Stephen Hickson on why we shouldn't remove GST from food

Stephen Hickson (University of Canterbury) wrote an excellent article in The Conversation earlier this week (and I heard him talk about it on The Panel on RNZ yesterday afternoon (at 10:15 in the recorded audio)):

Removing the goods and services tax (GST) from food is not a new idea. Te Pāti Māori are currently pushing for its removal from all foods. In 2011 Labour campaigned on removing GST from fruit and vegetables. In 2017 NZ First wanted GST removed from “basic food items”...

But the beauty of New Zealand’s tax system is its simplicity. Removing GST on food, or some types of food – for example, “healthy food” – makes that system more complex and costly.

There are a number of potential complications.

Let’s start with the obvious – what would count as “food”? Is milk powder food? Probably yes, so what about milk? Or flavoured milk? Oranges are food, so what about 100% natural orange juice? A broad definition of “food” would include lollies, potato chips, McDonalds and KFC, but many would object to removing GST from these on health grounds.

We would then need to decide what is acceptable to exempt and what is not. The arguments would go on and on.

In Australia, the question of whether an “oven baked Italian flat bread” is a bread (so not subject to GST) or a cracker (subject to GST) went to court, and involved flying a bread certification expert from Italy to testify. The only reason why that job exists is due to complexity in tax systems around the world.

In Ireland, the court was required to rule on whether Subway was serving “bread” or “confectionery or fancy baked goods” due to the difference in GST treatment.

I've written on this topic before, and the exemplar is the great Jaffa Cake controversy in the UK. We don't want to be in the position of having to have court cases to determine what is a food and what isn't, or which goods attract GST and which ones don't. The argument about reducing GST in order to help alleviate problems of rising living costs is attractive, but reducing GST is not the only, or even the most efficient, way to address living costs. As Hickson writes:

The 2018 Tax Working Group (TWG) didn’t support removing GST on food. It emphasised how such exemptions lead to “complex and often arbitrary boundaries”, particularly when trying to target specific types of food such as “healthy food”.

They also stated that such exemptions are a “poorly targeted instrument for achieving distributional aims”...

The working group explained that if the goal was to support those on low incomes, and the government was willing to give up the GST revenue from food, then it would be better to continue to collect the GST and simply refund it via an equal lump sum payment to every New Zealand household or taxpayer.

Higher income households pay more GST on food because they spend more on food than lower income households. Hence lower income households would get more back via a refund than what they pay in GST on food.

This would be simpler and a more effective way to address an issue faced by low income households.

Let's keep the tax system simple, and easy to administer. We don't need to set up a series of court cases to determine what is a cake or a biscuit, what is a bread or a cracker, or what constitutes healthy food. We shouldn't remove GST from food.