In summary: giving large businesses a 20% tax break on R&D spending is good for the economy but giving consumers a 15% tax break on fruit and vegetables threatens the ‘purity’ of our tax system. Here’s Bernard Hickey:
Can you imagine what would suddenly be classified as fresh fruit and vegetables? What about fruit in yoghurt? Or freshly tinned peaches? Or vegetables in a bun, with a slice of meat and some fresh and fruity mayonnaise?
I’m not a fancy big-city economist but neither is Hickey so it’s a fair fight. If I designed such a system the things that would be classed as fresh fruit and vegetables would be . . . fresh fruit and vegetables. Yogurt? Not fresh fruit or vegetables. Freshly tinned peaches(?). Not fresh fruit or vegetables. A bun with vegetables in it? Not fresh fruit or vegetables.
I guess my training as a scientist gives me an unfair advantage when it comes to empirical observations that one thing is different from another, dissimilar thing.
“In summary: giving large businesses a 20% tax break on R&D spending is good for the economy but giving consumers a 15% tax break on fruit and vegetables threatens the ‘purity’ of our tax system.”
When talking about taxes in this sense, the sole interest is based on “efficiency” – as fairness issues should be addressed by distributing income directly between people.
On efficiency grounds the R&D tax break is based on “positive spillovers” – so if someone invests in technology there are bits other people get to use for free. This is a type of positive externality. If we believed this is actually happening then the tax break could be a good idea – I’m not saying that is what I think, I’m just saying that is the reasoning.
The tax cut on specific food items on the other hand changes the relative price of one thing to another for no reason which is allocatively inefficient. To caricature an economist, if you want to help the poor you just give them money direct (through higher taxes on everyone else) rather than messing around with prices.
Now if we thought there were “positive externalities” associated with something to do with food, we could subsidise it on that basis – but such a tax break is an inefficient way of giving poor people income.
Comment by Matt Nolan — May 14, 2010 @ 11:56 am
I believe both are bad. Primarily because everyone knows that fresh fruit and veges are the very bane of a child’s life, mums could afford more of this bane, children are next to godliness, effectively we are encouraging the bane of god.
Satanic country we live in.
Comment by Jeff R — May 14, 2010 @ 12:02 pm
Matt – I think one part of the GST exception for certain good is to encourage people to use those goods more, and substitute goods less. And recent Wellington School of Medicine studies show that this kind of price signaling is more effective than public education campaigns at encouraging people to make healthier food choices (which is a public matter rather than a purely private matter due to health care costs that are borne by everybody). So it isn’t just about income – it is one policy that can potentially achieve two distinct goals.
Danyl – I agree, and I think Bernard is massively over-reacting. We’ll see this a lot I think in NZ, where simplicity and purity of taxes have become the prime watchwords, much more so that elsewhere. If you look overseas, it turns out that every other OECD country bar one has exemptions from consumption taxes for one good or another. Actually, we already do this here with rents and mortgages which, if you believe Bernard, would have lead to massive shenanigans with people renting out tents for a 99-year period for people to live in, for the same price as a retail pre-GST tent. Or people “selling” hotel rooms to each hookers who then “sell” them back 60 minutes later.
Comment by Rob Salmond — May 14, 2010 @ 12:06 pm
I really wish they would stop passing the mic to Hickey. I mean according to him we should be be a intergenerational war to end all wars after our house prices dropped 25% by the end of 2009….
Comment by max — May 14, 2010 @ 12:07 pm
[...] Dim Post makes a good point on the “framing” of policies, and how justifications for policies can seem [...]
Pingback by TVHE » Quote of the Day: Selling ideas — May 14, 2010 @ 12:14 pm
Fresh fruit and vegetables are officially defined as “the things by the supermarket entrance that you walk past quickly on the way to the beer.”
Teenagers working for Foodtown seem to know what goes where. Let’s put them in charge of our tax system.
Comment by sammy — May 14, 2010 @ 12:21 pm
“Teenagers … seem to know what goes where. Let’s put them in charge of our tax system.”
if you’d ever met grad policy analysts, you’d know they already are.
Comment by Che Tibby — May 14, 2010 @ 12:26 pm
Perhaps you could then get to be the registered “fresh fruit and veg decider”. In an Aussie GST case, they flew in an EU registered expert bread decider to help decide whether a mini ciabette was bread or cracker for tax purposes….
