The Mayor of Newmarket, Cameron Brewer, writes in The New Zealand Herald again today on GST. This time, Brewer takes aim at the Tax Working Group’s proposal to increase GST to 15%, arguing:

If an increase in GST is to lead to a fall in consumption, a tightening of business margins and a Government being hurt politically, it is hard to imagine the Finance Minister announcing it in his second Budget.

Cameron’s right that increasing GST on its own will lead to a fall in consumption -that is inevitable as prices rise. However, when combined with a cut to corporate and personal tax rates, it is likely consumption would remain unaffected. This is acknowledged, with an interesting rider:

An increase to GST could help to offset any cuts to the corporate and personal tax rates, but it would mean Kiwis’ pay-packets would shrink overnight.

Now this rider isn’t exactly correct. Increasing GST won’t hurt Kiwis’ pay packets, but it will mean we pay more on transactions. What would hurt pay packets would be not cutting income tax and corporate tax at the same time. That’s the real issue with raising GST – the only other valid issue is the potential to hurt inbound tourism, although I suspect a higher-valued Kiwi dollar versus the US dollar is hurting our tourist trade more, as it makes New Zealand less attractive (besides, a 15% sales tax is not that huge compared to other countries – I think the Japanese have a 25% sales tax from memory). That issue could also be easily remedied by allowing tourists to claim-back GST on their large purchases, as Cameron has previously proposed (and already occurs in Australia).

The real problem with raising GST is not cutting income and corporate tax rates at the same time. The Minister of Finance has ruled out cutting income tax, and may be forced to cut corporate tax because the Australians are going to in their next budget. The $2 billion raise from increasing GST could easily go towards cutting income tax towards 30% for top earners, and to get our corporate tax rate down. Since GST is a more efficient flat tax (and you can easily introduce measures to ensure the poorest members of society aren’t hurt too badly by an increase) increasing the amount of GST while cutting income and corporate tax increases the overall efficiency of our tax system. Sadly, it doesn’t look like the Minister of Finance will do that, so Cameron’s fears of a moribund retail sector may be well founded.

Funnily enough, Marty at The Standard says that it’s “ironic” that I think he’s got it all wrong on GST tax-back for tourists. I didn’t actually say he was wrong, I said he was moaning – the difference between my position and Marty’s is ideological, and strictly speaking just saying Marty’s “wrong” goes without saying when it comes to ideology. Likewise, he’d say I’m always wrong because of his ideology.

Marty, and social democrats, are concerned with keeping the tax base as wide as possible, taking the largest possible slice of the economic pie. This is to ensure that the government can spend our money on a range of programs to create their version of “social justice”. That’s why one of Labour’s first actions in government in 1999 was to introduce a new higher tax rate. The idea of offering a tax-back to tourists is an anathema to Marty.

From my perspective, the purpose of the government is not to tax and spend or create social programs to spend; and it’s certainly not the purpose of government to try and borrow and spend our way out of recession. It’s to maintain law and order and do what it should to create conditions for a good standard of living. Taxation is a necessary evil to meet those ends (I don’t think taxes are necessarily theft as libertarians do, although the focus of tax on the wealthy is envy related), not a means to an end.

Anyway, back to GST off for tourists. The Aussies National Accounts do show a general upswing in tourist spending following the introduction of GST tax-back:

Aussie International Trade in Tourism

Tourism exports (that’s what people spend when they’re in Australia, and imports are Aussies spending money elsewhere) have generally been increasing. What’s missing is the data prior to 1999, when there was no GST. However, the general trend for tourism as part of Australia’s national accounts has been good. The only other reason I could think of that would account for a jump in 2000 was the Sydney Olympics, but the above graph tends to disprove that.

Mayor of Newmarket Cameron Brewer writes in the Herald today that tourists to New Zealand should be able to claim back GST. Apparently it leads to greater spend by tourists, something Mr Brewer would like very much on Newmarket’s Nuffield St:

In 2000 when the Australian Government introduced a 10 per cent tax on goods and services and subsequently their refund scheme, the yield from annual tourism spending jumped 8.75 per cent. Tourists now visiting Australia spend an average of A$1320 each on shopping.

It’ll be interesting to see what the trend of tourist spending was before and after the introduction of GST, but a figure of 8.75% is compelling.

As expected though, Marty at The Standard moans:*

So, basically Brewer wants the New Zealand government to run a system to give tourists money as they leave the country. Why is that in the country’s interest? Why is it worth the expense? All it does is take money out of our government’s coffers and give it to tourists who are on their way out of the country.

It’s in the country’s interest because it encourages tourists to spend more, as the figures above show. Marty disputes that, pointing out that you only get the money back as you leave the country. But believe it or not, most tourists read up about sales tax (go anywhere in Asia and you’ll soon understand the beautiful simplicity of our GST) before they come to New Zealand, and would find out that we don’t give refunds on GST like the Aussies do.

Oh, and so what if it takes money out of the government’s coffers? The point of tourism is to give New Zealanders employment, which they’re then taxed for by the government. Same with profits from retail sales.

*To be fair, he does point out that Mr Brewer is bad at maths, but that’s all that he gets right.