Lower Costs Through a More Complex Tax System?

[DragonMaci]

Here is New Zealand a health group is suggesting that GST* be scrapped for all everyday necessary foods like milk, vegetables, cereals, and bread so as to make them more affordable and people eat healthier. No mention of fruit and meat, but based on what was said they would be included.

On the surface it would seem that it will reduce the price of these foods by one ninth (GST equals 12.5% (one eighth) of the GST exclusive price and then the GST is added to the price of the good or service, making GST equal to one ninth of the GST inclusive price). However, it would also complicate the tax system by adding pages to define what foods are except from GST and which aren't. The cost of dealing with this more complex tax code could eat away at most if not all of this reduced cost, maybe even make it cost more.

What are your thoughts? Would it really lower the cost of food or would it merely complicate the tax system further?

*Goods and Services Tax, a tax all customers pay on consumption, but it is paid on their behalf by businesses.

[Tom K.]

I'm not expert, but it would seem to me that if the tax is paid by the businesses themselves on behalf of the customer, the business is responsible for calculating that percentage and forwarding it to the government. Right now, based on what has be written, it's a flat percentage on all goods. With this new system, while the it sounds like it will drive down prices on food, I'm not so sure.

For instance, by complicating the tax system, even if they make it a blanket "all food is exempt", they're creating more overhead for the businesses to deal with. Overhead costs are always passed on to the customer. So, while the tax is no longer present, increased overhead charges will be there. Not only will the increased overhead drive up prices on food, but also on everything else in the store.

The only variable I see is the amounts. If the overhead cost increase is equal or greater to the tax percentage, then there will be zero savings for the consumer. It's just that simple.

As for more specifics, I couldn't tell you. This is just what ran through my mind as I read your post. I use absolutes like "will" and "always", but I'm not an expert so I could be way off on all of this.

[DragonMaci]

I'm not expert, but it would seem to me that if the tax is paid by the businesses themselves on behalf of the customer, the business is responsible for calculating that percentage and forwarding it to the government. Right now, based on what has be written, it's a flat percentage on all goods. With this new system, while the it sounds like it will drive down prices on food, I'm not so sure.

For instance, by complicating the tax system, even if they make it a blanket "all food is exempt", they're creating more overhead for the businesses to deal with. Overhead costs are always passed on to the customer. So, while the tax is no longer present, increased overhead charges will be there. Not only will the increased overhead drive up prices on food, but also on everything else in the store.

The only variable I see is the amounts. If the overhead cost increase is equal or greater to the tax percentage, then there will be zero savings for the consumer. It's just that simple.

As for more specifics, I couldn't tell you. This is just what ran through my mind as I read your post. I use absolutes like "will" and "always", but I'm not an expert so I could be way off on all of this.

The proposal is one for only certain foods to be exempt, which is something many countries do (eg Britain and Australia). In fact according to an Australian consumer watchdog NZ's lack of making everyday foods exempt is the exception rather than the normal. He also claims that the exempt foods in Australia are seeing less growth in their cost than the ones that are not. However, that says little about whether or not overall the lack of GST on those foods lowers cost. Are they higher than they would be with that tax due to increased overhead thanks to complicated food costs? Does that complication way cause over goods to cost more? Those are things that man's statements don't make clear.

I have no more knowledge about the overall effect than you to be honest. I know it would drive overhead up to some degree, but how much is beyond me. Would the overheard totally offset the tax reduction? Would it be greater than the tax reduction? That I don't know.

I think they have the wrong approach. A better and more effective means would be to totally scrap GST. That would lower the price of all goods and even services. It would even decrease overhead by removing one type of tax, thus making the tax system less complex. This would further lower prices. And finally it would lower government revenue by about a fifth. GST makes up 25% of government revenue, second only to personal income tax (about 42%). It even exceeds company income tax, which makes up about 17%. All other taxes make up about 16%, meaning that GST exceeds 15 other taxes combined, inclusing 5 withholding taxes. Cutting that would be a good step towards lowering taxes and prices. On the surface prices would go down by a ninth. However, the lower overhead would see them go down by more than that. On the surface taxes would go down by 25%, however the clawback effect (when lower taxes cause economic growth that results in more taxable income) would see that cut be lower. B ut either way, being such a large source of government revenue cutting it would reduce taxes by a lot and allow us to keep more of our money.

As a side note, both of the major parties say they do not support the proposal because it would be hard to enforce.

EDIT: Actually, cutting taxes altogther would be a better way to reduce prices, overhead, and government revenue. But my point was that the scrapping GST altogether is a much better idea than theirs.

Edited April 22, 2008 by DragonMaci

[Tom K.]

Thanks for clarifying the tax system in NZ. I have to admit being pretty ignorant of the laws over there.

