Dangerous Dave's Dlog

For those of you who are unaware, GST is a tax on Goods and Services. Many countries employ a similar tax system, and many don't. Basically anything you pay for is taxed. Currently the GST tax rate is 12.5% (or 1/8th) in New Zealand, and the current government proposes raising this to 15%.

By New Zealand law, retail shops are required to display prices GST inclusive. This is a positive surprise to many international visitors, notably those from the US, who expect this tax to be added on when paying. This means if you go into a store and see a nice pair of gloves for $90, you only have to pay $90 for them. From this $90, $10 will be paid in tax (Store sells gloves for $80, then adds on 1/8th for tax, price tag shows $90).

Now, I am about to go off into something I have no proof over but the word of friends who have obtained this knowledge somehow: Apparently, Australia (with a GST rate of 10%) does not charge GST on certain grocery items deemed necessities. These include things like bread and milk, but not chocolate and icecream. End of (non-humourous) anecdote.

I support the raising of GST to 15% in New Zealand. Firstly, the government has stated they will be lowing income taxes to counteract the increase in costs. Because of the different styles of taxing, it's not possible to match them exactly, but one estimate says a low income family will pay about $5 more per week than they are now. Considering grocery prices are up 12% on this time last year, that's not a big change at all, especially when you consider a grocery bill for a family is likely $200-$300 weekly (1 real dollar = ~$0.70 USD).

Let's break down the total costs of living, by necessity only. There are three expenses (please comment if you think I have missed one, no, internet is not a necessity):

Food Bill
Power Bill
Rent or Mortgage payments

One could argue clothing and other similar items are necessary, but I would argue that the clothes they have now are fine.

Let's start with the food bill. Imagine our example family spends $300 on groceries a week. Currently, $33.33 of that is GST. If GST is raised to 15%, this $300 grocery bill will become $306.67. Grocery prices rise quicker than this.

The power bill is in the same ballpark. An excessive user who showers for 6 hours a day and cooks dinner in their dryer may use $300 of power a month. That's $1.50 a week.

Now we come to Rent, or in the homeowners case, mortgage payments. What's that? Rent and Mortgage payments are exempt from GST? Oh, in that case there wont be any rise.


The total increase in taxes is about $8 per week, and this isn't even including tax cuts. My calculations imply this is easily covered by the proposed tax cuts, but the article in the paper said by their calculations low income earners would be paying $5 more than there are now.

Now if the net changes are so small, why do I support a change that will cost millions to initiate?

Firstly, the new system will tax spenders rather than earners. It's important to note at this point that the recession hasn't hit our economy anywhere near as bad as it hit the US, so we don't really need to encourage spending. What it does encourage, is investment. Being taxed less for income means people are happier to invest in something that earns them returns. Sure, buying things helps businesses, but so does cash injections.

So who is going to do the buying?

Tourists. Tourism has been a huge business in New Zealand since the early to mid 1800's. Increasing GST and decreasing income tax means the locals pay less and the tourists pay more. Of course the tourists don't notice it, as the change is so small, but because we have so many millions of tourists visiting every year, the tax dollars will soon add up.

Unless I have overlooked something, it is good for everyone. Locals are encouraged to invest rather than waste earnings, this investment helps to grow businesses, these businesses provide better services to tourists and the government gets more tax dollars. Everyone is happy.


-Dave

PS, I promised I would touch on the Right Turn Rule. A few days after my blog post about the right turn rule, the government has announced plans to have this law repealed before Christmas. Their reasonings were not because it was less efficient, not because it was a worse system, but based around the fact that international tourists have trouble adapting to a road rule that only exists in our country and none other in the world. I can see where they are coming from, and don't entirely object to it, although I think it would be better if we could convince the rest of the world to use the rule. While I'm at it, who wants to come and drive on the left hand side of the road like real drivers?