It's pretty obvious that income tax thresholds should automatically index with inflation - whether to anchor the thresholds in percentiles of the income distribution, or to anchor against a real consumption bundle.
But what about the threshold for filing GST?
My correspondent notes that when GST was first set in 1986, the threshold was $24,000. $24,000, CPI-adjusted to today's dollars, is $65,000. But the GST filing threshold is $60,000. So should it go up? There's a petition before Parliament on it.
That's a far more fun question than inflation-adjusting income tax thresholds.
The threshold for filing GST, as I've understood things, tries to balance the cost imposed on small businesses against revenue lost from failing to impose GST. If, as a small trader, you do not file for GST, you cannot claim back the GST on your inputs. The government loses only the 15% of the value that your firm adds in transforming inputs into goods or services for others - not 15% of your turnover.
If you're at the threshold and purchase inputs equal to half your turnover, then not filing means that the government misses out on 15% of $30,000: $4500. If it costs that business more than $4500 to deal with the GST system, then making them file destroys value.
When the threshold was set in 1986, accountancy software like Xero didn't exist that lets you submit GST by clicking a button, so long as you're keeping the rest of your accounts up to date in there - which many companies would want to be doing to simplify their year-end company accounts.
So the question isn't whether inflation has reduced the real value of the filing threshold as compared to 1986. The question rather is whether inflation has reduced the real value of the filing threshold by more than tech has reduced the real pain of filing GST for small traders. Filing GST can still be painful. But I have no sense of how much less painful it is now than it would have been for a small trader in 1986.
If tech has simplified things enough, you could even imagine a case for reducing the filing threshold rather than increasing it.
I wonder whether anyone's able to compare the pain of small-trader-filing for GST in 1986 as compared to now. Is it 10% easier? 50% easier? Or has something else dumb happened that made it actually harder despite tech?
I don't have any answer here. Just the way of framing the question. The relevant question isn't inflation per se. It's the real value of the filing threshold relative to the cost of filing.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
That's a far more fun question than inflation-adjusting income tax thresholds.
The threshold for filing GST, as I've understood things, tries to balance the cost imposed on small businesses against revenue lost from failing to impose GST. If, as a small trader, you do not file for GST, you cannot claim back the GST on your inputs. The government loses only the 15% of the value that your firm adds in transforming inputs into goods or services for others - not 15% of your turnover.
If you're at the threshold and purchase inputs equal to half your turnover, then not filing means that the government misses out on 15% of $30,000: $4500. If it costs that business more than $4500 to deal with the GST system, then making them file destroys value.
When the threshold was set in 1986, accountancy software like Xero didn't exist that lets you submit GST by clicking a button, so long as you're keeping the rest of your accounts up to date in there - which many companies would want to be doing to simplify their year-end company accounts.
So the question isn't whether inflation has reduced the real value of the filing threshold as compared to 1986. The question rather is whether inflation has reduced the real value of the filing threshold by more than tech has reduced the real pain of filing GST for small traders. Filing GST can still be painful. But I have no sense of how much less painful it is now than it would have been for a small trader in 1986.
If tech has simplified things enough, you could even imagine a case for reducing the filing threshold rather than increasing it.
I wonder whether anyone's able to compare the pain of small-trader-filing for GST in 1986 as compared to now. Is it 10% easier? 50% easier? Or has something else dumb happened that made it actually harder despite tech?
I don't have any answer here. Just the way of framing the question. The relevant question isn't inflation per se. It's the real value of the filing threshold relative to the cost of filing.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
2 comments:
And the GST rate was then 10% so the cost gap is potentially larger.
I personally would raise GST to 20% the only argument against this is that the poor pay more but in reality housing costs dominate the poor' costs. And these are not really GST impacted.
The 5% extra could be a form of tax on tourism and infrastructure and distributed to the regions needing the extra revenue.
"I personally would raise GST to 20%"
How far along the road to Communism do you expect to go? Already the Govt steals a third of the economic production through income tax, imagine how well-off the ordinary people would be if that was left with them to spend.
On top of that you want to add another 20%? So half the economy is taken away from the productive and given to the dead hands of the bureaucrats to disburse! Then you're halfway to Stalin's Russia, where The State controlled 100% of the economic activity.
Surely history has shown you that the more Communism you have, the less productive the country is?? Its just like solar and wind power, the figures clearly show that the more renewables a country has, the higher the cost of electricity.
No, you need less tax and a smaller Govt if your country is to thrive. Just one of the reasons I will never come back to NZ, it has gone so far downhill since the 1990s.
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