Comment by Eric Crampton — May 14, 2010 @ 12:32 pm
Your argument isn’t with the economists, it’s with the marketeers – see the successful lobbying that goes on with the Pick the Tick campaign.
Comment by Sally — May 14, 2010 @ 1:07 pm
Now if we thought there were “positive externalities” associated with something to do with food, we could subsidise it on that basis – but such a tax break is an inefficient way of giving poor people income.
It’s not so much the positive externalities associated with fresh fruit and vege as the negative externalities associated with the alternatives (heart disease, diabetes etc).
Comment by danylmc — May 14, 2010 @ 1:09 pm
Matt N: if the exception were just for fruit and veg, such that they were cheaper than other foodstuffs, then perhaps the resulting health benefits of a change in the population’s diet would be a positive externality. It’s not just about giving a break to the poor.
Comment by Stephen — May 14, 2010 @ 1:10 pm
“It’s not so much the positive externalities associated with fresh fruit and vege as the negative externalities associated with the alternatives (heart disease, diabetes etc).”
“Matt N: if the exception were just for fruit and veg, such that they were cheaper than other foodstuffs, then perhaps the resulting health benefits of a change in the population’s diet would be a positive externality.”
Indeed. And then, in this case, the goal of any policy should be to argue based on these relative points rather than the incomes of the poor per see.
We need a reason for the relative price of some food products to be lower in order to justify analysing the issue – note that saying we should subsidise “healthy” foods is very similar to saying we should tax “unhealthy” foods in this sense.
Now my impression was the Goff just said they would investigate the issues, rather than saying he would do things. This sounds fine to me – as long as any corresponding policy that changes relative prices is based on this type of externality argument rather than arbitrary politicking.
My main problem with his speech, and tax policy in general, is the fact that it doesn’t properly account for the linkages between a benefit and tax system – the tax system can be fully focused on “efficient allocation” as long as we have a benefit system that does redistribute based on the level of redistribution society desires. If we accept this breakdown of the system, then we can easily agree on a relatively simple tax system – and debates would be focus on the redistribution implicit on the benefit side.
Comment by Matt Nolan — May 14, 2010 @ 1:34 pm
As a scientist, would you include mushrooms in “fresh fruit and vegetables”? What about nuts?
Comment by Repton — May 14, 2010 @ 1:51 pm
And what about those chippy-style bags you can buy of sliced apple?
I assume you’d include fresh herbs; what about herbs sold in a pot so you can grow them at home?
Comment by Repton — May 14, 2010 @ 1:55 pm
“It’s not so much the positive externalities associated with fresh fruit and vege as the negative externalities associated with the alternatives (heart disease, diabetes etc).”
Hm, I can see you are no economist: a heart attack is not an externality to the person who suffered it. Of course, with socialised medicine, the costs of treatment are externalised. But if the victims dies quickly, then we taxpayers save on National Super. We could do better to INTERNALISE the costs of unhealthy food: private provision of healthcare/medical insurance. Just sayin.
So how much GST should one charge on a fresh squeezed OJ & carrot juice? If they add spirolina, do they have to start charging GST?
Comment by Clunking Fist — May 14, 2010 @ 2:01 pm
“As a scientist, would you include mushrooms in “fresh fruit and vegetables”? What about nuts?”
Yes to both. (Mushrooms are vaguely debatable, but most nuts are already fruit (having said that, salted nuts are again borderline)).
“And what about those chippy-style bags you can buy of sliced apple?”
Not fresh fruit or veg.
“So how much GST should one charge on a fresh squeezed OJ & carrot juice?”
See above. GST as per normal non-fresh veg/fruit. Danyl’s original post pretty much points this out, surely?
Comment by I am a scientist — May 14, 2010 @ 2:17 pm
Sigh. I lived through this debate in Canada. In the end it became pretty clear what kinds of food and drink was exempt from GST.
To give an example using the apples mentioned above – fresh apples, no GST, apples that have been modified from a fresh status, GST rated, so sliced dried apple chips attract GST.
Plain nuts, no GST. Nuts that have been roasted or salted attract GST.
