"And those of us working for low-ish incomes who haven't sprogged are compensated....how, precisely? "

Lucy,

The decline in income taxes will be sufficient to compensate those who are not eligible for any benefit - as the goal is to set the GST rate + income tax rate to the same level as it is now anyway, so that labour income is taxed in exactly the same way.

Hi Keith,

If we move away from borrowing and saving - which should only be on the basis of "lumpy consumption" (damn it I need to buy a dishwasher, but once I've got it I've got it for 5 years) and future income changes (I'm a student, I will earn more, I can borrow based on that) - then in a static sense we can fully compensate the poor by changing benefit rates and thresholds and tax rates/thresholds.

So by not assuming borrowing or saving we have that consumption=income. The GST tax could be treated like some increase in the price level. Moving thresholds up by that amount (so their real value is unchanged), changing the size of benefits by that amount (so their real value is unchanged) will leave them the same.

When people don't get benefits, we know they are paying tax. It doesn't matter whether we tax consumption or income (as we have no borrowing or saving) we know that a given person will be paying X% in tax - as a tax on income lowers real income, while a tax on all prices also lowers real income. We can lower these tax rates, such that the effective rate of tax is still the same.

As a result, if we have no borrowing and saving, there is no real difference between using a GST rate or using a FLAT rate of income tax. (Note this is why the reduction in income taxes also needs to be flat to keep people indifferent.)

In this sense, it looks like the change in tax has no point, but we know:

1) GST rates are cheaper to enforce,
2) GST doesn't create inefficiencies in the credit market - so when borrowing and saving "reappear" we know that the trade-off between future and current consumption won't be impacted by tax.

However, because GST isn't on interest, we know the base rate must be slightly higher (in a static sense). They must be aiming to make that up through the tax on depreciation.

"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."

He has said he'll change WFF and benefits with regards to the increase in the price level stemming from higher GDP.

As a result there are two ways to view his compensation claim:

1) It is on a lifetime basis - which would imply that some low income people now will be high income people in the future and it will wash out, or more directly ...

2) Most of the compensation will simply occur through the increase in benefit and WFF thresholds and rates.

By increasing these thresholds and rates, and by lowering income taxes so they retain the some level of progressivity then we have people paying the same amount of tax - if we ignore borrowing and saving.

If we then assume people only borrow or save on the basis of future income, and given that we are shifting the tax from income to consumption, the tax burden falls the same way it did before - on an intertemporal basis.