OnPoint by Keith Ng


Updated: GST compensation: Can be done?

John Key's promise to compensate low-income NZers for changes to GST is one he's unlikely to keep.

[RETRACTED! Actually, as Neil Russ points out to NZPA, the changes to depreciation rules are enough to fund the rates alignment by itself. Which means that, in theory, all the money raised by raising GST could be used to fund a tax cut on the bottom threshold.

Which begs a much more interesting question: Will he?]

TWG estimates upping GST to 15% will be worth $2.89b. 35% of this will be borne by the bottom 50% (by income) of the population.

This means that the bottom 50% of the population will have to pay $1b more in GST.

That's the goal post for Key's promise.

Key has ruled out changes to Working for Families. But tax cuts have a smaller impact on people with low income, so to deliver $1b via the tax system, it'd require a much bigger tax cut across the board.

To offset the impact of the GST increase to the bottom 50%, he'd have to slash the bottom tax rate in half (to around 6.7%, to be precise), or introduce a $6000 tax-free threshold.

But either of those measures would extend to the top 50% as well, and it would cost a lot more than $1b. In fact, it would eat up most of the revenue from the GST hike and leave little to fund the reduction of the top tax rates - which was the point of the whole exercise.

Sure, it *could* happen. But a much more likely scenario is that the compensation will fall far short of the actual impact of the GST.

If you want to verify the $1b for bottom 50% figure, see table 2 (page 2) and figure 5 (page 7) the GST paper prepared by the TWG.

[Update: Yes, the GST paper discusses compensation options, specifically, CPI adjustments for many benefits that will automatically kick in if GST goes up. However, that won't do anything for people not on benefits, which is quite unfair. (Haven't really thought through EMTR and such yet, but that depends on whether abatement thresholds and such are CPI-pegged too. Meh. I'm sticking with "unfair" for now.)]

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