Herbs that are fresh in a pot, no GST. Herbs that have been mixed up with oils, vinegars, or dried or made into pesto attract GST.
Plain ordinary milk attract no GST. Milk that has additives to make them different such as chocolate or banana flavoured milk (NOT A2 milk or ‘super nutrional’ milk) attract GST.
Oranges and carrots in their original form have no GST. Oranges and carrots juiced attract GST.
Plain bread, no GST. Bread that has been modified in some respect attract GST.
And so on. The principle is plain enough; Plain unadulterated foodstuffs don’t attract GST. Stuff mucked around with does. Easy peasey.
Comment by Chris — May 14, 2010 @ 2:20 pm
Sounds like a goer. No GST on healthy food and I can nearly buy a cheap Lotto ticket, a packet of smokes or a bottle of plonk.
JC
Comment by JC — May 14, 2010 @ 2:34 pm
And yet Danyl you were the one pointing out that fresh vegetables at a farmers market are 50% cheaper than at a supermarket? So how exactly is a 10-odd% change in the supermarket price suddenly going to unleash a wave of healthy food choices?
I find it slightly ironic that many of the people who suggest that consumers are going to perfectly respond to a price signal in healthy food, are the same people that decry neoclassical economics as divorced from reality.
Comment by garethw — May 14, 2010 @ 2:36 pm
Where does Hickey advertise tax breaks for specific companies? That the government has them is bad enough. Note that Hickey says:
Comment by Berend de Boer — May 14, 2010 @ 2:37 pm
Is the GST free part of the price just at the Supermarket, or does it go all the way down the chain – wholesalers, distribution, importers, growers etc?
Therefore where does it start? (e.g. sweet navel oranges from California).
If I drive a pumpkin delivery truck, is my business GST exempt?
Comment by Pat — May 14, 2010 @ 2:39 pm
Aussie does it…..so can we…..regardless of what Paul Henry types say.
Comment by kerry — May 14, 2010 @ 2:41 pm
It seems to me that the definition of ‘fresh fruit and vegetables’ is pretty simple – if it still looks like it did when it was hanging on a tree or growing out of the ground it’s GST exempt.
Hickey is an idiot if he is confused by yoghurt or canned peaches.
Also our simple, no exemption, GST system already has a number of exemptions – there is no GST on rents, or overseas travel or if you import items of less than $400 in value.
I think this is a good policy for Labour, it is a point of difference from National and something they can promise to enact that rolls back part of the GST increase to 15%.
Comment by ieuan — May 14, 2010 @ 2:53 pm
I might be persuaded about exemption for fruit and vege because of the (unintended from a tax point of view) health benefits but wonder if a general food exclusion would be better than non-exclusion with income tax relief for low income earners. I understand that low earners spend a greater percentage of income on food than higher but I would assume that higher income earners spend more in absolute terms fron which we get tax that cannot be avoided.
Comment by Neil — May 14, 2010 @ 2:56 pm
As a scientist, would you include mushrooms in “fresh fruit and vegetables”?
I was sitting in a seminar wondering if anyone would throw mushrooms in my face.
Comment by danylmc — May 14, 2010 @ 3:16 pm
Plain unadulterated foodstuffs don’t attract GST.
But why exclude dried or packaged apples? Still healthy aren’t they?
Comment by Stephen — May 14, 2010 @ 4:01 pm
“But why exclude dried or packaged apples? Still healthy aren’t they?”
Lots of things are healthy without being *fresh* fruit or veg. The whole point is to make it easy to administrate without having to make those arbitrary calls as to what is and isn’t a ‘healthy’ version of any particular foodstuff.
Thinly sliced, lightly salted, fried potatoes, anyone?
Comment by I am a scientist — May 14, 2010 @ 4:08 pm
Yes, one could argue that dried packaged apples are healthy, but it was recognised that a line had to be drawn somewhere, and the simpler the line, the better (like the Bakers dozen rule in Canada: buy five muffins, pay GST. Buy six, no GST charged. Buy seven, GST charged. I’ve no idea where this exemption came from, except that it was pretty basic and applied only to baked goods, not groceries like tinned fruit, or bags of dried apple slices).
