Equity and Gst Policy Jonathan Barrett∗ Abstract
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EQUITY AND GST POLICY JONATHAN BARRETT∗ ABSTRACT Ostensibly a technocratic instrument, goods and services tax (GST) nevertheless lends itself to philosophical analysis. Consumption taxes, in general, are congruent with Thomas Hobbes’s injunction that a person should be taxed on what they take out of the common wealth, rather than what they contribute through earnings and savings. GST, in its pure form, complies with the liberal philosophy of John Locke, which requires taxation to leave taxpayers’ choices intact. Further, versions of GST that tax luxuries at high rates correspond with Jean-Jacques Rousseau’s prescriptions for heavy taxation of luxuries. Focusing on Australian, New Zealand, South African and United Kingdom systems, this article uses basic philosophical ideas to illuminate key equity issues and GST policy. In recent developments, the Henry Report has denied the fairness of GST-free supplies in Australia, and New Zealand has increased its rate of GST from 12.5 to 15 per cent. These developments bring urgency to perennially contentious policy issues. I INTRODUCTION This article draws on certain ideas of Thomas Hobbes, John Locke and Jean-Jacques Rousseau, in addition to traditional tax criteria, to analyse the equity of goods and services tax (GST).1 Despite the limited scope of their examinations of taxation, these philosophers’ ideas illuminate tax policy at a fundamental level. Considering tax policy through a philosophical lens may highlight the justifiability of different policies from an equitable perspective, and, indeed, the ideologies or even prejudices that underpin them. In this article, the origins of GST are sketched and an overview of the tax is given. The commonly cited tax criteria of equity, efficiency and simplicity are briefly outlined, and applied to GST. Then, certain ideas of Hobbes, Locke and Rousseau are used to illuminate fundamental equitable issues arising from GST. Hobbes highlights the role of consumption as a tax base; Locke, the use of flat rates and a comprehensive tax base; and Rousseau, the use of heavy rates for luxuries. These ideas are applied to elements of the GST systems of Australia, New Zealand, South Africa and the United Kingdom to illustrate different equitable considerations for GST policy design. In 2010, the Henry Report criticised the equity of GST-free supplies in Australia,2 and New Zealand increased its rate of GST by 20 per cent.3 These recent developments bring urgency to perennially contentious tax ∗ Senior Lecturer, School of Business, Open Polytechnic, New Zealand. The author is grateful to the anonymous reviewer, whose comments significantly improved this article. Any errors are solely attributable to the author. 1 In this article, goods and services tax (GST) is used as the generic term for the tax under consideration because of its use in Australia and New Zealand. Readers should be aware that the most commonly used term internationally is value added tax (VAT). GST is also used in Canada at a federal level, Fiji and Singapore. Despite adopting the core substance of New Zealand GST, South Africa named its tax value- added tax to distinguish it from the general sales tax it replaced. 2 See Commonwealth of Australia, Australia’s Future Tax System: Report to the Treasurer (2010) (‘Henry Report’) vol 1, [D2–6]. 3 The rate of GST increases from 12.5 per cent to 15 per cent with effect from 1 October 2010. See Taxation (Budget Measures) Act 2010 (NZ) s 45. Australia’s rate is 10 per cent, South Africa’s 14 per cent and the United Kingdom’s 17.5 per cent with a reduced rate of five per cent for certain supplies. 15 JOURNAL OF APPLIED LAW AND POLICY, 2010 policy issues, notably whether basic food items should be excluded from the GST on equity grounds. II ABOUT GST A Origins Consumption taxes have historically proved a useful source of revenue because of the simplicity of their administration and collection.4 Over time, the host of levies typically raised on small and sundry goods became bundled into general sales taxes, whereas levies on the major revenue raising goods became excises.5 In the twentieth century, governments increasingly faced quantitative and qualitative tax challenges. On the one hand, the expansion of State welfare and government functions led to the need for greater revenues, and, on the other hand, existing general sales taxes, and turnover taxes in particular, created unacceptable economic distortions. Consumption taxes that might raise sufficient revenue and prove less distortionary were therefore sought.6 GST-type taxes appeared to offer a solution. Although the idea of GST is generally considered to originate from a 1920s essay by the industrialist Wilhelm von Siemens, Maurice Lauré, a director of the French tax authority, is known as ‘le père