I see your point about eliminating the GST, and I'd have to agree with you. Not only would it simplify the tax code, but also increase individual buy power with strengthens the overall economy to some degree.

[DavidOdden]

Obviously elimination of all taxation is the best, and it would be sour grapes to denounce a partial tax cut since it wasn't a complete dismantling of taxation. I doubt that it would have a substantial effect on store costs, since everything has a number and a computer can figure out whether an item is on the A list or the B list. The rest of the world manages quite well with differential tax rates, even in the US where you compute the tax on the total and add it on, rather than adjusting the price to include the tax. The real concern would be that this could easily turn into another way of regulating people's lives, by imposing punitive taxes on some foods but not others. It's basically just another scheme to soak the rich, since the proposal isn't to cut government spending and thus reduce the tax burden, it's to shift the tax burden off of things that affects absolutely everybody where individual expenditures (thus revenues) are not dramatically different, and on to the subset of the population that has enough money that they can buy the big-screen TVs, cars, books and bedsheets. The thing to watch for would be the compensatory increases elsewhere: what you should ask is, what evidence is there that this will result in an actual net reduction in total tax?

[DragonMaci]

I would like to make a correction: businesses are only required to register for GST and pay GST on behalf of their customers if they make $40,000 or more in sales, otherwise customers are expected to pay on their own behalf or get an accountant or lawyer to do it on their behalf. However, businesses making less than $40,000 in sales can opt to register for GST.

Also, when GST does and doesn't apply is already complicated

[DragonMaci]

The real concern would be that this could easily turn into another way of regulating people's lives, by imposing punitive taxes on some foods but not others.

The health group advocating this explicetly want that. They claim that the fact it would incentivise people to buy healthy foods and not buy unhealthy foods isone of their motives.

It's basically just another scheme to soak the rich, since the proposal isn't to cut government spending and thus reduce the tax burden, it's to shift the tax burden off of things that affects absolutely everybody where individual expenditures (thus revenues) are not dramatically different, and on to the subset of the population that has enough money that they can buy the big-screen TVs, cars, books and bedsheets.

Actually those people would get the lower food prices as well and those goods wouldn't cost more since they already have GST on them and GST is a flat rate here ulike Australia.

The thing to watch for would be the compensatory increases elsewhere: what you should ask is, what evidence is there that this will result in an actual net reduction in total tax?

GST is a flat rate and all the political parties (bar those that want totally scrap it), so there would be no compensatory raise in the GST for other goods and services. As for a tax reduction, that is not argued for by the health group nor is it on their agenda. In fact they seem to be in overall support of taxes and GST in particular, so I'd guess that tax reduction isn't something they care about. Afterall they like the idea that GST exceptioms would be tax based incentives for certain purchasing behaviour.

[Clawg]

The health group advocating this explicetly want that. They claim that the fact it would incentivise people to buy healthy foods and not buy unhealthy foods isone of their motives.

Well, then that "health" group consists of very ignorant people. What is healthy food? For me bread is very unhealthy, so is milk. Chocolate is very healthy, if it has a high cacao percentage. On the other hand some people have problems with the digestion of cacao. Meat is very healthy. Fruits can be unhealthy to some people. etc. pp...

It results in an endless battle between lobby groups what food is "healthy" and what is not healthy.

In germany we are taking the opposite direction. We have a lower tax rate for *some* foods and now some politicians call for a normal tax rate for "unhealthy" food.

From what I have read the tax code is very complicated, every single type of food is listed with no real system behind it.

One has to keep in mind that especially the tax code is the result not of the legislative but of lobby groups of various businesses (at least in germany, not sure about the situation in NZ). The only way to really reduce costs is by reducing government spending.

[DavidOdden]

GST is a flat rate and all the political parties (bar those that want totally scrap it), so there would be no compensatory raise in the GST for other goods and services.

Why is that: is there an unrepealable constitutional requirement that states what the GST is? If not, if the GST rate can be set by the legislature, and it can be raised because the tax revenues are insufficient. They will be insufficient, if they eliminate the tax on food (some or all), because that takes revenue away from the government and does not replace it with another source. The only possible way to continue, as a nation, would be to go into debt (to be paid by..?) or to do the unthinkable. Cut government spending. No, let me rephrase that, to eliminate people's entitlements. What party has vowed to reduce the entitlements of the populace? The "Yeah, Right" party, I imagine.

[D'kian]

All complications to the tax code wind up costing the tax payer mroe money.

As an example, it used to be taxes in Mexico were relatively simple, so our family business needed only a part-time accountant to figure them out. As taxes got more complex, regardless of whether they rose or fell, we had to employ an accountant on staff full time, and eventually we had to hire him an assistant to keep up with the work. not to mention paying for two or three tax workshops per year so they could keep current on changes to the tax codes.

