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, , 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.

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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’. 18 Peter Hill, Australian GST Handbook 2009-2010 (2009) [1 000]. 19 Cooper and Vann, above n 15, 344. In this article, the unique Australian terms, ‘input taxed’ and ‘GST- free’ are used in place of the usual ‘exempt’ and ‘zero-rated’, respectively. 20 Carl S Shoup, Public Finance (1969) 22 describes equity and efficiency as ‘consensus criteria’, although there is considerable variation in views on the meaning of these terms, and the weightings they should be given in formulating tax policy. 21 Countless commentators and inquiries have proposed different sets of tax criteria, although a remarkable consistency of themes can be discerned. For example: Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (first published 1776, 1952 ed) 361 proposed proportionality (as equity), certainty, convenience and efficiency as the four maxims of taxation. James Meade (Chair), The Structure and Reform of Direct Taxation: The Report of a Committee Chaired by Professor J. E. Meade (1978) (‘Meade Report’) considered, inter alia, incentives and economic efficiency, distributional effects, simplicity and costs of administration and compliance. For the Henry Report, above n 2, vii: ‘Raising revenue should be done so as to do least harm to economic efficiency, provide equity (horizontal, vertical and intergenerational), and minimise complexity for taxpayers and the community.’ Bob Buckle (Chair), A Tax System for New Zealand’s Future: Report of the Victoria University of Wellington Tax Working Group (Centre for Accounting, Governance and Taxation Research, Victoria University of Wellington, 2010) (‘Buckle Report’) 9 identified the six principles of a good tax system as: the overall coherence of the system, efficiency and growth, equity and fairness, revenue integrity, fiscal cost, and compliance and administration costs. 17

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A Equity Equity in taxation is principally a matter of distributive justice;22 that is, determining a fair tax burden for different taxpayers. This article uses a conception of equity derived from Aristotelian distributive justice, which requires an equal distribution of benefits and burdens among equals (horizontal equity),23 and, by implication, an unequal distribution among non-equals (vertical equity). Intergenerational equity, which is concerned with a fair distribution of tax burdens over time, is a further aspect of distributive justice.24 In income tax, horizontal equity is sought through a comprehensive tax base, and vertical equity through progressive rates.25 When assessing the equity of GST, consideration can similarly be given to the equity of taxing similarly situated taxpayer-consumers differently (horizontal equity), and to the equity of taxing differently situated taxpayer-consumers similarly (vertical equity). (Horizontal and vertical equity considerations may also be applicable, albeit to a far lesser extent, to different GST-registered persons.)

B Efficiency A tax system may be efficient in the sense of being cost-effective to administer, from the perspectives of the taxpayer and government. GST has clear advantages for tax administration, provided a single rate applies,26 but may place considerable burdens on GST-registered suppliers.27 A tax system may also be efficient in its economic effects by, for example, not discouraging enterprise and savings.28 From a classical liberal perspective, a tax that is economically neutral is efficient because the market is not impeded in allocating scarce resources in accordance with consumer choices.29 A pure GST system, provided its rate is not so high so as to modify behaviour, is distinguished by its economic efficiency as it does not prefer particular consumption and production choices.30 However, tax neutrality is commonly sacrificed for the sake of political expediency,31 and this is the case for many GST systems.32

22 Joseph Bankman and Thomas Griffith, ‘Social Welfare and the Rate Structure: A New Look at Progressive Taxation’ (1987) 75 California Law Review 1905, 1907. Bankman and Griffith observe that opponents of progressive taxes tend to avoid the issue of distributive justice, and stress efficiency considerations, at 1912. 23 R W M Dias, Jurisprudence (4th ed, 1976) 66. 24 In a different aspect, temporal equity may be concerned with treating similarly situated taxpayers similarly in different assessment periods, see Shoup, above n 20, 23 on the principle of equal treatment. This criterion corresponds with tax certainty, see Smith, above n 21, 362; and the broader principle of legislative certainty, see Lon L Fuller, The Morality of Law (Revised ed, 1969) 42. 25 See Shoup, above n 20, 23 for a discussion of horizontal and vertical equity in taxation. 26 In proposing a multi-rate system for South Africa, Dennis Davis, ‘Taxation in a post-apartheid South Africa’ in Robert Schrire (ed), Wealth or Poverty: Critical Choices for South Africa (1992) 105, 111 argued: ‘It would appear that the only obstacle to such a system is administrative complexity.’ 27 Binh Tran-Nam and John Glover, ‘The Goods and Services Tax – Recurrent Compliance Costs and Benefits for Australian Small Businesses: A Case Study Approach’ (2004) 10 New Zealand Journal of Taxation Law and Policy 334, 352 conclude, ‘it is clear that replacement of the [wholesale sales tax] WST by GST has substantially raised operating costs, and especially tax compliance costs, for Australian small businesses’. Ebrill et al, above n 6, at 60 note ‘there is little hard evidence on the costs of administering and complying with the [GST] in developing countries. This is an important area of ignorance about the [GST].’ 28 Meade Report, above n 21, 7. 29 William J Baumol and Alan S Blinder, Economics: Principles and Policy (5th ed, 1991) 705. 30 Cnossen, above n 17, 74. 31 Shoup, above, n 20, 21 fn 2. 32 New Zealand GST is exceptional. Thus the Buckle Report, above n 21, 15 observes, ‘New Zealand’s broad-based GST, which has very few exemptions and a relatively low rate, is highly efficient’. 18

EQUITY AND GST POLICY

C Simplicity Despite the self-evident desirability of simplicity in taxation, where it is achievable, different commentators have different perspectives on the criterion of simplicity. Simplicity may be seen in terms of the drafting of legislation, the conduct of administration and substance of tax laws,33 or a narrower, administration-focused view.34 For Graeme Cooper, tax rules are simple when they are predictable, proportional to the complexity of the problem to be solved, consistent, easy to comply with, easy to administer, co-ordinated with other tax rules, and clearly expressed.35 Whatever the scope of the conception of simplicity adopted, it is reasonable to expect the text of tax legislation to be readily comprehensible, and for administration to be structured so as to make compliance as simple and cost-efficient a matter as is practicable. However, substantive simplicity is more problematic,36 although likely to be determined by the existence of simple and consistent guiding principles set for the long-term.37 GST is distinguished by the simplicity of its underlying principles.38 From a New Zealand perspective, Alistair McKenzie observes that ‘[t]he comprehensiveness of the tax complements its underlying simplicity’.39 In other words, GST’s simplicity is compromised once the principle of a comprehensive tax base is no longer followed. Further, simplicity of principles does not necessary translate into simple legislation. Thus the New Zealand GST legislation was drafted before the move towards the use of plain language in tax legislation in the 1990s,40 whereas the Australian GST legislation has ten constitutive Acts.41 GST is, then, in principle, simple and convenient for consumer-taxpayers – if not others42 – and efficient.43 Neutrality, however, varies considerably between different

