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.