A side consequence is that loopholes, if any, exemptions and such money saving tricks, which are legal, can be harder to find or to take advantage of. It doesn't help that upon finding a contradiction, a double-taxation circumstance, or other situations of that kind, the rule by the tax collection agency is "pay first, then complain about it."

Oh, there was also an examption from a value added tax for certain foods. That got complicated very fast. For example, foods in liquid form were not exempt, except for milk and products with a high milk content, but not liquid yogurt or any milk-containing products that also contained fruit. What about plain liquid yogurt? Who knows.

It gets worse. Books, newspapers and magazines are also exempt, because they promote culture, but not comic books, music CDs or movie DVDs. So Cosmo doesn't pay the tax, but Pavaroti does.

Finally, the sales tax is 15% throughout Mexico, except for border regions where it's only 10%, and free ports (such as Tijuana and Cancun) where there is no sales tax for goods bought or sold in such ports, unless they are to be shipped elsewhere; in that case the tax is 15%, unless they go to a border region and it's 10%.

[DragonMaci]

Well, then that "health" group consists of very ignorant people. What is healthy food? For me bread is very unhealthy, so is milk. Chocolate is very healthy, if it has a high cacao percentage. On the other hand some people have problems with the digestion of cacao. Meat is very healthy. Fruits can be unhealthy to some people. etc. pp...

It results in an endless battle between lobby groups what food is "healthy" and what is not healthy.

Well, strictly speaking they are referring to the average not exceptions, but you have a good point that such lobby group battles would occur. I think I have heard of such happening with goods and services in general in Australia with its complex system of whether or not GST applies and if so what rate it is (they have varying rates depending on the product). Meanwhile NZ has a simple flat rate with complexity lying only in whether or not a business is required to register for GST and whether or not an international business with NZ sales or an NZ business with international sales has its sales subject to GST.

One has to keep in mind that especially the tax code is the result not of the legislative but of lobby groups of various businesses (at least in germany, not sure about the situation in NZ). The only way to really reduce costs is by reducing government spending.

Here it is legislation based, though lowering of rates (eg the recent 3% business tax cut and personal tax cuts being promised) are sometimes done to win votes come election time. As for how to cut taxes, well it can be done without lowering spending if the surplus is large enough. A few years ago the NZ government had an $11b surplus, giving it room for massive tax cuts without cuts to spending, but it didn't deliver any. Although strictly speaking since surpluses do end up being spent it would mean a cut in government growth.

Why is that: is there an unrepealable constitutional requirement that states what the GST is?

No, it is because the major parties oppose adjustments to GST.

If not, if the GST rate can be set by the legislature, and it can be raised because the tax revenues are insufficient. They will be insufficient, if they eliminate the tax on food (some or all), because that takes revenue away from the government and does not replace it with another source.

No, it would just reduce the massive surpluses the government keep having. However, no GST rate rises would occur. The major parties oppose that. As for recovering that income, taxes that are being introduced or increases soon (eg $30/tonne of carbon emissions and extra fuel excise tax) would more than make up for a limited selection of food not having GST on it. Due to the limits and food costing a lot less than other goods the loss of revenue would be small and more than made up for thanks to new and increased taxes, so if anything government surpluses and growth would still grow and if anything grow faster.

The only possible way to continue, as a nation, would be to go into debt (to be paid by..?) or to do the unthinkable. Cut government spending. No, let me rephrase that, to eliminate people's entitlements. What party has vowed to reduce the entitlements of the populace? The "Yeah, Right" party, I imagine.

Actually, there are two parties in NZ that have promised such. The promises of one are half-arse and will make little difference. They unsurprsingly get few votes. In fact in the 2005 election they only got seats in parliament because they got an elective seat. They were under the 5% requirement to get in without an elective seat. The other party proposes total cuts, ie, laissez faire capitalism. They get only 1% of votes though, a lot less than the other party.

Edited April 23, 2008 by DragonMaci

[DragonMaci]

All complications to the tax code wind up costing the tax payer mroe money.

The question isn't whether or not it will cost more, but whether or not it will cost more than the surface level 11% drop in prices due to GST exemption.

As an example, it used to be taxes in Mexico were relatively simple, so our family business needed only a part-time accountant to figure them out. As taxes got more complex, regardless of whether they rose or fell, we had to employ an accountant on staff full time, and eventually we had to hire him an assistant to keep up with the work. not to mention paying for two or three tax workshops per year so they could keep current on changes to the tax codes.

I am not sure how it works inh Mexico, but in NZ their fees are tax deductable, so their fees don't make much difference. I don't think the workshops are deductable though, so they would increase overhead.

A side consequence is that loopholes, if any, exemptions and such money saving tricks, which are legal, can be harder to find or to take advantage of. It doesn't help that upon finding a contradiction, a double-taxation circumstance, or other situations of that kind, the rule by the tax collection agency is "pay first, then complain about it."

