Benjamin Franklin, famously wrote in a letter in 1789 “in this world nothing can be said to be certain, except death and taxes.”
Tax isn’t an exciting or fun topic. But we all pay them. And we all get benefits of public services because of them. There are many different types of tax policies and regimes throughout the world, some more common and popular than others.
Sales taxes are a common form of taxation. How each country or state runs its sales tax varies considerably. The first time I went to the United States I couldn’t understand why in California they’d advertise a price, then the tax would be on top of that (which you’d find out at the counter once you’d counted out your coins). In Arizona there was from memory no sales tax, whereas neighbouring Utah had high alcohol tax and restrictions on sales (thus you crossed the state line to stock up on beer).
In New Zealand a Goods and Services Tax (GST) was introduced in the mid 1980s by the fourth Labour Government as part of their Neo Liberal reforms (yes you read that right, a Labour Government in NZ introduced the policies of Thatcher and Reagan back in the 1980s). This originally started off as a 10% tax on all Goods and Services sold, but shortly afterwards rose to 12.5% and in 2011 was increased to 15%. The argument was at the time and since that a sales tax was the best form of taxation as nobody could avoid paying it. NZ doubled down on this and said that no item at all would be exempt from GST as this would just created administrative headaches.
In the UK there has for many years been a Value Added Tax (VAT). This tax is 20%. When I moved over to the UK a number of people exclaimed that this was such a high rate, and that it must make things more expensive than in NZ. This proved not to be the case. In the UK most supermarket items do not have VAT on them. When I do my weekly shopping, out of say 20 items I might pay VAT on maybe one or two things. Whereas when I recently visited NZ, I was staggered by how expensive everything was. This in part is economies of scale as large supermarket chains in the UK have stronger buying power than NZ. But also 15% tax on milk, bread, apples and other grocery items in NZ all adds up.
Setting up Piko in the UK I made a few initial errors with VAT. Luckily I my helpful accountant Paul Beare who is used to helping international companies move to the UK put me on the right track. I soon discovered that train tickets, taxi’s, rent and many other core expenses have no VAT on them. In NZ all businesses must register for GST, and all items will have GST charged on them. In the UK only businesses with a turnover of above £70,000 need to register for VAT, and between half to two thirds of typical business expenses have no VAT charged. Does this create more administrative work? Yes, especially at first when you don’t know the rules. However, on balance I still believe that the NZ system, while administratively more straight forward is worse.
The biggest argument against any sales tax is that a billionaire pays the same tax on an item as someone on minimum wage. This makes it a regressive tax. This issue is compounded in the NZ model where everything has a 15% tax on it. The significant increases in poverty, rising gaps between rich and poor and the many related social problems NZ has faced in my lifetime are certainly not helped by this tax policy. The Australian GST or UK VAT policy of exempting basic necessities like fruit and vegetables is far more egalitarian. This is not to say either of these countries have it right, or should be held up as examples. But the NZ model of no exemption is very bad in my view.
The big challenge in 2018 to any of these sales tax policies is the significant increase in online shopping, much of which is done across national borders. Increasingly people are and will continue to buy and sell items across the globe. With smartphones this can be done anywhere anytime. Having a tax regime that operates within a nation state is a 19th and early 20th century model, which in the early 21st century is fast becoming obsolete. Yes governments are finding ways to get tax money from these international transactions, and with some success. But it still poses a challenge, and many international transactions go untaxed. Until such time as there is stronger global governance and international cooperation, nation states will continue to struggle with this challenge.
There is no perfect taxation system. And it is easy to criticise one form of taxation as I just have without proposing an alternative. There are alternatives, many have a degree of merit, and people far more qualified than I can and have outlined their arguments for them. What is clear to me is that sales taxes are regressive, and the NZ no exemption model particularly so. Designing equitable, sustainable tax systems appropriate to the 21st century needs to be a priority for policy makers.
One thought on “VAT vs GST – the tale of two taxes”
Having experienced the administrative side od thw New Zealand and Australian GSTs, I can say without a word of a lie that I believe the New Zealand one is the better tax. A third former can calculate the GST component (by hand if necessary) in New Zealand, although that was easier before 2011 since you only needed to divide by 9 or 8 depending which way you are going. Australia not so much, it’s a real nightmare and only microbusinesses could consider doing it without specialist (read Australian and expensive) bookkeeping software. It makes a real difference to small businesses and creates another barrier to entry for businesses in certain industries such as bakeries.
I’d like to see a big tax free threshold introduced to income tax and a low flat rate below that (the Australian Liberal Democrats propose $40k tax free threshold and 20c on each dollar after that), in exchange for an easier to administer GST (perhaps at a lower rate).
Every administrative burden might only have a small effect on its own but in totality they add up to an extremely inefficient system and sadly it is small businesses who are disproportionately affected by them.