33 See John Prebble, ‘Can Income Tax Be Simplified?’ (1996) 2 New Zealand Journal of Taxation Law and Policy 187, 187-89. 34 Paul Kenny, ‘Capital Gains Taxation for New Zealand: Fairer and More Efficient’ (2001) 7 New Zealand Journal of Taxation Law and Policy 265, 286 argues that simplicity is generally considered by comparing the administration costs incurred by government in collecting a tax with the compliance costs incurred by taxpayers in paying the tax. 35 See G S Cooper, ‘Themes and Issues in Tax Simplification’ (1994) 11 Australian Tax Forum 417, 417-60. 36 Warwick Anderson and Adrian Sawyer, ‘Legislative Complexity – the Need for Appropriate Variables and Some Likely Candidates’ (1997) 3 New Zealand Journal of Taxation Law and Policy 3, 31 conclude that there is no certainty as to which variables capture the essence of legislative complexity. 37 Simon James, Adrian Sawyer and Ian Wallschutzsky, ‘The Complexities of Tax Simplification: Progress in Australia, New Zealand and the United Kingdom’ (1998) 14 Australian Tax Forum 29, 62 conclude that ‘rewriting tax law alone is insufficient to achieve significant simplification of the tax system. Complicated, inconsistent and frequently changing tax policy will be reflected in complex legislation however it is written or however frequently it is rewritten’. 38 Alistair McKenzie, GST – A Practical Guide (8th ed, 2008) ix is able to explain the underlying principles of New Zealand GST in four bullet points. 39 Ibid. 40 Compare, eg, with the language of the Income Tax Act 2007 (NZ). For a discussion of the project to simplify income tax legislation in New Zealand, see John Prebble, ‘An Evaluation of the New Zealand Income Tax Law Rewriting Project from a Compliance Cost Perspective’ in Chris Evans, John Hasseldine and Jeff Pope (eds), Tax Compliance Costs: Festschrift for Cedric Sandford (2001) 389, 389-406. 41 Simon James, ‘Tax Simplification Is Not a Simple Issue: The Reasons for Difficulty and a Possible Strategy’ (Discussion Papers in Management Paper No 07/18, University of Exeter, 2007) 4 observes: ‘Complexity does not just involve the language – the quantity of legislation also contributes to the problem.’ 42 The South African Constitutional Court observed in Metcash Trading Ltd v Commissioner, South African Revenue Service 2001 (1) SA 1109 (CC) at [60], ‘the scheme of [GST] instituted by the Act is a complex one’. Keith Hooper, ‘The New Zealand Goods and Services Tax: Identifying the Problem Areas’ in Keith Hooper et al (eds), Tax Policy & Principles: A New Zealand Perspective (1998) 125, 125-26 notes in regard to the New Zealand GST that despite being ‘known for its simplicity and comprehensiveness, having a single rate and few exemptions … there is a degree of complexity in the system which cannot be totally eradicated’. Further, Eugen Trombitas, ‘The GST Revolution’ (2007) 13 New Zealand Journal of 19

JOURNAL OF APPLIED LAW AND POLICY, 2010 jurisdictions. The critical question for this article lies with whether the administrative advantages and neutrality potential of GST can be compatible with the conception of equity identified. In the following part, relevant ideas of Hobbes, Locke and Rousseau are sketched in order to further illuminate equity issues in relation to GST.

IV PHILOSOPHICAL IDEAS

A Hobbes: Consumption as the Tax Base In Leviathan, Hobbes argued for consumption taxes, reasoning that, since rich and poor are equally indebted to the sovereign State for the defence of their lives: … the Equality of Imposition, consisteth rather in the Equality of that which is consumed, than of the riches of the persons that consume the same. For what reason is there that he which laboureth much, and sparing the fruits of his labour consumeth little, should be more charged, than he that liveth idlely, getteth little, and spendeth all he gets; seeing that the one hath no more protection from the common-wealth, than the other? But when the Impositions, are layd upon those things which men consume, every man payeth Equally for what he useth: Nor is the Common-wealth defrauded, by the luxurious waste of private men.44 Hobbes’s prescription and its underpinning justification raise two key tax policy considerations: (1) whether savings should be privileged over consumption, (2) how those, whose circumstances do not allow them to save, should be treated. 1 Savings v Consumption The Hobbesian preference for taxing consumption rather than savings is not historically specific. John Stuart Mill also argued for a consumption tax base to counter the inequity of ‘double taxation’ of savings.45 Nicholas Kaldor prefaced his thesis on a progressive expenditure tax by quoting Hobbes,46 and the argument that tax should fall on what a person takes out of the common productive pool was also reprised in the influential Meade Report.47 In A Theory of Justice, John Rawls considered it only common sense for consumption to be taxed and savings spared.48 The national economic benefits that arise from promoting savings over consumption seem self-evident, but the Hobbesian distinction between consumption and saving on virtue grounds is overstated. Saving is not selfless. It is not a complete deferral of utility and is, indeed, likely to engender utility itself because the saver gains the satisfaction of financial security and anticipation of future consumption.49 From a legal perspective, both consumption and savings are effected through contracts; exchanges that are assumed to confer mutual satisfaction, including allocation of risk, on the parties.50

Taxation Law and Policy 75, 75 observes: ‘Notwithstanding GST applying for over 20 years, it still causes considerable issues for business, the taxpaying community, advisers and revenue administrators.’ 43 In addition, Cnossen, above n 17, 74 notes that GST is an ‘exceptionally stable and flexible source of government revenue’, a ‘certain levy and relatively easy to understand’, ‘its base is rarely subject to different interpretations’, and ‘[o]pportunities for tax avoidance and evasion are more limited than under income taxes’. 44 Thomas Hobbes, Leviathan (first published 1651, 1973 ed) 184. 45 John Stuart Mill, Principles of Political Economy (1885) 628. 46 Kaldor, above n 4, 5. 47 Meade Report, above n 21, 31. 48 See John Rawls, A Theory of Justice (1972) 278. 49 From a utilitarian perspective, consumption through exchange permits market participants to maximise their utilities and hence the aggregate utility of society. Consumption taxes, by impeding utility- maximising exchanges, promote disutility. See Alan Ryan, ‘Utility and Ownership’, in R G Frey (ed), Utility and Rights, (University of Minnesota Press, 1984) 175, 188-89 for a discussion of relevant utilitarian principles. 50 See Anthony T Kronman and Richard A Posner, The Economics of Contract Law (1979) 4. 20

