Saturday, July 24, 2010

ZenTiger How to get a 15% reduction in the cost of food

Exempting GST on certain items is touted by many as "simple" and "easy". I disagree. It's certainly "possible" and "do-able" but at the impact of greater costs. Here's one area of complexity that impacts compliance costs (thus increasing time and effort and ultimately raising prices):

Firstly, some baseline facts: all businesses are GST exempt. They do not pay GST, they only have to collect it. So any time a business buys something, it needs to record the amount it spent on GST, to offset against the amount of GST it has collected and send the difference to the government.

So should a business purchase items for the staff kitchen such as detergent, coffee, milk, biscuits and fruit it will have to enter into the accounting system the cost of those goods, and their computer program, or the accounts person with a calculator will divide by 9 and that is the amount of GST that will be deductible.

But if GST is exempt from healthy food, they could no longer do this, as they will be claiming back far too much GST. The milk and the fruit may not have tax on. Now they need to enter multiple lines into their system. One amount for the items that have GST, one for the amount that do not have GST, and calculate the different amounts. Suddenly, a single line entry for a single purchase takes more effort and more scrutiny. With many of these receipts in a busy business, more time. Just like the impact of FBT items, depreciation and other fantastic ideas from the government dictating an ever increasing amount of work we need to do to pay them the money they demand.

A study was done in the USA I read a few years ago (sorry, can't find it now) that said the cost of government compliance with accounting added 10-15% to the price of products and services in the market.

If we wiped out all business tax and PAYE tax, we could possibly reduce not just the cost of healthy food, but the cost of EVERYTHING by 10-15%!

Not only that, but we'd stop putting so much effort into totally unproductive work, and allow us to focus on productive work. Our exports would be competitively priced, and companies would want to come to NZ to do business. The government wouldn't have a reason to track your personal income, or tax you for a second job, or fine you for getting your tax returns wrong. There would be no "under the table jobs" and working your way above previous "tax bands" would be rewarded better. There are so many upsides, one must conclude the only reason the government doesn't want to do it is because....well, you have a think about that.

Of course, we'd have to replace that tax with another form of tax that didn't increase the cost of compliance to the same extent as business and payroll tax - and we could, but that is a different post. Suffice to say, if finding an alternative tax source was the only thing you could come up for not considering dumping PAYE and business tax, you'll have to reconsider.

This post follows on from this post: Key says No to No GST

3 comment(s):

Scorpio said...

I'm very interested in what you would replace business and PAYE tax with.

I agree the current tax system is costly for businesses to administer - indeed, Labour 99-08, and National 08-10, have both made it mush more complex and costly to administer.

My view is that I like GST because it taxes what people spend rather than income - meaning a young couple, for example, who are saving for a house can make a big difference to the amount they save by reducing spending.

I also like that it is very hard to avoid - even criminals pay GST when they buy something.

So generally I prefer to see spending taxed, not income.

ZenTiger said...

Thanks for the comment Scorpio.

I like GST for many reasons too. Although I'm not particularly in favour of the upcoming increase.

I'll take your comment as an invitation to do another post shortly on those alternate tax sources.

Stripe said...

Flat tax. 9% on every working person. That's the way to kick start the economy. :thumb:

Good post.

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