There are certain policies that make little sense from an economic perspective. As I noted yesterday, rent controls are one such policy. Another policy the government should not be considering is removing GST from food (and yet it seems that they are, and it is a policy position for Te Pāti Māori as well). This subject was well covered in this article in The Conversation by Steven Hickson last year (which I discussed here). Hickson wrote:
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.
Politicians really need to read about the great Jaffa Cake controversy in the UK. We don't want to be tying up our courts trying to determine whether Jaffa Cakes are cakes, or biscuits. Or what constitutes food and should therefore be GST free. Are Tic Tacs a food and therefore should be GST free? What about edible underwear? Those are the sort of stupid arguments that removing GST on food would create.
On the other hand, I foresee a potentially lucrative business opportunity. <satire>I should set up a company, SpudCars, that sells 10kg bags of potatoes for $55,000. As a free gift, SpudCars will give each potato purchaser a free Tesla Model 3. The Tesla Model 3 currently retails for $57,572 including GST (after you factor in the clean car rebate). However, that price includes GST. SpudCars won't need to charge GST on the Teslas it gives away (because they are being given away for free, and the GST on $0 is equal to $0). The $55,000 bag of potatoes will not include GST either, if there is no GST on food. The buyer is better off by more than $2500, because they get an awesome bag of potatoes with a bonus car, for just $55,000, instead of slightly more than $57,572 if they bought a Tesla from a car dealer and a bag of potatoes from the supermarket. SpudCars can buy Teslas from the dealership for $57,572, claim the GST (of about $7,500) back from the government, and then sell a bag of potatoes for $55,000 with no GST included. That means that SpudCars profits by nearly $5,000 for every bag of potatoes it sells. It's a win-win for the buyer and for SpudCars. As a dirt-poor university professor though, I'll need some investors to get SpudCars up and running. If you want to get in on the action, and be a founding shareholder in SpudCars, drop me an email.</satire>
It should be easy to see the shenanigans and potential legal battles that removing GST from food creates. It shouldn't take an economics blog outlining a ridiculous scenario to make this clear. This is a policy failure in waiting, if the government ever chose to implement it.
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