GST at 40: policy, politics, and public reaction

By Jack Becker & Allan Bullot

By the early 1980s, the tax burden for most New Zealanders had shifted heavily towards personal income tax with inflation pushing many middle-income earners into higher marginal tax rates - with the top bracket reaching 66%. As there was also no dividend imputation scheme in place, company profits paid out to individuals could be subject to even higher rates. Concessions, incentives, and loopholes made the tax burden uneven across taxpayers which resulted in policymakers favouring a move from a narrow-based, high-rate system toward a broad-based, lower-rate system.

GST was introduced as a way to broaden the tax base by taxing consumption, rather than relying as heavily on income.  Its broad base allowed revenue to be raised at a relatively low initial rate of 10%.

In order to only tax the consumption of goods and services, an input tax mechanism was used.  

The broad base with a few exemptions (such as financial services and residential rental accommodation) was intentional to minimise the extent to which GST influenced consumer and business decisions.

The GST surprise

The Fourth Labour Government had inherited a significant deficit, overseas debt, an overvalued currency, and high inflation when it was elected in 1984. GST was one part of the Government’s wider economic reforms, sitting alongside deregulation, removal of subsidies and tax concessions.

After an election campaign that did not prominently mention the potential introduction of GST, GST was announced on 8 November 1984 and the GST Bill was introduced on 22 August 1985 and passed into law on 3 December 1985. The original proposal was for GST to commence on 1 April 1986, however it was ultimately deferred until 1 October 1986.

Consumers faced an obvious concern: GST added 10% to most goods and services, with some recollections of the time describing a mad rush to purchase certain expensive items before GST commenced, followed by a short-term drop in spending.  GST replaced the existing wholesale sales tax regime that applied, so while the price of most goods increased post the introduction of GST, some goods actually decreased in price.   GST has maintained its surprise factor over the years, with the GST rate increase to 12.5% in 1989 not being part of the Labour Party’s manifesto and again in 2010 when John Key had not campaigned on a hike to 15% in the 2008 election process.

Taxing the poor?

Critics often view GST as regressive because lower-income households spend more of their income on consumption and there have been countless debates over exempting necessities, particularly food, which have continued long after GST’s introduction. The counterargument was that wealthy people spend more money in total therefore pay more GST in gross terms.

When GST was introduced, social benefits were also increased to compensate and the same happened again in 2010.

A business burden

Businesses became responsible for collecting and paying GST to Inland Revenue, in addition to the significant transitional work required by businesses to implement GST. Businesses needed to change their pricing and there were increased compliance costs as accounting systems, invoicing, and record-keeping all had to be changed.

A revenue boost

GST gave the Government a broad and stable source of revenue, with the Government earning $1.5 billion in GST’s first financial year (1987). There has been a steady increase in revenue every year since, with GST reaching $29.3 billion last year. GST supported a reduction in reliance on revenue from personal income tax and provided scope to reduce income tax rates. The broad coverage of GST with minimal exemptions helped reduce opportunities to avoid tax by choosing one type of consumption over another.

GST’s central design has survived 40 years: generally one standard rate (currently 15%), broad coverage, and relatively few exemptions. GST stands out as being an established core part of the New Zealand tax mix and is the envy of many other countries whose own consumption taxes are often riddled with political concessions, which add significant complexity while also reducing the revenue-raising efficiency of the tax. New Zealand’s GST is ranked Number 1 in the world in the Tax Foundation International Tax Competitiveness Index.