That simple line was if a food stuff was in its basic form then it didn’t attract GST. Modified, GST was applied and any argument over the nutritional benefits or otherwise were ignored.
Comment by Chris — May 14, 2010 @ 4:09 pm
Plain potatoes, no GST. Potatoes thinly sliced, fried or baked and lightly salted, GST rated. As would be the chips in your fish&chips.
Comment by Chris — May 14, 2010 @ 4:10 pm
But why exclude dried or packaged apples? Still healthy aren’t they?
Because the policy is to exclude fresh fruit and vegetable and they are not fresh fruit or vegetables.
Comment by danylmc — May 14, 2010 @ 4:16 pm
I’d rather not employ a bunch of people in the IRD (alongside the ones already running Working for Families, Student loans and any other clever means-tested and ruinously high marginal tax rate schemes) dreaming up definitions of what is fresh food and veges.
I’d rather our food companies and supermarkets didn’t employ a bunch of people to run (onion) rings around the bunch of people at the IRD.
I actually like the idea of putting extra taxes on high fat and high sugar manufactured foods (say by calorie) in the same way we have extra taxes on alcohol and cigarettes. It would be far simpler and cleaner than messing with GST.
PS Max – Hang in there on the house price fall. We’ll get there, just slowly.
cheers
Bernard
Comment by Bernard Hickey — May 14, 2010 @ 4:27 pm
What about rice and other pulses? What about that Uncle Ben’s par boiled rice?
I love being able to take my gst free potatoes and cover them with butter and sour cream, and encase my gst free apples in butter rich pastry, having earlier combined them over heat with large quantities of sugar.
Comment by insider — May 14, 2010 @ 4:38 pm
Take 15% off brussell sprouts, and watch sales go through the roof. Yeah, right.
The elephant in the room is that the reason why a good proportion of the population don’t eat enough fruit and vegetables now is not because of price – it’s because they don’t know how (or don’t want to) cook and prepare them.
Comment by Pat — May 14, 2010 @ 4:58 pm
they don’t know how (or don’t want to) cook and prepare them.
That is a very fair point.
Of course, asking why so many New Zealand families don’t have the time or inclination to cook from scratch takes us way down the rabbit hole. The life most families lead now is very different from the middle class childhood I remember from the 70s, and having a spare adult with time to cook for the family every day is one of those differences.
Comment by Stephen — May 14, 2010 @ 5:05 pm
Plain rice, plain pulses, no GST. Uncle Ben’s – GST rated. Chickpeas in a can, GST rated. And your tatties with sour cream and butter only attracts GST on the sour cream, while your apples in butter pastry (made from scratch) using large amounts of sugar is GST free.
I echo Bernard’s comment about legions of IRD servants nitpicking about what is plain, unadulterated food; there was a whole section in Ottawa that dealt with this issue. Guess it would make for interesting CV’s; where did you work again? Oh, in a section at Revenue Canada working out the tax status of food.
So Bernard’s suggestion is eminently more sensible. Tax fats and sugar in foodstuffs; this would also apply to Nutrasweet right? No. it doesn’t add calories.
Comment by Chris — May 14, 2010 @ 5:05 pm
I think people who object on grounds of the administrative cost would help their case if they could come up with even a loose estimate. Maybe 30 new civil servants, for example, would still lead to a net benefit, whereas 200 wouldn’t? We can all pluck figures out of the air one way or the other.
As for as the strange edge cases go, well the perfect is the enemy of the good. Again, how much of a problem is that really?
Comment by Stephen — May 14, 2010 @ 5:10 pm
It’s 35 pages, but this is how it’s handled in Canada.
Comment by Cameron — May 14, 2010 @ 5:11 pm
Whoops.. sorry.. http://www.cra-arc.gc.ca/E/pub/gm/4-3/4-3-e.pdf there it is..
god I fail at the intertubes
Comment by Cameron — May 14, 2010 @ 5:13 pm
“I think people who object on grounds of the administrative cost would help their case if they could come up with even a loose estimate. Maybe 30 new civil servants…”
I don’t know, but it looks like Chris is putting together his job application.
Comment by Pat — May 14, 2010 @ 5:20 pm
Compared to my current job defining what is or is not a fresh fruit or vegetable sounds pretty peaceful. Perhap I’ll join Chris.
