Last week I asked a friend, “Are you mortgaging your house on Waiheke to travel on the ferry?” He grinned and said, “Thanks to Winnie, I travel for free.”
Gold Card millionaires on Waiheke ride the ferry for free while the poor are marooned, unable to afford the fare.
Similarly, the biggest beneficiaries of taking GST off food would be the rich. And the lost tax revenue would have to be made up in some other way.
I was one of the Finance Ministers who introduced GST. “Do not do what we did,” said the mandarin from the British Treasury. “We exempted fruit and vegetables. It led to endless arguments and evasion. Is decorative cauliflower a flower or a food? Put GST on everything so it is easy to pay and collect. Then assist low-income households directly.”
For 37 years - and through several tax reviews - successive governments have followed the mandarin’s advice. New Zealand has had the most efficient and cheapest method to collect and pay GST in the world.
If food is exempt, then why not children’s clothing, schoolbooks, hearing aids, public transport, home insulation, electric cars ... it’s a long list.
The across-the-board fuel tax relief was of most benefit to the 59.4 per cent of households with two or more cars. It was of no benefit to the 7.9 per cent of households too poor to even access a car. The lost tax revenue was not made up. Now we have potholes in the roads and increased debt.
When the purpose of taxation is social engineering, tax becomes complex and expensive to pay. There are always unintended consequences. Punitive cigarette taxes, for example, have made ram-raiding dairies an industry. As addicts feed their addiction first, the tax is now a cause of child poverty.
We do not just pay taxes; we also pay the cost of paying taxes. The only reason I need an accountant is to assist me to fill out my tax returns correctly. In effect, my accountant is working for the IRD, but I am paying him.
In 2021, an IRD study on the time and costs of small businesses paying taxes found that the average small business spends 31 hours a year on tax compliance, at a cost of $4495.
The cost of compliance is one reason why nearly all OECD countries that have tried wealth taxes have abandoned them. Wealth taxes require expensive annual valuations.
But there is an even more important consideration when making tax policy: when taxes are too high, they cause so much damage to the economy that the extra taxes raise no revenue.
For 37 years, New Zealand has had the most efficient and cheapest to collect and pay GST in the world, writes Richard Prebble. Photo / 123RF
During the Great Leap Forward, China’s communist government increased taxes. The peasants stopped planting, 30 million people died of starvation and the government got no revenue.
There is an optimum point where the Government could get the maximum tax revenue without damaging our ability to pay.
Sitting on its shelf, the IRD has world-leading research on what the optimum level of tax is. We know how much of the country’s GDP the Government can take before the level of tax damages the economy.
An international economist, Patrick Caragata, was commissioned by the IRD to discover the optimum level of tax for New Zealand. He engaged other international economists using different models to find the answer. The optimum level of tax in New Zealand is somewhere between 15 and 23 per cent of GDP.
The economists estimated that if the New Zealand Government took no more than 23 per cent of GDP a year, the economy would grow at 5 per cent per annum. If the advice had been taken, the average New Zealander today would be as wealthy as the average Australian. We would be able to afford a world-class health system.
But the Treasury was horrified by the results and closed the project.
The economists’ projections have come true. Labour has expanded government expenditure as a proportion of GDP to 40.42 per cent. Despite increasing the top tax rate to 39c, the Government’s accounts are in deficit. Government debt is rapidly rising. The economy is in recession.
How Labour has changed. Starting with Roger Douglas, Labour cut the top tax rate from 66 per cent to 33 per cent, and total tax revenue recovered in a few years.
Michael Cullen reduced Government expenditure as a percentage of GDP to 29.5 per cent in 2004. The Government ran a surplus, debt was reduced - and the economy grew.
The coming election is not just about who has the best tax plan, but who has the best plan to reduce the size of government.
Richard Prebble is a former leader of the Act Party and a former member of the Labour Party.
