet. But only conditional on shipment’s being seamless. I’m more than happy to bet that you could kill demand for Book Depository by making it a hassle to receive shipment.


5. I am curious that they're counting as benefit the jobs that would be created in New Zealand subsequent to deterring imports by imposing substantial delays on importation. Mightn’t we need some modelling of whether those workers would be drawn from other actually productive sectors? It looks to me like we’d be imposing large and real costs here to effect a transfer from domestic consumers and foreign retailers to domestic retailers. Some accounting for the elasticity of domestic prices with respect to degree of foreign competition also seems likely to be relevant.


6. I was interested in their choice of counterfactual at the end where they invite the reader to imagine the benefits of a $5k tax-free threshold if only we could lower the de minimus threshold. Do they believe that this is the relevant counterfactual? Really?

In particular, I was very surprised to see this line in a report that had either Bronwyn's or Norm Gemmell's name on it:

“This enhanced demand at domestic retailers not only results in increased producer surpluses, but firm growth leading to increased employment. Jobs created by a reduction in the de minimis threshold increase the economy’s productive capacity, clearly benefiting the rest of the country. Enhanced domestic employment results in increased consumer spending, and through the multiplier effect, enhanced growth throughout the economy.”

Emphasis added. Jeez.

GST confusion

In last week's NZ Initiative "Insights" newsletter, I'd hit on public misunderstandings around GST. People think taking GST off food would be strongly progressive, because poor people spend a greater fraction of their income on food, but richer cohorts get a much larger fraction of the total benefit because they spend more in total on food. If you want to help poorer people, run the redistribution directly rather than taking GST off food.

I have never been a fan of the old prayer wishing confusion upon one’s opponents. In a real war, your enemy’s confusion helps. But in policy battles, it rather seems to me that that confusion hurts everybody.

Take GST. New Zealand is blessed with what is about the world’s cleanest value-added tax. Australia’s GST is in dire need of modernisation – their tax exemption regime around food, for one, makes ridiculous and arcane distinctions between bread and crackers and around just what gets to count as a pizza, as noted by the Australian Broadcasting Corporation this week.

Nevertheless, it is not hard to find local advocates of exempting ‘healthy’ food from GST to change peoples’ diets, or for exempting food entirely to help poorer people. Both proposals are hopelessly confused: they are very costly ways to fail to achieve the desired objectives.

To start with, so long as richer people spend more money on food than do poorer people, exempting food from GST does more to help richer people than it does to help poorer people. If your goal is to help poorer families be able to afford more food, policies that reduce the cost of housing leave more space in the budget – but we will come to that later. Food exemptions from GST are a very expensive way of helping poorer people as compared to just using our existing income transfer programmes – or making jobs easier to get.

Further, exemption regimes make a mess of GST accounting. If you think that we should tax people until they eat the way you want them to eat, it is better done with an excise regime than by wrecking GST. We will be taking on the case for and against food taxes later in the year.

I hadn't known it at the time, but John Creedy and co-authors have run the numbers on this one. Their abstract, in a forthcoming NZEP piece:

This paper investigates the welfare effects on New Zealand households of zero-rating food in a goods and services tax (GST). The detailed effects, for a range of household types, are investigated using Household Economic Survey data. Demand responses to consumer price changes are estimated and welfare changes, in terms of equivalent variations, are obtained. Comparisons are also made across clusters, consisting of groups of households with similar characteristics. A tax change is found to produce a very small amount of progressivity in the GST. Redistribution is from households without children and with high total expenditure to households with children and low total expenditure, and towards older households.

You get far more progressivity, if that's what you want, by transferring more money to poor people. Their bottom line?

The analysis supports earlier studies suggesting that the use of zero-rating in an indirect tax structure provides a poor redistributive instrument compared with direct taxes and transfers

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. 

Protecting retailers

Retail NZ spokesman Greg Hartford explains why he believes GST on imports is important:

But Retail New Zealand spokesman Greg Hartford says the proposed online GST idea will help retailers that can’t compete with foreign websites.

He says the cost to the government of not having an online GST system is somewhere above $200 million a year and adds that he expects this figure to climb as online shopping becomes more popular.

“We’re certainly aware of retailers going out of business because they cannot compete with foreign websites.

“We’re also aware of shops having to reduce staffing because of the state of their businesses.”

Mr Hartford disagrees that the higher level of bureaucracy will put smaller retailers off.

“Creating a level playing field isn’t a magic bullet that’s going to solve all the issues facing New Zealand’s retailers but it’s certainly one that is an easy fix for the government that will at least mean that everyone is competing on the same page.”

Hartford would prefer that the threshold be dropped to $25.

Both the above pieces also quote from our recent media release.

I'm not sure about that $200m figure: it would require that Kiwis spend $1.3 billion on direct imports from abroad, or a bit over $300 per capita. Total retail spending in New Zealand last year was just over $20 billion. Is it plausible that 5% of retail volume is direct to consumer imports of low-value items?