Comment by LucyJH — May 14, 2010 @ 5:26 pm
The was a Listener food column many years back about poverty and food choices. If you don’t have enough money for a good diet you go for price:calorie ratio. From a standing start fish and chips is pretty good for that.
If the price of food goes down, more people can afford a good diet. On the other hand, adding a tax on bad food doesn’t help this.
Comment by lyndon — May 14, 2010 @ 5:27 pm
Instead of farting about with nonsensical exclusions, why not just reduce Govt expenditure to 30% of GDP.
That would reduce the national blood pressure by heaps.
JC
Comment by JC — May 14, 2010 @ 6:00 pm
Instead of farting about with nonsensical exclusions, why not just reduce Govt expenditure to 30% of GDP.
Because sucking that much money out of the economy would require massive cuts, leading to a surge in unemployment, suck huge amounts of cash out of the economy, wipe out hundreds of businesses and plunge us back into recession?
Comment by danylmc — May 14, 2010 @ 6:19 pm
danylmc, not to mention what it would do to the minimal safety net…
I really don’t get how people don’t get this: If you give money one place (say, tax cuts) you have to take it from somewhere (services, employees that deliver same, infrastructure)…
Comment by Cameron — May 14, 2010 @ 6:37 pm
“If you give money one place (say, tax cuts) you have to take it from somewhere…”
There is another way: Grow The Pie e.g. mining.
Economic growth means it should be possible to have tax cuts AND an increase in government services (not according to Goff The Reverser, though).
Comment by Pat — May 14, 2010 @ 6:56 pm
Oh yes, please, let’s use mining as an example, shall we?
So you go after the unnamed resources, getting some magical total figure. But to get them there are the suck costs of infrastructure and housing and equipment. All of which becomes useless once a) the resources are exhausted b) their worth drops below the magic number where it’s no longer economically viable to extract.
Then you’ve got two choices a) ghost towns b) mine more.
Whee.. yummy pie you have.
Comment by Cameron — May 14, 2010 @ 7:20 pm
“I guess my training as a scientist gives me an unfair advantage when it comes to empirical observations that one thing is different from another, dissimilar thing.”
I got my training on Sesame Street. They had a song *sings* “one of these things is not like the other….”
I think the idea gets tricky when (as someone suggested) you ask how it affects the wholesalers and producers. GST goes all the way down, so who does and doesn’t pay it? Lots of hard accounting stuff comes into play, and associated compliance costs. We already have some GST exempt things though: eg financial services. And the IT industry would be happy. It might even nudge up the GDP. But surely a simpler idea is slap a tax on the nasties, you do have to argue through the value judgments (…but my product is GOOD for you, no really, it’s just sugar and fat…)
Comment by Roger Parkinson — May 14, 2010 @ 7:20 pm
“Because sucking that much money out of the economy would require massive cuts, leading to a surge in unemployment, suck huge amounts of cash out of the economy, wipe out hundreds of businesses and plunge us back into recession?”
That wasn’t the case in 1999 when we were at around 30%. The major issue was the Nats from 1991 moved too drastically and fast coming out of the 1990/91 recession. But then they inherited major debt of around 50% of GDP. There’s no reason why we shouldn’t aim for that figure over the next few years.
From what I can see of the EU, something like this approach will be forced on many members anyway to keep afloat. It may well be the days of major Govt action in our economy is over in the face of trading tigers like China and India.. they are the competition and benchmarks, not Greece, Italy, France etc.
JC
Comment by JC — May 14, 2010 @ 7:24 pm
“But then they inherited major debt of around 50% of GDP. There’s no reason why we shouldn’t aim for that figure over the next few years.”
Jeez.. I meant aim for the 30% of GDP.
JC
Comment by JC — May 14, 2010 @ 7:28 pm
I think people who object on grounds of the administrative cost would help their case if they could come up with even a loose estimate. Maybe 30 new civil servants, for example, would still lead to a net benefit, whereas 200 wouldn’t?
Actually, it’s up to the people who want to take GST off fresh fruit and vegetables to come up with even a loose estimate of the net benefit. What constitutes “healthy” food is a rich area for dispute, and the supposed benefits of persuading people to eat more fruit and veg is largely speculative – especially re fruit, which largely consists of balls of sugar with a few vitamins and trace elements in them.