EQUITY AND GST POLICY

The contemporary preference for consumption taxes is partly attributable to the ascendancy of neoliberal ideology – GST was, for example, a key election issue for the Howard government.51 However, consumption taxes may be seen as a default, rather than an active policy choice. If an individual’s income is the sum of her savings and consumption, to promote savings, consumption must be discouraged. This goal appears to require regressive taxation.52 However, if sufficient national savings can be achieved, for example, though compulsory superannuation membership,53 discouraging consumption through taxes may be unnecessary. 2 Those Unable to Save Hobbes describes two economic actors: one, who labours diligently and is thrifty; and another, who earns little from her dilatory labour and spends it all. He fails to consider the infinitely variable conditions of differently situated people, and conflates the hapless labourer with the sybarite. These stereotypes and scenarios taken out of context continue to colour tax debate.54 Even if it is assumed that Hobbes’s taxpayer binomial – thrifty/spendthrift – was plausible for his time,55 in contemporary society, those who enjoy full employment and who earn sufficient income to invest a significant portion of those earnings are fortunate. Conversely, those, for whom earnings are meagre, precarious and occasional, necessarily spend all they earn because they have no alternative. For them, a choice between saving and consumption is illusory. Taxes which privilege saving and so prejudice consumption may be seen as behaviour modifying techniques applied to people who frequently cannot modify their behaviour. A tax that penalises taxpayers for behaving in a particular way when their circumstances allow no alternative is fundamentally inequitable.56 Arguing against comprehensive consumption taxes is, however, akin to shutting the stable door after the horse has bolted. GST is a well-established component of almost every national tax system and will be for the foreseeable future. Nevertheless, the inequity that a significant, comprehensive consumption tax introduces into the tax-transfer system merits due policy and political consideration.

51 For a chronology of the of the GST debate in Australia, see John Harrison, ‘The GST Debate – A Chronology’ (Background Paper 1 1997-98, Parliamentary Library, Parliament of Australia, 1997). 52 However, Baumol and Blinder, above n 29, 216 note that, during the Reagan administration, when tax cuts were granted to the wealthy, the change in the rate of savings was negligible. 53 Compulsory superannuation in Australia has amassed huge funds for investment. According to Australian Prudential Regulation Authority (APRA), Quarterly Superannuation Performance: September 2009 (2009) 5, at the end of September 2009, total estimated superannuation assets amounted to A$1.2 trillion. The creation of a significant domestic capital base has long been a goal of Labour governments in New Zealand, and so the maintenance of GST intact by the centre-left Fourth Labour Government (1999-2008) is understandable. However, it is moot whether maintenance of this regressive component of the tax- transfer system contributed to national savings, whereas other measures have been obviously successful. Thus the voluntary but incentivised KiwiSaver superannuation savings scheme, introduced by the KiwiSaver Act 2004 (NZ) has accumulated significant capital in a short period of time. See Government Actuary, Report of the Government Actuary (in respect of the KiwiSaver Act 2006) for the year ended 30 June 2009 (2009) 8. 54 For instance, J K Galbraith, The Culture of Contentment (1992) 101 quotes the following sentiments of the influential neoliberal author George Gilder: ‘Material progress is difficult: it requires from its protagonists long years of diligence and sacrifice, devotion and risk that can be elicited only by high rewards.’ 55 J F C Harrison, The Common People: A History from the Norman Conquest to the Present (1984) 207 sums up the life of ordinary contemporaries of Hobbes as one of ‘want and hardship’ – the socio-economic equivalents, perhaps, of the ‘poore’ and ‘nasty’ with which Hobbes, above n 44, 65 typifies the ‘natural condition’ of man before submission to the Leviathan. 56 See Fuller, above n 24, 42 on the anti-impossibility injunction. 21

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B Locke: Flat Rates In Two Treatises of Government, Locke argued that ‘it is fit every one who enjoys his share of the protection [of the State] should pay out of his estate his proportion for the maintenance of it’.57 Further, tax ‘laws also ought to be designed for no other end ultimately but the good of the people’,58 which, in the Lockean view, is tantamount to preserving citizens’ extant property holdings.59 Neutrality in this sense requires a tax system to ‘preserve the relative priorities that individuals attach to various activities’ and ‘also keep[s] their relative wealth constant’.60 Lockean neutrality provides a philosophical basis for a pure GST because a comprehensive base and a flat rate do not distinguish between people’s autonomous choices.61 ‘Choice’ here includes both consumption and production decisions.62 Taxing people’s choices differently infringes their autonomy, and may lead to people suffering unfair discrimination.63 This concern may be particularly relevant in a plural society. For example: if a minority group considers a certain good a necessity, whereas the majority considers it a luxury, the minority group will be discriminated against if luxuries are taxed at a higher rate than necessities. Strong equitable arguments support a pure GST: it respects heterogeneity and autonomy, which is commonly conflated with consumer sovereignty;64 it is formally non- discriminatory; and from, a traditional tax perspective, delivers horizontal equity, provided taxpayers are similar situated. However, practicable GST cannot accommodate a plausible progressivity mechanism, such as an annual exemption in the way of the Hall-Rabushka flat income tax proposition,65 or graduation, as with Kaldor’s progressive expenditure tax.66 GST is, therefore, regressive,67 and so inequitable from a vertical perspective. Vertical equity is a critical consideration here, because the poor, without making a choice, consume a greater proportion of their incomes (particularly on necessities) than the wealthy.68 The most vulnerable members of society are, then, denied the opportunity of autonomous choice that consumption taxes are supposed to respect. Further, the wealthy

57 John Locke, Two Treatises of Government (first published 1689, 1990 ed) [140]. 58 Ibid [142]. 59 Ibid [123]. Sir William Petty, A Treatise of Taxes and Contributions (first published 1662, 1769 ed) [3.2] argued more explicitly: ‘Let the tax … be proportionable unto all, then no man suffers the loss of any riches by it.’ The lifetime of Petty (1623-1687) overlapped those of Hobbes (1588-1679) and Locke (1632-1704). 60 Richard A Epstein, ‘Taxation in a Lockean World’ in Jules Coleman and Ellen Frankel Paul (eds), Philosophy and Law (1987) 39, 55. Epstein builds on Locke’s brief statements about taxation, and argues for a flat rate, comprehensive income tax. 61 True neutrality would ensure that any form of expenditure is taxed, including, eg, investments and donations to charity. However, the dominant conception of consumption excludes savings (sometimes on the assumption that future consumption or capital transfers will be taxed). Greater good arguments may apply to charitable donations as expenditure. 62 Harvey, above n 17, 284 observes: ‘If applied across all kinds of activities and outputs, [GST] offers no economic bias in favour of any “preferred” goods or services. It does not discriminate between capital or labour inputs.’ 63 See Ronald Dworkin, A Matter of Principle (2001) 371. 64 See Henry Report, above n 2, vol 2, [E 6] on the importance of consumer sovereignty to (neoliberal) tax policy design. 65 See Robert E Hall and Alvin Rabushka, The Flat Tax (2nd ed, 1995) vii. 66 See Kaldor, above n 4, 47-53. 67 Regression in taxation occurs when the effective rate of tax decreases as ability to pay increases. See Bernard P Herber, Modern Public Finance (5th ed, 1983) 123. But compare with Cnossen, above n 17, 83, who argues that consumption should be used as the denominator when considering regression and consumption taxes. 68 The Meade Report, above n 21, 34 compared the positions of two wealthy people, putting forward a persuasive argument for a progressive consumption tax from a perspective of horizontal equity – assuming a capital transfer tax system was in place to tax non-consumed wealth. However, the critical vertical equity consideration was not examined. 22

