GST lessons from across the pond

ScreenHunter_08 Jul. 01 09.14

Cross-posted from The Conversation

When long-time Kiwi expat John Clarke was asked why he left New Zealand, he said: “Because it was there.” Clarke at least knew what being “there” meant, in contrast to most of his new compatriots, whose interest in and knowledge of their ANZAC cobbers (or “bros”, as we would say) extends little beyond the usual clichés.

Of course, lack of mutual understanding is, well, mutual. For example, I am a NZ economist interested in policy matters. I did know that Australia had followed NZ (and many other countries) in adopting a general retail sales tax, known in both countries as the GST, and I also happened to know that – like Canada and other countries, but not NZ – the Australian government had made the usual capitulation to the farm lobby by excluding food from the tax.

I didn’t know that the Australian GST was introduced so long ago (in July, 2000), I didn’t know its level (then and now set at 10%) and I certainly hadn’t been told that its list of exclusions extends to such upper-middle class trinkets (as they are in NZ, anyway) as private health care and private school fees.

I found out these snippets when asked to comment on remarks made by your Treasury Secretary, Martin Parkinson in a “hard-hitting” speech last week to the Sydney Institute, with the prime minister Tony Abbott in the Chair.

Dr Parkinson did indeed offer an unusually frank and far-reaching set of comments on how Australia best should deal with long-run prospects somewhat less sanguine than those until recently enjoyed by the “lucky economy” that, uniquely in the OECD, sailed through the global financial crisis without recession on a torrent of mineral revenues (did I get that right?).

In a response to a question about increasing the GST, Dr Parkinson said that he was “not going to speculate on what tax changes Australia might want to do”, and then went right ahead with some quite forthright speculations. (Good for him.) In particular, he referred to the political ease with which GST increases were introduced in NZ along with cuts in personal income taxes, after “long public debate”. There are “probably some lessons” there for Australia, he said.

Ok, that gives me three questions to address: Is the Treasury Secretary on target with respect to political aspects of the changes in NZ? Are comparisons in any case valid? And what do I think of the economics of sales versus income taxes?

The NZ GST was introduced in 1986 at 10% and increased the first time to 12.5% in 1989. While I was living in Canada at the time, I do know that its introduction was linked to a truly massive halving of the top marginal income tax rate from 66% to 33% – quite an attractive trade-off there, at least for higher income taxpayers! And when the most recent increase to 15% was made, in 2010, it was packaged with a cut in the top income tax rate from 39% (where the Helen Clark government had raised it) back to the 33% rate. My recollection is that there wasn’t particularly long or intense public debate before the increases, nor much of a political kerfuffle following them.

What about the appropriateness of the comparison? Here I would be more cautious. In New Zealand, with our remarkably (uniquely?) comprehensive GST, just about everyone is paying the same, and if it goes up everyone shares that equally, too. That won’t be true in Oz. If you raise without broadening, you will be widening already problematic disparities between taxed and untaxed sectors. And if you try now to broaden the tax base, after your leaders didn’t have the guts to do it right at the beginning in 2000 – well, that really will be opening a political can of worms, won’t it? I’ll definitely be paying attention to that!

On the economic issues, Dr Parkinson claimed “research consistently demonstrated that relying more on indirect (ie, sales) taxes, than income taxes, can support higher growth and living standards.” I expect he means that sales taxes (if comprehensive!) are less distortionary than income taxes, in particular in terms of the supposed discouraging effect that high marginal tax rates have on wealthy folks’ willingness to get up and go to work in the morning.

I’d say that the research of the brilliant Australian economist Andrew Leigh (formerly at ANU, now a federal MP) along with Tony Atkinson of Oxford University, does show that the income tax taken from the top 1% of earners can increase when marginal rates are dropped from some levels.

But this doesn’t mean that produced income has increased (it may just be less avoidance), and these are complex issues. Good luck, Australia!

Article by Tim Hazledine, Professor of Economics, University of Auckland Business School at University of Auckland

Leith van Onselen
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  1. You missed that the Labor government kept the lower skilled workers and construction industries going through the Schools building and insulation installation schemes. This kept unemployment low which is arguably more important as the paradox of thrift never got hold in Australia.

  2. Bravo for such a well explained synopsis of GST in Australia and New Zealand. I am sure Australia has a a huge leakage in the collection of GST caused by the many exemptions. You have shed light on what could and should be done.