I'll assume that Hartford would wish the abolition of the biosecurity levy and the Import Entry Transaction Fee for lower valued imports - they add $47.29 in transaction costs for any import that runs through Customs processing, and $47.29 in fees on a $25 import (plus $3.75 GST) hardly makes sense. But abolishing those levies doesn't abolish the associated handling costs - it just shifts them to the general ledger. And without making it cheaper to process GST at the border, a $25 threshold necessarily imposes transaction costs far in excess of the revenues collected - and that's even imagining that the mechanism doesn't impose other hassles on customers.

If Hartford, or anybody else, is able to come up with 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 GST collected, that would be great.

GST on imports - yet again

Not sure that I'm a fan of the latest idea for applying GST on lower-valued imports.

Recall that New Zealand uses a de minimus minimis regime - no tariff or GST applies for imports where the total amount that would be collected is less than the cost of collecting the tariff. For most goods, that works out to a $400 threshold on purchases. 

In some first-best world, in which tax collection at the border were effortless, there would be no GST threshold and all goods consumed in New Zealand would attract the same tax treatment, regardless of whether they were bought domestically or imported from abroad. In a world with collection costs, we trade off between the distortions caused where the absence of GST encourages more imports, and the distortions caused when the application of GST at the border introduces hassles that discourage consumers from importing when it would be efficient for them to import, or discourage foreign retailers from shipping to New Zealand. Bundled into all of that as well is that a very liberal importation regime can provide strong competitive pressures in sectors with weaker domestic competition.

The Prime Minister suggested coordination through the OECD as potential solution. In that scheme, as best I understand it, anybody wishing to export to an OECD member would need to register with some agency and collect sales tax on behalf of the country to which the goods were being shipped. So Amazon, for example, would need to register, then pay GST to the New Zealand government on all shipments to New Zealand. Where New Zealand could never convince anybody else to collect taxes for New Zealand, the joint approach could have larger firms do so.

There are a few problems with this though.

First off, while big firms would do it, what are the odds that smaller US-based firms would want the hassle of dealing with a myriad of international tax rules? There are already plenty of American firms that don't want to bother with international shipment - that's why YouShop exists. More would stop shipping internationally. While it's simple to say "tech will fix it" and that retailers would only need to put some product characteristics into an online form to figure out what tax applies, none of that is simple. Canada exempts kids' clothes from GST but not adult clothes: do you know if your customer is a kid? The UK has weird delineations around what counts as which types of foods for tax purposes. I wonder how many Etsy sellers currently shipping internationally would still want to do that if they had to figure out exactly into which category their products fit, on pain of, well, pain if they got it wrong?

It gets worse if subnational taxes also need be applied and collected. Canadian provinces vary in sales taxes. America has over 8000 different local taxation regimes, some of which issue 1,437-word memos on which kinds of ice-cream sandwiches are taxable and which kinds aren't. It seems ridiculous to imagine that some simple "put in a few product details" form would solve this. If the US does move towards a harmonised interstate sales tax regime, things would be simpler, but we aren't there yet.

And that leads into the second problem. New Zealand firms selling to NZ consumers have to deal with GST - which is pretty simple in the grand scheme of things. NZ firms selling directly by mail order to consumers abroad do not have to collect taxes on behalf of foreign governments. Do we really want a world in which would-be exporters from New Zealand need register with the OECD and figure out a pile of international tax issues to, say, ship a set of sheepskin slippers to somebody in the US?

The retailers respond

Retail NZ's Greg Harford replies to my piece on maintaining the GST-threshold:

While Government must balance potential revenue with the costs of collection when considering the GST loophole, the negative effects on local retailers are an important part of the equation. Difficult conditions for local businesses have flow-on effects that impact the whole economy including reduced employment (which results in reduced consumer spending), lower tax revenue and empty store fronts in our town centres.

GST is not a new tax. Introduced in 1986, New Zealand’s simple and broad-based GST policy was the envy of Australia and the United Kingdom. It was, until the advent of e-tailing, an easy to use and fair system that applied to all good and services consumed by New Zealanders.

The internet means that consumers are now able to easily avoid GST by purchasing from offshore retailers online, and they are doing so in droves. Nielsen estimate New Zealanders spent $1.3 billion on purchases from offshore retailers in 2013 and this is only expected to grow.

The confusing variable de minimis level for GST and duty on offshore online purchases further complicates our otherwise simple consumption tax system.

He goes on to make some reasonable points about Retail NZ's role in informing consumers about the benefits of buying locally. That's all fine; I'm happy with whatever choice consumers want to make about paying more and having all the local service or buying from overseas and potentially having warranty problems.

But I'll disagree that negative effects on local retailers are that substantial a consideration. Really, we need to be minimising deadweight costs here. The absence of GST on imports means some things get imported that, in an ideal world, would be purchased domestically. This distortion is inefficient relative to a blackboard ideal. But some inefficiencies are best left alone - where the cost of mitigating the failure exceeds the cost of the deadweight loss, it's best not to mess with it.