EQUITY AND GST POLICY are able to choose whether to spend a greater proportion of their income on supplies that are typically privileged under GST systems, such as education and foreign travel.69 Finally, flat rates are an ideological imperative of neoliberalism,70 which is generally indifferent, if not inimical, to vertical equity.71 If wealth is evenly distributed in a country, flat rates of GST may be reconcilable with vertical equity. For example, Scandinavian countries, which have low Gini coefficients72 (around 25),73 might consider flat GST rates, but, in practice, have high rates for luxuries.74 Conversely, New Zealand, which has a pure GST system, like Australia and the United Kingdom, has a relatively high Gini coefficient for a developed country (around 35). South Africa, which has emulated the New Zealand system, is egregiously unequal, having a Gini coefficient of about 60.75 These countries, which are already unequal, employ GST structures that are likely to exacerbate inequality, whereas countries with the most even distributions of wealth have GST systems that are ostensibly progressive.

C Rousseau: Super Tax on Luxuries Rousseau presents a counterpoint to Lockean disinterestedness about personal choice. While similarly asserting that ‘personal taxes and duties on the necessaries of life’ may only be established with ‘the express consent of the people or its representatives’,76 he recommended taxes on ‘articles the use of which we can deny ourselves’.77 For Rousseau, heavy taxes should be levied on ‘all that multiplicity of objects of luxury, amusement and idleness, which strikes the eyes of all, and can the less be hidden, as their whole purpose is to be seen, without which they would be useless’.78 His proposal was, then, for a tax on conspicuous consumption, expenditure that offends the envious or disapproving eye. This sentiment appears to inform contemporary luxury taxes, including distinctions between different classes of goods and services under many GST systems,79 and, indeed, the Australian luxury car tax.80 Before the 1700s, church and state condemned expenditure on luxuries and ostentatious display ‘as self-indulgent and unproductive’.81 Bernard Mandeville’s The Fable of the Bees: or Private Vices, Publick Benefits marks the genesis of the idea that any economic

69 New Zealand’s neutral GST system, while motivated by simplicity and administrative concerns, partially eliminates these inequities. Nevertheless, international travel is GST-free. See Goods and Services Tax Act 1985 (NZ) s 11A(1)(a)(ii). 70 As Richard A Epstein, ‘The Case for a Flat Tax’ (Lecture given to a New Zealand Business Roundtable at the offices of Ernst & Young, , 5 August 2004) 17 observes, ‘it is no accident that every strong defender of limited government has tended toward the flat tax’. 71 Flattened income tax rates and the existence of regressive GST are cited as causes of mortality inequality in New Zealand. See Tony Blakely et al, ‘Decades of Disparity: Widening Ethnic Mortality Gaps from 1980 to 1999’ (2004) 117 New Zealand Medical Journal at 10 October 2010. 72 The Gini index lies between 0 and 100. A value of 0 represents absolute equality and 100 absolute inequality. The average Gini coefficient for economically developed countries is 31.6. See United Nations Development Programme (UNDP), Human Development Report 2009, ‘M Economy and inequality: HDI Rank Country 1992-2007’ at 10 October 2010. 73 Denmark (24.7), Finland (26.9), Norway (25.8) and Sweden (25.0). Ibid. 74 Denmark 25 per cent, Finland 22 per cent, Norway 25 per cent and Sweden 25 per cent. See Schenk and Oldman, above n 9, 459-62. 75 Australia (35.2), New Zealand (36.2), South Africa (57.8) and the United Kingdom (36.0). See UNDP, above n 72. 76 Jean-Jacques Rousseau, ‘A Discourse on Political Economy’ in The Social Contract and Discourses (GDH Cole, trans, 1992) 128, 167 [trans of: Du Contrat Social et al (first published 1762)]. 77 Ibid. 78 Ibid 166. See also Mill, above n 45, 671-72 on the eminent taxability of luxuries. 79 Epstein, above n 70, 17 observes: ‘Banish envy and the battle [for flat taxes] is half won.’ 80 See A New Tax System (Luxury Car Tax) Act 1999 (Cth) and ancillary legislation. 81 Roger Mason, ‘Conspicuous Consumption and the Positional Economy: Policy and Prescription since 1970’ (2000) 21 Managerial and Decision Economics 123, 124. 23

JOURNAL OF APPLIED LAW AND POLICY, 2010 activity contributes to economic growth.82 Mandeville’s proposition that ‘mankind thrives because of mutual greeds’83 can be seen as a crude expression of neoliberalism and its imperative of consumer sovereignty. The market does not fail if it delivers the luxuries that consumers (who can afford them) demand, even if basic social goods are not produced.84 There is no externality to be rectified by way of luxury taxes.85 For those who argue that the State should intervene through taxes to ‘correct’ the disproportionate production of ‘frivolous’ luxuries, practical problems lie in identifying the goods to be taxed.86 Theoretical distinctions based on a generic necessity/luxury binomial include: merit/demerit goods;87 material/positional goods;88 primary social/other goods;89 necessaries/superfluities;90 subsistence/luxury articles.91 Indeed, a hierarchy of taxability based on human needs is imaginable.92 However, as Michael Ignatieff observes: … economic growth constantly expands the frontier of necessity. The luxuries of the few gradually become the necessities of all. If moral virtue depends on common agreement about necessity, how is moral virtue possible in a society which is constantly pushing back the limits of need?93 In a developed economy, both obvious necessities, say, potable tap water, and, obvious luxuries, say, mink stoles, can be identified, but definitive categorisation of almost everything else in between is problematic. Differentiating between goods and services leads to anomalies,94 if not absurdity.95 For J K Galbraith, it was simply impossible to draw ‘a useful distinction’ between luxuries and necessities in an affluent society.96 While food and clothing will always be universally recognised as necessities, ‘they can be and frequently are among the most opulent of expenditures’.97 Distinctions between supplies are likely to be irrational and arbitrary, and led by the interests of hegemonic or influential groups in society.98 Once some concessions are granted, ‘other lobby groups are

