GST hike should not be written off

Whacking up GST, probably to 15 per cent, is on the cards if the Government follows the recommendation of a working group presenting options for the Government to restructure the tax system.

Hiking GST will provide a huge opportunity for the Government to raise more cash.

Basically every 2.5 per cent of GST increase injects another $2 billion a year. The Crown currently rakes in $10.6 billion net from GST.

The working group includes members from Inland Revenue, Treasury and tax experts like Deloitte's Mike Shaw, who says reducing tax fraud and loopholes and making the system more efficient are among the reasons for raising GST.

Shaw says the current system has too many loopholes, which he calls "serious evils" that enable people to set up tax rorts.

He gives the example of higher-income earners who set up trusts and syphon money into them to keep their personal tax rates lower.

A shift to a GST-based system and flattening the income tax rates would reduce these rorts, he says.

The increase in GST could be used to reduce all tax rates by 2 per cent, the report says - which coincides with the Minister of Revenue Peter Dunne's policy.

"One of the major drivers of this review is the Government's medium-term objective of aligning the top personal, corporate and trust tax rates at 30 cents or lower, consistent with the objective of a broad-based, low rate tax system," Dunne says.

"This is most definitely not another talkfest. That is why we are ruling nothing in and nothing out at this stage."

New Zealand has a low rate of GST by international standards, although the major European economies with rates of 17.5 per cent to 19.5 per cent have lower rates for food.

The counter-argument to a GST increase is its effect on the poor, who spend most of their money on necessities like food, power, and rent.

Palmerston North financial adviser Kathy Jarrett has crunched numbers to show a GST increase will hit two main groups: the "Kiwi battlers" with young children who spend every cent they earn, and the majority of retired folk.

Jarrett says the lower your income, the more of it you spend on food, petrol and so on, whereas people on higher incomes are able to save.

She calculates people on lower incomes would need a pay increase of 8 to 10 per cent "just to tread water" if GST is increased to 15 per cent.

Shaw favours increasing benefits most people on low incomes are beneficiaries or retired to make up for the increase in the price of food.