Comment by Psycho Milt — May 14, 2010 @ 7:57 pm
I think the idea gets tricky when (as someone suggested) you ask how it affects the wholesalers and producers. GST goes all the way down, so who does and doesn’t pay it? Lots of hard accounting stuff comes into play, and associated compliance costs.
Speaking as a tax practitioner this is vital to understanding the net benefit of any change to GST. Everyone in the chain would have to adjust their prices and systems to introduce a zero rate. It’s called the cascade effect by GST practitioners and although ultimately the final consumer is left paying GST the cascade effect means that even with the best will in the world each supplier in the chain will extract a tiny part of the net GST benefit through a higher charge to recover their increased admin costs.
The assumption of the zero-rate food proponents is that the full amount of the GST cut will flow through to the consumer. It won’t because there is a greater cost to each supplier in administering it (and a few will undoubtedly take advantage of a change to slip in a price increase). Actually I’d suggest that zero-rating would be more costly to administer because it disturbs a consistent treatment of one rate across all goods and services. In this context comparisons with Canada, Australia etc are unfair – they had the split treatment from the beginning of GST and it’s easier to manage a system like that from the outset than to change it after 20 years.
Also it’s not just the poor who would benefit from zero-rating. In fact the greater benefit would flow through to higher income families with better dietary habits.
Personally I doubt whether half of the possible benefit of zero-rating food would flow through to consumers. That seems a marginal benefit for increased complexity (particularly when the benefits flow to everyone and not those most in need). Far better to increase benefits and specifically tax the troublesome food.
Comment by Terry B — May 14, 2010 @ 9:54 pm
We already complicate the tax system by offering creating tax rates on some types of foodstuffs. Alcoholic drinks are taxed differently because we recognise that there is a social good to be had to by manipulating the price of these goods.
Purists can go live in their Austrian fantasy land. We live in a real world, and reality is dirty and often complicated.
Comment by George D — May 15, 2010 @ 11:38 am
you are exactly right. and the excuse they are using on fruit and veg is the same as they used to get rid of the R&D subsidy the first time, that businesses were iligitimately calling some spend R&D when it really wasn’t. i’m not sure if this has been cleaned up in the new policy but would be interesting to find out how they define R&D and how businesses qualify for the credit.
Comment by Steve — May 15, 2010 @ 5:51 pm
Yeah, “They” are really the illuminati, manipulating our breeding via a fascist flat rate GST regime.
Comment by patx — May 15, 2010 @ 5:59 pm
“I guess my training as a scientist gives me an unfair advantage when it comes to empirical observations that one thing is different from another, dissimilar thing.”
Oh how cute, the scientist thinks that empirical observation counts for anything when lobby groups are involved.
Comment by Miguel Sanchez — May 17, 2010 @ 8:36 am
Instead of farting about with nonsensical exclusions, why not just reduce Govt expenditure to 30% of GDP.
Because sucking that much money out of the economy would require massive cuts, leading to a surge in unemployment, suck huge amounts of cash out of the economy, wipe out hundreds of businesses and plunge us back into recession?
Well, not if all the folk receiving a tax cut spent about 70% it. The multiplier effect of gummint expenditure is reckoned at around 1, with private expenditure at 2. So for each dollar cut from gummint expenditure, only 50c need be handed back to taxpayers to generate a similar level of economic activity. Sure, it will take a while for all those ex-gummint workers to be assimilated back into the real workforce. But whatever they end up doing, their productivity will be higher than before. Yes I’m thinking of the Families commission.
“suck huge amounts of cash out of the economy” well, no, that cash simply stays in the taxpayers wallets to be spent on stuff they want, like insulation.
“ wipe out hundreds of businesses” well, no, the workers would be sacked from the gummint, quangos would be slashed. Oh, sure:, if your business currently supplies toilet paper to the families commission, you may notice a downturn. (okay, okay, I’ll admit: a lot of Wellington cafes will feel the squeeze as all those gummint workers and their “working” morning teas and lunches are culled. One of the funny little fiddles I used to see was ciggies going down on the cafe’s handwritten invoice as “food”.)
Comment by Clunking Fist — May 17, 2010 @ 1:36 pm