82 Bernard Mandeville, ‘Selections from The Fable of Bees, Volume I (1723): Remark L’ in E J Hundert (ed), The Fable of the Bees and Other Writings (1997) 65, 72: ‘Their luxury, as long as they spend nobody’s money but their own, will never be prejudicial to a nation.’ Mandeville lived between 1670 and 1733. 83 Michael Stapleton, The Cambridge Guide to English Literature (1983) 557. 84 See, generally, Fred Hirsch, Social Limits to Growth (1977) for an argument on the need for luxury taxes to correct the market driven production of positional goods. 85 Henry Report, above n 2, vol 2, [E8–2]. 86 It should also be noted that luxury taxes are not particularly effective. See, eg, Mason, above n 81, 126 on the aborted luxury excise tax introduced in the United States in the early 1990s. 87 See Richard A Musgrave and Peggy B Musgrave, Public Finance in Theory and Practice (2nd ed, 1976) 65. 88 See Hirsch, above n 84, 27. 89 See Rawls, above n 48, 90. 90 See Rousseau, above n 76, 160. 91 See Mill, above n 45, 82. 92 Abraham Maslow, Motivation and Personality (2nd ed, 1970) 16-21 distinguished between physiological; safety; belongingness and love; esteem; self-actualisation needs. Corresponding goods and services might be taxed in accordance with their position in the hierarchy. 93 Michael Ignatieff, The Needs of Strangers (1984) 93. 94 J F Rees, A Short Fiscal and Financial History of England 1815-1918 (1921) 4 observes the perennial difficulty faced in distinguishing between luxuries and necessaries: ‘Throughout the eighteenth century the idea that tea was a luxury was fanatically held by some in spite of the fact that its use was becoming almost universal. Pitt taxed newspapers, because he regarded them as essentially luxuries, and he thought houses ought to be exempted because they were necessaries.’ 95 See, eg, United Biscuits (UK) Ltd (No 2) (LON/91/160) VAT Decision 6344 (1991) for the VAT & Duties Tribunal’s formulation of the 11 tests that distinguish a biscuit ‘wholly or partly covered in chocolate’ from a cake. 96 J K Galbraith, The Affluent Society (1968) 254. 97 Ibid. 98 Patriarchal power may have particularly relevance here. For example, in the United Kingdom, supplies of sanitary towels are subject to a reduced rate, rather than being GST-free, and this concession has only applied since 2001. See HM Revenue & Customs, Women’s Sanitary Protection Products (March 2002) 24

EQUITY AND GST POLICY encouraged to press for their own special exemptions’.99 Seeking to correct the disproportionate production of private goods, while avoiding the arbitrariness of luxury taxes, Galbraith plausibly proposed a general sales tax on all privately produced goods and services, with the specific purpose of funding production of public goods and services to counterbalance the market’s preference for private goods.100 This proposal indicates that inequities within GST need to be remedied in the broader tax-transfer system.

D Summation of Ideas Hobbes offers a philosophical basis for taxing consumption, and yet, implicit in his conception of saving as a virtue and consumption as a vice, are the equity risks of failing to take proper account of differently situated individuals. Similarly, Locke’s espousal of neutrality provides persuasive grounds for a comprehensive base and a flat rate, but eschews vertical equity. Rousseau intimates the possibility of vertical equity being achieved through differentiated tax rates, but his disdain for certain goods reveals the arbitrariness that informs luxury taxes and multiple rate GST systems.

V GST IN PRACTICE Supplies conferred with input taxed or GST-free status are most contentious from an equity perspective.101 (The annual turnover level at which registration becomes compulsory may also confer privileges, but is not considered significant.102)

A Input Taxed Supplies Certain supplies, including those of financial services, are input taxed from technical necessity.103 Difficulties arise in calculating the value added by these supplies at a particular point in time.104 Further, many inputs into financial institutions are made by unregistered individuals who cannot set off their GST.105 Without input taxing, a cascade

at 10 October 2010. 99 Keith Hooper, ‘Tracing the Origins of Taxation’ in Keith Hooper et al (eds), Tax Policy & Principles: A New Zealand Perspective (1998) 1, 21. 100 Galbraith, above n 96, 254. 101 To reiterate: the terms ‘input taxed’ and ‘GST-free’ are uniquely Australian. The normal equivalents are ‘exempt’ and ‘zero-rated’, respectively. Hill, above n 18, [16 000] suggests ‘a subtle difference’ lies ‘between GST-free and zero-rated supplies. Whereas zero-rated supplies are subject to GST, albeit at a rate of 0%, GST-free supplies are not subject to GST at all’. Despite the difference in terminology, the practical effects appear to be the same. 102 Schenk and Oldman, above n 9, 48 observe: ‘A small business exemption may remove a significant number of firms but a small percentage of value added from the tax base.’ The small business exemption relieves many firms from administrative obligations but does not raise obvious equity concerns, although some economic privilege may be conferred. The registration levels for suppliers are: Australia (A$75 000); New Zealand (A$48 000), South Africa (A$155 000), and the United Kingdom (A$120 000). See A New Tax System (Goods And Services Tax) Act 1999 (Cth) s 23-5; Goods and Services Tax Act 1985 (NZ) s 51; Value-Added Tax Act 1991 (South Africa) s 23(1); and Value Added Tax Act 1994 (UK) sch 1, respectively. (Amounts are expressed in Australian dollars, using rounded exchange rates quoted in ‘Exchange Rates’, The Australian Financial Review (Melbourne), 9 July 2010, 38.) The extent to which South Africa, as a developing country, effectively excludes many businesses from the GST net is notable. 103 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth), sub-div 40–A. 104 Cooper and Vann, above n 15, 347 note this is only a problem under the invoice-based, subtractive system, but this system is almost universally used. Cnossen, above n 17, 98 fn 1 observes that Argentina and Israel have applied an additive method to financial services. 105 In terms of Goods and Services Tax Act 1985 (NZ) s 11A(1)(q), business-to-business financial services are GST-free. See Marie Pallot, ‘GST and Financial Services – Rating Zero-Rating’ (2007) 13 New Zealand Journal of Taxation Law and Policy 267 for a discussion. 25