de la TVA’7 for implementing a version of GST in France in 1948. Michigan introduced its Business Activities Tax (later called the Single Business Tax) in 1953, with France extending the scope of its GST beyond the manufacturing stage to consumers in 1954.8 A rapid uptake of GST occurred from the late 1960s,9 including by the United Kingdom in 1973,10 New Zealand in 1986,11 South Africa in 1991,12 and Australia in 2000.13 David White and Richard Krever observe that, because its constitutional set up at that time permitted radical, unilateral lawmaking: New Zealand was able to adopt what many consider to be the world’s purest value added tax. The contrast with the European examples could not have been starker and the New Zealand model became the starting point for many of the world’s modern value added taxes.14 4 Nicholas Kaldor, An Expenditure Tax (1955) 21. 5 Sijbren Cnossen, ‘Economics and Politics of Excise Taxation’ in Sijbren Cnossen (ed), Theory and Practice of Excise Taxation: Smoking, Drinking, Gambling, Polluting, and Driving (2005) 1, 1. 6 Liam P Ebrill et al, The Modern VAT (2001) 4. 7 In English, ‘the father of VAT’. GST is known as ‘la taxe de valeur ajoutée’ in French. 8 Ebrill et al, above n 6, 4. 9 Alan Schenk and Oliver Oldman, Value Added Tax: A Comparative Approach (2007) 459-62 record that 145 countries have adopted GST, with the United States being the significant exception. 10 See Finance Act 1972 (UK) c 42; Value Added Tax Act 1983 (UK) c 55; Value Added Tax Act 1994 (UK) c 23. 11 See Goods and Services Tax Act 1985 (NZ). 12 See Value-Added Tax Act 1991 (South Africa). 13 See A New Tax System (Goods And Services Tax) Act 1999 (Cth) and ancillary legislation. 14 David White and Richard Krever, ‘Preface’ in Richard Krever and David White (eds), GST in Retrospect and Prospect (2007) vii, viii. New Zealand is a unitary state with a unicameral legislature and has no written constitution legally superior to laws made by Parliament. At the time GST was introduced, the electoral system was on a first past the post basis which gave the winning party untrammelled legislative and executive power, see Geoffrey Palmer, Unbridled Power: An Interpretation of New Zealand’s Constitution and Government (2nd ed, 1987) 279. Since 1996, New Zealand has used a mixed member proportional representation (MMP) electoral system which tends to lead to coalition governments and consequent policy compromises, see Geoffrey Palmer and Matthew Palmer, Bridled Power: New Zealand’s Constitution and Government (4th ed, 2004) 27. It is debatable whether such a pure GST as the one enacted would have been politically plausible under the MMP system. Singaporean GST is similarly comprehensive to New Zealand GST but levied at a low rate of seven per cent. See Goods and Services Tax Act (Singapore, cap 117A, 1993, rev ed). 16 EQUITY AND GST POLICY New Zealand GST manifests significant differences from the United Kingdom’s version, but provides the basis for the South African system, and to some extent, Australian GST. Graeme Cooper and Richard Vann conclude that, in Australia, ‘the result is midway between the EU and New Zealand versions’.15 B Technical Basics GST systems can be categorised into various groups,16 although most can be described as: … a multistage, destination-based, net consumption [tax]. It includes all goods and services in its base (expect those explicitly exempted), covers the retail stage and grants registered firms a credit or deduction for the tax paid in respect of registered suppliers against their own tax payable on sales.17 GST is self-assessed by businesses registered as suppliers, who regularly account for GST payable (output tax charged to their customers less input tax credits incurred), or claim refunds due to them.18 GST-free supplies are relieved of all prior tax and input taxed supplies are taxed before final consumption.19 III TAX CRITERIA There is broad consensus that a scheme of taxation should, at least, be equitable and efficient.20 Other commonly expressed requirements include simplicity.21 These criteria will be briefly outlined as they apply to the consideration of GST in this article, which is principally concerned with equity. 15 Graeme S Cooper and Richard J Vann, ‘Implementing the Goods and Services Tax’ (1999) 21 Sydney Law Review 337, 344. 16 See Schenk and Oldman, above n 9, 58; Ibid 343. 17 Sijbren Cnossen, ‘Issues in Adopting and Designing a Value-Added Tax’ in Cedric Sandford (ed), Key Issues in Tax Reform (1993) 73, 75. Supplies of real property may also be included in the GST net. Thus, eg, Goods and Services Tax Act 1985 (NZ) s 2 defines ‘goods’, in part, as ‘all kinds of personal or real property’. As Geoffrey J Harvey, ‘Dilemmas for GST Tax Policy’ (2007) 13 New Zealand Journal of Taxation Law and Policy 281, 287 observes, ‘to treat a supply of land as being a “good” is a strange use of language’.