GST rise will hurt poor the most

What the GST rise means for you. Sources / Treasury, Herald calculations

Raising GST to 15 per cent would increase living costs for the poorest New Zealanders more than twice as much as for the rich, unless low income tax rates are cut to compensate.

A Weekend Herald analysis of figures in last week's tax working group report shows that the proposed GST increase would cost 2.9 per cent of the net after-tax incomes of the poorest tenth of households - but only 1.2 per cent of the net incomes of the richest tenth.

The analysis confirms that raising GST by itself would be highly "regressive", bearing most heavily on the poor. This is mainly because low-income families spend even more than they earn, whereas richer households save much of their incomes and do not pay GST on what they don't spend.

But Professor Bob Buckle, the economist who chaired the tax working group, said yesterday the Government should cut income tax rates on low incomes, as well as high incomes, to compensate for raising GST.

"We would like to see the personal tax reductions right across the board, and as part of a tax package we would like to see a shift towards taxing spending, and we think the way to do that is a moderate increase in GST," he said.

As an example, he pointed to a scenario in the group's report that would cut the bottom tax rate from 12.5 per cent to 10.5 per cent, and the next rate up from 21 per cent to 19 per cent, as well as cutting the top two tax rates from 33 and 38 per cent to 30 per cent.

Those cuts would cost the Government more than the $2.1 billion that would be gained from raising GST, but Professor Buckle said the cost should be recovered through new taxes on property and the switch would still be worth making.

"Even though it doesn't collect a huge amount of extra revenue, it will have a behavioural change in a desirable direction," he said.

The proposal to raise GST, which has been fixed at 12.5 per cent since 1989, was one of the most controversial ideas in the working group's report.

Council of Trade Unions policy director Bill Rosenberg said yesterday that the CTU would oppose any GST increase because of the impact on low earners. "For low-income workers every dollar counts much more than it does for someone on a higher income. Every extra dollar you get in is spent on necessities rather than on discretionary goods and services or savings," he said.

He expected welfare benefits and superannuation rates would be raised to compensate for higher GST, but that left "a big hole" for the working poor.

He believed the tax working group had dropped the idea of cutting low-income tax rates because that would benefit all income taxpayers, not just those at the bottom.

"So I presume you'd have to look at improving the rates of Working for Families or something like that," he said. "But the figures in the report were that the net benefit of increasing GST after doing all of that is only about $200 to $300 million, and it seems to me that that is simply not worth doing."

However, Professor Buckle said the switch from income tax to GST would encourage saving, because it would not be taxed, and that would foster investment and economic growth.

He said the proposed new taxes on property would also capture revenue from rich people who now avoided paying income tax by sheltering their earnings in companies and trusts.