I've yet to see a mechanism for collecting GST on low value imports that does not induce more distortion in favour of NZ retail than the current system applies against NZ retail. If somebody comes up with one, fine. But just insisting that GST be applied without specifying a mechanism for doing it smacks of protectionism, not playing-field levelling.

Rob Salmond also took issue with my piece, though I'm not convinced he read more than the bits I'd excerpted for Offsetting. The Standard thought Salmond worthy of reposting. I left the comment below there for Salmond.

Hi Rob,

If you check the full op-ed piece, you'll note that my main argument is about the hassle cost that GST collection would impose on NZ consumers. I argue that the GST difference is trivial relative to the magnitude of savings from shopping online, and that retailers looking to blame the GST are missing the bigger problem of economies of scale available abroad.

You'll also find that I support applying GST on imports IF there's a mechanism that would impose no hassle costs on consumers and that wouldn't just eat up all the revenue in transactions costs for the government.

I'm not sure why you characterise the argument around extra customs fees as slippery slope. The Customs fact-sheet dated November 2014 says that they collect those two charges whenever they collect GST. I hardly thought it unreasonable to expect that they would continue with that practice. It's always possible that the government could tell them "And, don't charge any fees for collecting $15 on $100 purchase", but that just shifts the collection cost to the broader public, and it wouldn't be trivial. If the existing fees are cost-recovery per transaction, think a bit about how much the Customs budget will have to hike to cover $37 in real costs per processed transaction if they have to process all of them and are barred from recovering the cost. We can ban customs from charging for it, but we can't wave a wand to make the collection costless. We just change who pays.

But, again, that isn't the crux of it. Rather, it's the differential hassle cost imposed on online shoppers purchasing from abroad when they have to jump through additional GST hurdles.

Hey, if you come up with some actual real-world mechanism that works, that's great. I expect that if any such mechanism existed, IRD would already have done it. But you could be an entrepreneur in this space.

The other main point is that NZ retailers may be deluding themselves by laying blame on GST when the price difference between NZ retail and shipped-to-my-door-from-abroad is often 33%-50%. Rather, it's economies of scale from abroad that are the main source of the cost differences.

Anyway, you might check back on the full piece I'd written and linked. I say pretty explicitly that I'd support GST on imports were there a way of doing it without effectively just putting up a big hassle-cost non-tariff barrier.

I'm curious about your source on Amazon's willingness to collect foreign taxes. If it's just that Amazon.co.uk collects VAT on goods shipped from the UK to other parts of the EU, I'm really not sure that's the same thing as Amazon.com agreeing to collect NZ's GST.

Finally, I'll note that where the NZ market is often pretty small and cannot sustain that much competition, it's fringe competition from online imports that help to constrain domestic prices. Make low-value imports a hassle to parallel import, and I'll bet you'll start seeing hikes in the local prices of those products.

Online GST revisited

While pretty much all goods and services consumed in New Zealand attract GST, imported goods under $400 are GST-exempt; IRD generally reckons the cost of collecting the tariff to be higher than the taxes collected.

As Australia's debates around reducing or abolishing its GST-free threshold have sparked renewed NZ-retailer pushes for its removal here, I wrote a short piece for NZ Retail, the local retail trade magazine. Their news story is here. Here's the op-ed. A snippet:

Does this create an uneven playing field for New Zealand retailers? Yes, as compared to a world in which tax could be collected costlessly. But consider the real world!

Ordering higher valued products from abroad means they will be held up at Customs until GST is paid. The quickest payment option is the online credit card service which attracts a 2.5 percent convenience charge. Internet bank transfers are cheaper, but require the customer to take the separate step of logging into online banking, making the payment, then waiting for Customs to notice that payment has been made.

Or, you can drive across town to your nearest Customs office. All of these methods also attract a separate Import Entry Transaction Fee of $29.29 (including GST) and a biosecurity levy of $17.63, regardless of the value of the import. That hundred dollar import that was undertaxed by $15 suddenly would attract not only $15 in GST, but also $47.29 in transaction charges.

...

It often seems like local advocates of a lower GST threshold really just want importation of foreign goods to be such a hassle that customers give up on trying. That world is the one I lived in in Canada in the 1980s, when I would stare longingly at American computer magazines and know that getting anything across the border involved at least $200 in brokerage fees.

I worry that too many local retailers focus on the GST issue when the underlying issue is rather more troublesome. New Zealand simply is not large enough to be able to achieve the economies of scale that foreign warehouses enjoy. Even if GST could be applied on foreign imports, today, with zero hassle-cost imposed, the foreign cost advantage is not likely to decline over time. The problem really isn’t the GST, or at least not in cases where consumers can easily save at least a third by shipping goods in from abroad. Domestic retail of easily shipped goods that do not require specialised local advice is not going to get easier. Recognising that rather than blaming the GST will be an important part of a reality-based reassessment of retail opportunities in the coming decade.

Previously:

• A modest proposal for internet tax parity.