Generally Stupid Tax

I am not a big fan of GST. I appreciate it is a consumption tax and therefore inherently much fairer because it taxes all people, equally. I also understand that it has a small positive effect on savings, as it discourages spending (a little). The reason I am not a fan is entirely personal – I don’t like being forced into being an unpaid collector for Inland Revenue. It is bad enough that the government has its sticky little hand buried deep into my back pocket, without it forcing me to dig into the pocket of the man next to me.

OK rant over. GST may annoy me, but it doesn’t deserve the daft nonsense that Shrill Phil (Goff) is talking about it. Labour is trying to make out that the GST rise will destroy all the tax benefits in the current budget for low-income people. This is simply not true. It is very possible that the large increase in tobacco tax will destroy these benefit and it is likely that the ETS will eventually make us all poorer, but a small rise in GST is unlikely to make more that a momentary light impact.This is Labour’s own experience when they raised GST last time.

Of course, Phil the Thrill can’t complain too loudly about the effects of Tobacco tax and the ETS. No one would believe for a moment that Labour would not have imposed those two bits of legislation. In fact, we all know that the financial impact of Labour’s version of the ETS would have been far worse. It is therefore unsurprising that Phil continues to harp on about GST, despite the fact that he won’t commit to reducing it in 2011, in the unlikely event that he became prime minister. He really does not have much alternative than to rabbit on about GST and inflation, despite the simple fact that nobody except die-hard Labour supporters are buying it. Unlike, Danyl at Dim-Post who wishes to make fertiliser out of Goff’s advisors, I don’t think they have a great deal of other options (but great comment anyway, Danyl!).

So let’s briefly look at Goff’s arguments:

1. GST will increase inflation – Paul Walker at Anti-Dismal correctly points out that GST is an instantaneous price rise and therefore not part of inflation. Admittedly, this point is a bit meaningless to non-economists as it still means that you will be paying more for goods.
2. Inflation will rise by an extra 2.2% – It is by no means certain that a 2.5% rise in GST (which is a 2.2% rise in overall prices) will actually cause a 2.2% increase. Some retailers will almost certainly absorb the increase, particularly those in higher-value transactions.  I have heard that treasury is proposing a 2.02% increase, but it may well turn out to be less than that.
3. Tax Cuts will be eaten by 5.9% inflation – This is an absurd argument. 2.7% of that inflation is inflation that is already going to happen, regardless of GST. You cannot add that to the effects of your tax cuts, because it would have happened anyway and is compensated for by normal wage increases. Therefore, it is only the increase cause by GST alone that should be offset by tax cuts. Labour’s own figures demonstrate this perfectly, when they add in wage increases – nobody is worse off (albeit not as well-off in the first year due to the one-off increase in GST). Thereafter, everyone is exactly as well-off as National are saying (from 2012 onwards – unless the Mayans drown us…)
4. The guys at the top are still getting a windfall – This will be the “guys at the top” who create jobs in the economy (you know, Phil, real jobs that produce things and don’t require state subsidies). And this is somehow a bad thing? Most small businessmen I know will be using this “windfall” to pay down debt and strengthen their currently rickety financial positions. Consequently you should see fewer small businesses going under (and jobs preserved). As the economy recovers fully, the smaller tax burden will also allow faster expansion. Surely even a socialist economist should know this?

I find it very hard to give much credence to Goff’s assertions that this budget will be hard on the poor when they will be manifestly better off than if the budget had not happened. Of course, ditching the ridiculous ETS would make everybody better off still, but I’m not holding my breath…

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