GST

Though not yet officially announced, this months budget looks likely to include an increase in GST from 12.5 to 15.0%.

It is clear we are being softened up with promises direct rates of income tax will be reduced at the same time.

Personally I feel cynical when I hear these arguments.


The same line was used in 1986 when 10% GST introduced and perhaps there was some truth in the promise because back then the maximum marginal rate introduced by Rob Muldoon was 66%. Lets hope we never get back to such incentive destroying levels, though I think Helen Clarke would have liked to have done so.

We also had to contend with sales taxes which were often around 20% for things like automotive parts and certain appliances. GST certainly removed many anomalies that existed at time. For instance the same item used for automotive uses was taxed but the same item used for something else was not.

The problem is new taxes are simply ratcheted up when ever there is a problem. Within 2 years new Finance Minister David Caygill solved his problems by increasing GST from 10% to 12.5%

In 1999 when Helen Clarke became Prime Minister the maximum marginal rate of personal tax was hiked up to 39%. No balancing reduction in GST of course. It was claimed only a small number of high earners would be affected. Nine years later a substantial number of workers found them selves on the maximum rate.

Now we are being spun the same old argument supporting a rise in GST so direct taxes can be lowered so there is an incentive for people to work, so there is less incentive for tax avoidance and so on.

One new element this time is the argument we need to be competitive with Australia who we are told might reduce direct taxes to 30% the same rate as company taxes. Australia has a maximum marginal rate of nearly 50%, plus capital gains tax so the fears seem unfounded. seems to have been forgotten. We are almost certainly loosing people to out neighbors cause of incomes, and lifestyle not taxes.

Of course the obvious question is: What is to stop some future Clarke/ Cullen type government increasing tax rates to 40% or more again? The only way to stop this happening is for a multi party commitment and that is highly unlikely.

Another argument wheeled out is how much lower our GST is than say Europe where it is around 20% .The Comparisons are always selective of course. In the USA there is no GST, just state sales taxes which are typically around 5% the mark.

In Australia GST is only 10% with exemptions for quite a few items such as non processed foods, medical expenses like doctors visits and the like. If Government is truly concerned about comparisons perhaps we should just match their GST rate.

The PM promises no one will be worse off.
Irrespective of his intentions I think there will be plenty of people who are worst off. Number one on my list is superannuates. National super is based on average wages (currently 66 percent of the net average wage) not costs so even if there is some sort of boost to super this will likely not be permanent unless super levels are set at a higher fraction of wages.

One of the most onerous effects will be the effect on peoples savings. If you have managed to put aside some reserves for major purchases unexpected expenses or retirement then on the day GST is increased the purchasing power of those savings will reduce by 2.5%.

Imagine a young family saving for a brand new house. On the day GST increases a $400 000 house suddenly jumps in price by $10 000. If they have managed to save $100 000 for their deposit then those saving will suddenly decrease in purchasing power by $2500.

It is almost a form of legalised theft.

Only way to ensure no one worse off will be a 2.5% government top up of all private savings. Let see if Prime Minister John Key believes his own rhetoric and makes sure no one is worse off by finding the money to do so.