JOURNAL OF APPLIED LAW AND POLICY, 2010 effect would arise,106 which GST is expected to eliminate.107 Supplies of precious metals subsequent to the first supply after refinement are also input taxed.108 This concession compensates for the prices of precious metals being set internationally, and so dealers cannot pass on their GST.109 Residential rentals110 and sales of rental properties111 are excluded from the net because of the impracticability of making all individuals who supply residential rentable properties taxable persons.112 No privilege is intended for these suppliers because they are unable to set off input tax incurred, and so equity issues do not arise.113 Supplies may be input taxed to confer a degree of preference because they are considered supplies of merit goods or services. New Zealand does not input tax supplies on merit grounds, other than supplies by non-profit bodies of donated goods and services.114 South Africa input taxes certain housing and leases; passenger transport; most educational services; trade unions; and crèches.115 As Cecil Morden observes, exemptions are seen as a ‘good compromise’ between the costs of permitting a broad range of GST-free supplies and social expectations.116 Thus public transport issues, including government engagement with the socio-economically significant but informal taxi industry, are of great public concern in South Africa.117 Australia input taxes school tuckshops and canteens118 and charity fundraising events on merit grounds.119 Granting this concession was aimed at benefiting consumers financially and enabling the supplier ‘to either charge a higher price to achieve increased profits or reduce their prices to ensure their prices are affordable or simplify their administration’.120 The United Kingdom input taxes a wide range of supplies, including: burial and cremation; education; fund raising events by charities; health and welfare; land; postal services; sport, sports competitions and physical education; trade unions and professional bodies; and works of art.121 Plausible merit arguments may be made for each of these supplies, but they appear to have a medium merit ranking. A reduced rate of five per cent applies to other supplies that appear to have a lower merit rank. These are: domestic fuel or power; installation of energy saving materials; grant funded installation of heating

106 ‘Tax cascades arise when a supplier of goods and services cannot recover the GST paid on the acquisition of goods and services. As a result, the cost of the inability to recover must be borne by the supplier, or passed on to the supplier’s customers. The cost cascades as the customer, and those further on the supply chain, must make the same decision to absorb or pass on the cost.’ Ibid 269. 107 Hill, above n 18, [24 005]. 108 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 40–D. 109 Hill above n 18, [23 120]. 110 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 40–B. 111 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 40–C. 112 Hill, above n 18, [24 005]. 113 However, as McKenzie, above n 38, [311] observes: ‘The inability to recover input tax means that the [input taxed] supply has a pronounced downside. Residential loans illustrate this – here the financier has to incur the cost of GST on relevant inputs because it is unable to charge output tax on the supply of the loan.’ 114 Goods and Services Tax Act 1985 (NZ) s 14(1)(b). 115 Value-Added Tax Act 1991 (South Africa) s 12. 116 Cecil Morden, ‘Fifteen Years of Value Added Tax in South Africa (1991-2006)’ in Richard Krever and David White (eds), GST in Retrospect and Prospect (2007) 543, 550. 117 Ibid 551. 118 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 40–E. 119 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 40–F. 120 Hill, above n 18, [24 005]. ‘However, it may have been simpler, and certainly more generous, to treat these as GST-free supplies. This was presumably not done so that the small charities and tuckshops would not need to register for GST.’ Ibid. 121 Value Added Tax Act 1994 (UK) sch 9 pt 2. 26

EQUITY AND GST POLICY equipment or security goods or connection of gas supply; renovation and alteration of dwellings; residential conversions; women’s sanitary products; and children’s car seats.122 By input taxing selected supplies, government makes a distributive decision about the equitable tax burden.123 Some supplies are privileged and other comparable supplies may not be. This raises the prospect of unequal treatment. While concessions granted by Australia, New Zealand or South Africa seem unobjectionable, the United Kingdom’s eclectic range of favoured supplies, combined with its implicit merit ranking holds the potential for significantly unequal and arbitrary treatment. It is not immediately obvious why, for instance, sports competitions might be considered more meritorious than children’s safety seats, and they, in turn, more deserving of a tax concession than other children’s safety devices. Lobby group pressure may have contributed to distinctions.

B GST-Free Supplies The principal privilege conferrable under a GST system is GST-free status. Here input taxes can be deducted, but no GST is charged to consumers. This is the critical focus for equity because the possibilities for unequal treatment and arbitrariness indicated by input taxing are amplified. To reiterate: the principle of horizontal equity is breached when similarly situated taxpayers are treated differently; and vertical equity is not honoured when differently situated taxpayers area treated similarly. Generally, supplies of going concerns are excluded,124 thus avoiding ‘taxation of nuisance supplies’.125 The first supply of precious metals after refining is also GST-free;126 this ensures that GST does inflate the price of an internationally priced commodity.127 Because GST is generally destination-based, exports and other supplies for consumption offshore;128 duty-free sales;129 and international mail,130 are excluded.131 Exports and other supplies consumed offshore are ‘said to require GST-free treatment because of the basic design goal of taxing only domestic consumption’.132 However, a jurisdiction could tax certain supplies consumed outside its territory, such as, international flights, to reduce its residents’ carbon consumption. Certainly, benefits accrue to exporters from their supplies being GST-free, which is presumably in the national interest,133 but it is not obvious why resident individuals should be able to travel overseas and consume offshore on a tax-free basis. Since the wealthy disproportionately engage in overseas travel, this exemption is better seen as an unwarranted privilege, rather than a technical necessity, and merits review on equitable grounds. New Zealand does not make any supplies GST-free on merit grounds. South Africa exempts certain agricultural goods;134 fuel subject to a fuel levy;135 crude oil for refining;136

122 Value Added Tax Act 1994 (UK) sch 7A. 123 Hill, above n 18, [24 010] says: ‘The impact of input taxed supplies is that the cost of the supply to the final consumer is less than it would be under a full taxation system and more to a taxable person due to the hidden GST that is not available for credit.’ However, the elasticity of demand for the input taxed goods and services must also be taken into account. 124 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–J. 125 Cooper and Vann, above n 15, 349. Cash-flow considerations are also likely to be relevant here. 126 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–L. 127 See McKenzie, above n 38, [201]. 128 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–E. 129 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–M. 130 See, eg, A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–Q. 131 Schenk and Oldman, above n 9, 196 note that Australian GST is basically territorial, ‘but has a unique set of place of supply rules’, whereas New Zealand and South Africa basically start with a GST with global reach and ‘then narrow the tax base to treat internationally traded goods in a fashion similar to the destination principle used under a territorial [GST]’. 132 Cooper and Vann, above n 15, 349. 133 Producers might prefer to export rather than supply the home market. This could have deleterious domestic consequences, particularly for the poor, if, say, enough staple foods were exported. 134 Value-Added Tax Act 1991 (South Africa) s 11(1)(g). 27

