Five reasons why we close the GST loophole but leave others wide open

Gareth MorganTax and Welfare

To paraphrase the Southern Man:

She’s a hard road to find the perfect tax system, son.

Inland Revenue, local retailers and our politicians are getting hot under the collar about all the revenue being lost on GST from small online purchases. No tax system is perfect, there are always going to be tricky issues at the edges that allow people to sidestep paying their fair share. No one likes paying more tax, so the public will always balk at change. So what makes our policy makers tackle some loopholes and not others? GST on foreign transactions is certainly far from the largest loophole in our tax system.

In this blog we look at five issues that seem to govern which tax loopholes politicians will dare to tackle.

1/ Size doesn’t matter

It appears that the amount of money lost by a loophole has little impact on politicians. At the moment the focus is on closing the loophole around the GST lost on small online purchases – which estimated to be worth around $200m. Exactly how much of this money will be left after the administrative costs are paid doesn’t seem to matter either.

Compare this to closing the loopholes on income derived from assets, which would be worth around $7b. Closing the GST loophole might still make sense, but it is hard to believe it is really the priority – clearly we could get a better bang for buck elsewhere.


2/ Make foreigners pay

The first rule when closing tax loopholes is to pick on foreigners. It helps that big foreign retailers like Apple and Netflix are benefitting from this GST loophole, to the detriment of New Zealand shopkeepers.

What is even better is if you can make foreigners pay without locals having to cough up at all. Our recent blog Tax mega rich for their Kiwi hideaways won many fans for suggesting closing the tax loopholes on housing – at least as far as rich foreigners are concerned. People are far less sanguine about closing loopholes that they exploit – the fact is that in this country tax dodging is a national sport. We don’t mind exploiting loopholes ourselves, but God help any foreigner that dares try the same thing.

3/ Pick on the rich

Similar to foreigners, often the tax narrative descends into calls to ‘eat the rich’. As we have discussed in previous blogs, the crime is not being rich, it is that the rich don’t pay tax on all the income that they earn. That is why Green Party and Labour fussing over the top rate of tax misses the point.

4/ Only tax when cash changes hands

One of the major complaints we have heard about our plans to close tax loopholes around income from assets is that people shouldn’t be taxed when they might not have the cash flow to pay. This is an emotive issue, but shouldn’t be.

For starters, it is a fallacy that we only tax those that have the cash flow to pay. We tax GST on transactions regardless of whether the purchaser can afford that purchase or not. They might be going into debt in order to put food on the table for their family, or buy a school uniform for their children. No matter, they pay GST anyway.

The fact is that people will arrange their affairs to suit the tax system they are faced with. Why else do half the wealthiest Kiwis not pay the top rate of tax? The answer is because they can arrange their affairs to have a low cash income. Many Kiwis respond to our current tax system in the same way – investing all their money in a house, bach and boat, then quietly retiring. For some reason it is unfair to tax these people because they are responding to our tax system in exactly the way we incentivise them to.

In short, we allow people to sit on top of a pile of assets without taxing them on the effective income or ‘benefits’ that ownership provides. Even more incredibly, we refuse to tax people when they pass that pile of wealth on to the next generation, furthering the huge inequalities in society.

5/ Whatever you do, don’t touch housing

The final rule for politicians closing tax loopholes is to leave housing alone.

We have seen this in the recent debate over soaring Auckland housing prices. Politicians have been scrambling to build more houses, when the real problem is one of demand, not a lack of supply. The Reserve Bank tinkers with loan to value ratios and definitions of investors when the real problem is that our financial system is fundamentally tilted to favour investment in housing.

So we conclude that the politicians’ appetite for taxing income and closing tax loopholes has nothing whatsoever to do with the efficacy of such policies. It’s all to do with the political kudos they derive from a fawning public that despises foreigners and regards their house not as their castle, but as their church – a place to shelter oneself from the hardship those outside the property-owning congregation, must endure.

Five reasons why we close the GST loophole but leave others wide open was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

Facebook Twitter

Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.