NZ Tax Working Group Raises Idea Of GST Rise

by Mary Swire, Tax-News.com, Hong Kong

19 August 2009

A background paper prepared for New Zealand’s Tax Working Group has been released, regarding possible increases to the current 12.5% rate of General Sales Tax (GST).

While the paper looks at the three possible rates – 15%, 17.5% and 20% – for illustrative purposes, and calculates that an increase to 15% could, by itself, generate additional revenue from the private sector of more than NZD2bn (USD1.3bn) per annum, it stresses that any change to the GST rate would probably be part of a broader package of tax reform.

“Broad based consumption taxes are generally seen to be a more efficient form of tax than income taxation,” the paper states. “Combining an increase in the rate of GST with a reduction in income tax rate could be used to increase the efficiency of tax collections provided the efficiency gains from lower income tax rates exceed the efficiency costs of a higher rate of GST, as well as contributing to improving the integrity of the system.”

With regard to the equitable and distributional consequences of an increase to the GST rate, the paper says that a GST, in common with other consumption taxes such as VAT, is widely perceived to be regressive. However, it says, such taxes may be less regressive when looked at over an individual’s lifetime, rather than on one year’s income.

In any case, it acknowledges that an increase to the rate of GST would be likely to be introduced with measures to reduce its perceived regression and compensate people on lower incomes – for example, the exemption of food (or other necessities) from its base, transfer payments, benefit payments or other government expenditure.

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