Let’s not need bread deciders

Eric Crampton writes on why clean GST is better:

. . . Just imagine the conversations the bread deciders might have at cocktail parties.

“Oh, what do you do for a living?”
“Well, I’m a bread decider.”
“A what?”
“A bread decider. I decide whether or not things are bread.”
“But doesn’t everybody know what’s bread and what isn’t?”
“Ah, but think about a mini ciabatta, which is an interesting borderline case.”
“But why would anybody care?”
“Well, taxes …”
“And you’ve not shot yourself yet?”
“Well, I also have a side-gig as a pizza decider …”

We do not know how lucky we are in New Zealand. We have no need of bread-deciders. So far. . .

Anyone who thinks complicating New Zealand’s GST is a good idea should think again.

New Zealand’s GST is uniquely, and admirably, clean. It applies broadly. Every producer has an incentive to report honestly because they also report the GST they paid to their suppliers on every item when claiming GST on their inputs.

That’s a very important point, keeping the system simple incentivises honesty.

Were New Zealand to exempt healthy foods from GST, we would well be on the slippery slope. It is one of those things that sounds really easy, but would be an utter disaster in practice.

What counts as healthy? Not only does the medical evidence keep changing, but there would also be a string of boundary cases needing adjudication. If beans are healthy, what about frozen beans? Beans in a can? Beans in a can with pork fat and sauce? How much pork fat and sauce before it is taxable? What if we use Jamie Oliver’s recipe and fly him in to say it’s good?

Even worse, think through the consequences of tax exemption.

Under the current beautiful broad-base, low-rate system, companies gather all their receipts for everything they purchased when making things and claim the GST on them. They then charge GST on the full value of their final product. Their net GST is on the value they added to their inputs along the way, since they netted out the GST from the inputs. Nice, clean and easy.

If some goods were exempt from GST, we would have problems. Imagine you were a food manufacturer making two products. One attracts GST and one does not. It is possible to charge GST on one product and not the other, but all the point-of-sale terminals would need to be reprogrammed – feasible but expensive. But how do you start thinking about claiming the GST on your inputs if you are selling an exempt product. You will need to justify how you apportion all your plant’s shared costs across the different product lines. And Internal Revenue would worry you were loading costs onto the taxable line to claim GST where you shouldn’t. The auditors would be kept busy.

And an industry would quickly emerge to make everything seem easier – and to prevent it all from ever really being easier. The political case for exemptions is dangerously tantalising. And when you’ve granted one, it is almost impossible to resist granting others. . . 

A little exemption is like a little bit pregnant, it doesn’t stop there. You become more pregnant then you have a baby and the baby grows  . . .

Any exemptions to taxes add complications which add compliance costs and incentives for avoidance all of which is a handbrake on productivity.

Let’s not get on the slippery slope to bread deciders and beyond.

Simple taxes are better taxes.

New Zealand GST is simple and it should stay that way.

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