JOURNAL OF APPLIED LAW AND POLICY, 2010 certain unprocessed foods; 137 kerosene for heating or lighting;138 and land supplied under a restitution programme.139 Food;140 health;141 education;142 child care;143 religious services;144 activities of charities;145 water, sewerage and drainage;146 transport and related matters;147 grants of land by governments;148 farm land;149 and cars for disabled persons150 are GST-free in Australia.151 Subject to numerous exceptions, the United Kingdom makes books; clothing and footwear; drugs, medicines, aids for the handicapped; food; protected buildings; sewerage services and water; talking books for the blind and handicapped and wireless sets for the blind; and transport GST-free.152 Identification of supplies which should attract GST-free status on merit grounds defies technical rationalisation. Exemption is an intensely political consideration.153 Thus, the Australian Democrats gave their decisive support for GST, only once the concession for food was granted.154 Indeed, seeking GST-free status for basic food items is the focal point for equitable sentiments, and, perhaps, political opportunism.155 Faced with the politically untenable prospect of taxing the staple foods of impoverished people, South Africa, sought to make those foods GST-free, which would be of specific benefit to the poor, but not to the non-poor. It is not obvious why concerns should have been limited to food, and thereby excluded other prerequisites for survival. Indeed, kerosene, the normal cooking and lighting fuel for low-income groups in South Africa, was made GST-free in 2001.156 The quest also lacked gender nuance.157

135 Value-Added Tax Act 1991 (South Africa) s 11(1)(h). 136 Value-Added Tax Act 1991 (South Africa) s 11(1)(hA). 137 Value-Added Tax Act 1991 (South Africa) s 11(1)(j) and sch 2, Part B 19 types of otherwise unprocessed or cooked basic foods. 138 Value-Added Tax Act 1991 (South Africa) s 11(1)(l). 139 Value-Added Tax Act 1991 (South Africa) s 11(s). 140 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–A. In terms of s 38–3, qualifying food excludes restaurant food, hot takeaway food and certain beverages. 141 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–B. 142 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–C. 143 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–D. 144 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–F. 145 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–G. 146 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–I. 147 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–K. 148 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–N. 149 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–O. 150 A New Tax System (Goods And Services Tax) Act 1999 (Cth) sub-div 38–P. 151 While these are all ostensibly merit goods, Cooper and Vann, above n 15, 378 note that government’s intention in making health services GST-free was to ensure competitive neutrality between public and private providers. The same concern applied to education, at 381. 152 Value Added Tax Act 1994 (UK) sch 8 pt 2. 153 Making certain supplies GST-free may have a ‘disciplinary’ function, see Michel Foucault, Power/Knowledge: Selected Interviews and Other Writings 1972-1977 (trans and ed Colin Gordon, 1980) 104 for a discussion of disciplinary power. For example, if residential caravan park accommodation is made GST-free, a signal may be sent about the ‘right’ place for the poor to live. This may have the socially segregative effect of cajoling low-income families away from formal housing and consequently denying them access to schools, hospitals and other social infrastructure. See also below n 159, on GST as a public health instrument. 154 Hill, above n 18, [1 100]. 155 Paul Goldsmith, We Won, You Lost, Eat That! A Political History of Tax in New Zealand since 1840 (2008) 298 notes that, in response to the Labour government’s introduction of GST, the opposition National Party undertook to repeal GST and replace it with an ‘Extax’, a sales tax that would exempt basic foods, doctors’ fees, rates and non-profit activities. 156 Value-Added Tax Act 1991 (South Africa) s 11(1)(l). As Morden, above n 116, 553 observes, political pressures to extend the scope of GST-free supplies has so far been resisted. See Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (2007) chapter 10 on the neoliberal influence on South African fiscal policies post-Apartheid. 28

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Research indicates that only maize meal uniquely benefits the poor,158 yet 19 types of food for human consumption are currently GST-free in South Africa. (In Australia, despite only powdered milk, canned meat and offal being of specific benefit to the poor,159 a far wider food exemption applies.) Most of these foods disproportionately benefit the health conscious wealthy,160 rather than the poor, who, struggling for day-to-day survival, are likely to be ill-informed and unconcerned about optimal nutrition. Making the supply of virtually any basic food GST-free will benefit the poor to some extent but the wealthy will also benefit, and generally to a greater degree.161 New Zealand modelling indicates that ‘removing food from the base makes almost no difference to the distribution of the tax across income levels, but loses 20% of GST revenue’.162 Seeking substantive equity through differentiated rates appears, therefore, to be unachievable, and diversionary. ‘Sharp instruments, such as family support, are a better method of compensating families with dependent children than selective omission of food or children’s clothing’.163 A final point to be made on GST concessions on equitable grounds, is that people may support measures that are symbolically, if not substantively, equitable. Indeed, for Thurman Arnold, the law ‘is primarily a great reservoir of emotionally important social symbols’.164 Despite the technocratic arguments that can be adduced for a comprehensive base and flat rate, people may simply feel uncomfortable with taxes on supplies associated with basic human rights, such as water, food, education, health, and so forth. They may then be prepared to sacrifice tax benefits for symbols of equity, such as GST-free concesisons.165 Keith Hooper predicted before GST was implemented in Australia, that GST-free exceptions for merit goods, ‘may be more acceptable to the majority of Australians because of their greater social equity considerations’:166 symbolism may have been a more accurate word than considerations.

157 Terence Smith, ‘Women and Tax in South Africa’ (IDASA, Women’s Budget Initiative, 2001) and the Parliamentary Joint Standing Committee on Finance, Parliament of South Africa, Final Draft Report of the Joint Standing Committee on Finance on the Third Interim Report of the Katz Commission of Inquiry into Taxation (1996) 10 recorded the differential effects of regressive taxes, given inequalities between women and men. Both concluded that women were more likely to benefit from necessities being excluded from the tax net than men. 158 Harold Alderman and Carlo del Ninno, ‘Poverty Issues for Zero Rating Value-Added Tax (VAT) in South Africa’ (Informal Discussion Paper Series, South Africa: Poverty and Inequality 19336, World Bank, Country Department I, Africa Region, February 1999). 159 Henry Report, above n 2, vol 1, [D 2–1]. In New Zealand, without the support of the senior coalition partner, Māori Party MP, Rahui Katene introduced the Goods and Services Tax (Exemption of Healthy Food) Amendment Bill 2010 (NZ) as a Private Member’s Bill. This would institute input taxed supplies of ‘healthy food’, including ‘lean meat’. (It is not obvious why the proposal was not for GST-free status.) Because this is a public health, rather than a vertical equity proposal, a person who cannot afford lean meat would pay the full rate. Bizarre anomalies of this nature bedevil GST policymaking, once the principle of comprehensive inclusion is abandoned. For example, James, above n 41, 9 observes that in the United Kingdom, unlike meals eaten on the premises, take-away meals were originally input taxed. To counter abuse, hot take-away food was made taxable. Consequently, caviar as a cold food is input taxed but fish and chips are not. 160 Research shows that ‘absolute actual expenditure on GST-free food is almost six times greater for the highest than the lowest income groups’. See Henry Report, above n 2, vol 1, [D 2–1]. 161 See Delfin Go et al, ‘An Analysis of South Africa’s Value Added Tax’ (World Bank Policy Research Working Paper 3671, World Bank, Washington, 2005) for research that suggests it is possible to craft food exemptions that specifically benefit the poor. 162 See Buckle Report, above n 21, 47. 163 Robert Stephens, ‘The Economic and Equity Effects of GST in New Zealand’ in Richard Krever and David White (eds), GST in Retrospect and Prospect (2007) 65, 87. See also ibid. 164 Quoted by D N Schiff, ‘Socio-Legal Theory: Social Structure and the Law’ (1976) 39 Modern Law Review 287, 298. 165 As James, above n 41, 8 observes, ‘when it comes to matters of fairness in taxation complexity often wins over simplicity’. 166 Hooper, above n 99, 21. 29