Here in NZ double and sometimes even triple taxation is common but not an error. It is through second, sometimes third taxes. GST, gaming duties, and excise taxes (alcoholic benerages, petroleum products, and tobacco products) being the main culprits. However, soon extra cases of triple taxation and sometimes even cases of quadriple taxation will come into effect through a $30/tonne carbon emissions tax on all carbon emissions above the 1990 levels (NZ signed the Kyoto protocol).

Oh, there was also an examption from a value added tax for certain foods. That got complicated very fast. For example, foods in liquid form were not exempt, except for milk and products with a high milk content, but not liquid yogurt or any milk-containing products that also contained fruit. What about plain liquid yogurt? Who knows.

Yeah, they are complicated in Australia and Britain too according to the current affaris show I watched. That complication is why the parties don't want to introduce it. They aren't worried that it will complicate matters for businesses and customers that have to pay their own GST. They are worried that it will complicate matters for tax officials.

Finally, the sales tax is 15% throughout Mexico, except for border regions where it's only 10%, and free ports (such as Tijuana and Cancun) where there is no sales tax for goods bought or sold in such ports, unless they are to be shipped elsewhere; in that case the tax is 15%, unless they go to a border region and it's 10%.

The closest we have to that is duty-free shops, but that is a globally common phemomenon at airports as far as I know. At least in Western nations.

EDIT: If anyone is wondering why I know so much about NZ taxes and about GST in particular, in the the case on most taxes it is because of research a project I was doing a while back and in the case of GST and some other taxes it is because I have been researching tax liabilites for businesses lately so I can know as much as possible when I start my business later this year. Also, I read news and opinion articles about tax when I see them and remember the facts mentioned in those articles.

Edited April 23, 2008 by DragonMaci

[D'kian]

I am not sure how it works inh Mexico, but in NZ their fees are tax deductable, so their fees don't make much difference. I don't think the workshops are deductable though, so they would increase overhead.

In Mexico most expenses are partially deductible (though even that changed with the latest "reform", which I have yet to fully comprehend). So an accountant's fee would be partially deductible. In any case, since we had to put ours on the payroll, we also had to pay social security, 2% payroll tax (a tax for the priviledge of employing people and paying them wages says a lot about those who collect taxes, does it not?), retirment co-payments, etc etc.

Here in NZ double and sometimes even triple taxation is common but not an error.

Oh, that's common here to with surtaxes and such. But the tax code is so screwed up you might, say, earn enough for a tax bracket, yet be liable for a higher bracket, or even both. It happens often with people who work on commission, since their earnings are not constant throughout the year.

The closest we have to that is duty-free shops, but that is a globally common phemomenon at airports as far as I know. At least in Western nations.

It's global.

Tijuana is across the border from San Diego, Cancun is a popular beach resort on the Caribbean. Both are also sea ports. They see a lot of foreign visitors, who spend more money without the sales tax. Why the government can't see the economy would improve if there were no slaes taxes all over the country remains a mystery.

[DragonMaci]

In Mexico most expenses are partially deductible (though even that changed with the latest "reform", which I have yet to fully comprehend). So an accountant's fee would be partially deductible. In any case, since we had to put ours on the payroll, we also had to pay social security, 2% payroll tax (a tax for the priviledge of employing people and paying them wages says a lot about those who collect taxes, does it not?), retirment co-payments, etc etc.

Ah, the point of difference is one of degree then. Here 100% of their fees are tax deductable. Also, we have no seperate social security tax. However, we do have high personal tax rates and extremely low thresholds for the higher rates. However, you would have to deduct a 1.4% ACC Levy from his pay and forward it to ACC and you would have to pay an ACC Levy of 1.4% of his income from your income. But if he was self-employed and offering his services to you he'd pay about a 2-3% ACC Levy to ACC himself (I am not sure what it is for accountants; it varies from job to job). However, this is paid to ACC not the government. However, ACC is a government owned (but not run) mandatory accident insurance scheme, so I count ACC Levies as an effective tax on income.

Oh, that's common here to with surtaxes and such. But the tax code is so screwed up you might, say, earn enough for a tax bracket, yet be liable for a higher bracket, or even both. It happens often with people who work on commission, since their earnings are not constant throughout the year.

What is a surtax?

What do you mean by, "earn enough for a tax bracket, yet be liable for a higher bracket, or even both"?

Tijuana is across the border from San Diego, Cancun is a popular beach resort on the Caribbean. Both are also sea ports. They see a lot of foreign visitors, who spend more money without the sales tax. Why the government can't see the economy would improve if there were no slaes taxes all over the country remains a mystery.

Shops at ports in NZ are not exempt from GST. We only have duty-free shops at airports.