JOURNAL OF APPLIED LAW AND POLICY, 2010

D Broader Equity Considerations Even if GST itself is considered inequitable, to some extent, its faults may be compensated for elsewhere in the tax-benefit system. Thus payments to New Zealand beneficiaries were increased when GST was introduced at 10 per cent in 1986, but not two years later when the rate was increased by a quarter to 12.5 per cent.167 Further, the actual impact of GST was significantly greater than the average price increase on which the compensation was based.168 Attempts were also made to compensate low-income earners for the increased cost of food, health care, and medicines by a low-income rebate, but this was probably insufficient and not increased in line with the higher GST rate.169 In contrast, the current government has introduced a comprehensive scheme to compensate for the 2010 increase in the GST rate from 12.5 to 15 per cent.170 Adopting the efficiency of GST may be seen as a trade off against the equity of a progressive income tax. New Zealanders were persuaded by a massive advertising campaign promoting a fair exchange of less income tax for more indirect tax.171 (Conversely, Australians settled for less GST and more income tax, as personal tax cuts at the upper end were traded off for the food exemption.172) Despite the claim for a fair exchange, the benefits of the GST-income tax recalibration accrued to the highest income earners. Between 1988 and 1990 ‘the poorest fifth of wage and salary earners sustained an income fall of 0.8% … while the richest fifth in New Zealand enjoyed an income rise of 6.9%’.173 The current government has been explicit in its intention to specifically benefit the wealthy by cutting income tax and increasing the GST rate.174 Despite the compensation provided elsewhere in the tax-transfer system, such a policy may be expected to exacerbate inequality in wealth and other manifestations of wellbeing.175 Even if no one is worse off in absolute terms,176 relative wealth matters to people in a particular society, not absolute wealth.177 Liam Murphy and Thomas Nagel argue that the proper equity concern ‘is the extent to which social outcomes are just, and knowledge of the distribution of real tax burdens is

167 Stephens, above n 163, 87. 168 Ibid. 169 Ibid. 170 Coincident with the increase in the rate of GST, payments increase by 2.02 per cent for people receiving: New Zealand Superannuation or a Veterans Pension; all main benefits; the maximum rates of the Disability Allowance, Child Disability Allowance and Childcare subsidies paid through Work and Income; the Family Tax Credit and Minimum Family Tax Credit; Student Allowances; CPI-adjusted payments from the Government Superannuation Fund or National Provident Fund. Across the board income tax cuts also apply. See Bill English, ‘Fact Sheet – GST and Compensation’ (Media Release, 20 May 2010). 171 Hooper, above n 99, 20. The trade-off between direct and indirect taxes could be seen as way of recalibrating the fiscal equilibrium. Thus, according to Goldsmith, above n 155, 295, the wholesale sales tax that GST replaced was an ineffectual revenue raising instrument, despite being levied at rates of up to 60 per cent on certain items. Therefore, GST could be seen as a means of re-establishing a traditional balance between direct and indirect taxes at a time when the ‘overwhelming source of revenue was a progressive income tax’. 172 Cooper and Vann, above n 15, 343. 173 Ibid. 174 Vernon Small, ‘Budget Gifts for the Rich’, The Dominion Post (Wellington), 18 May 2010, A1 quotes Prime Minister John Key as ‘urging Kiwis not to be jealous if the rich get more from the … [2010] Budget tax package – because the rich are crucial to the economy’ to justify an increase in GST and decrease in marginal income tax rates. 175 See, eg, Richard G Wilkinson, The Impact of Inequality: How to Make Sick Societies Healthier (2005) 102 on the connections between wealth and health inequality. 176 Evidence is emerging that some groups will, in fact, be worse off as a consequence of the rate increase. See, eg, Katie Chapman, ‘Parents Using Childcare ‘Worse off’’, The Dominion Post (Wellington), 31 May 2010, A3. 177 Richard Layard, Happiness: Lessons from a New Science (2005) 46. 30

EQUITY AND GST POLICY important only insofar as it helps us advance that aim’.178 In other words, final analysis should not lie with GST concessions, rates or compensation, but with the overall consequences of tax policy. ‘Whether the accentuation of inequalities of income and wealth is regarded as good or bad is a matter of value judgment.’179 As Cedric Sandford observed of New Zealand’s tax restructuring in the 1980s: Some people have felt that the regime pre-tax reform had unduly compressed differentials by incomes policies of various kinds. For others the increase in inequality is a serious blemish on the tax reform of the ’80s to set against the gains in efficiency.180

VI CONCLUSION This article has drawn on the ideas of Hobbes (the virtue of taxing consumption), Locke (neutral treatment of consumption decisions) and Rousseau (punitive taxation of luxuries) to augment the traditional tax criteria of equity, efficiency and simplicity. It was argued that, because the Hobbesian preference for taxing consumption on virtue grounds is ill- founded, policymakers should be alert to the inequitable potential of broad based consumption taxes, such as GST. The neutral Lockean approach to GST rates was seen to be more easily justified than Rousseau’s value-laden aversion to luxuries. From a perspective of Aristotelian distributive justice, GST is an irremediably inequitable tax, whose faults can only be remedied elsewhere in the overall tax-transfer system. Concessions, which commonly represent arbitrary sentiments or the influence of hegemonic and special interest groups, dilute the significant efficiency and simplicity advantages of a pure GST. It might be ideal if every element of the tax system were discretely equitable and reflective of an overall equity in the system, but, in practice, the justice of the tax-transfer system as a whole must be the principal consideration, not the equity of its constitutive parts. The policy prescriptions for GST, therefore, appear obvious: Income redistribution to make [a country] fairer is primarily the job of the income tax and transfer system … other taxes and charges can be used in the most efficient way, reducing the overall complexity of the system. It is very difficult to target GST exemptions on some products to certain groups.181

178 Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (2005) 131. 179 Cedric Sandford, Why Tax Systems Differ: A Comparative Study of the Political Economy of Taxation (Fiscal Publications, 2000) 193. 180 Ibid. 181 Henry Report, above n 2, vol 1, [D 2–1]. 31