Allan Bullot: GST - a birthday worth celebrating

GST - The Key to Lower Income Tax was the title of the document released in March 1985 to explain the Labour Government's push for a fundamental change to the nature of taxation.

Today GST accounts for around the same amount of tax revenue as corporate income tax and is a pivot of the tax system.

It has just had its 20th birthday on October 1 looking remarkably like it did when it first came into being and there are no proposals to change it as part of the business tax review.

It has also just been the subject of an official 20-year review to be attended by interested professionals, academics and revenue authorities, hence these reflections.

Imagine our tax system without GST. Well, take all existing taxes and materially increase each rate. Imagine GST being introduced in an MMP environment.

Even if it was a starter, it would be far more complex and inefficient with many more exemptions and boundaries. It was a creature of its time and stands ahead of what was able to be introduced in Britain, Canada, Australia and elsewhere.

Some may not remember pre-GST times. The top personal marginal tax rate was 66 per cent. Two-thirds of every last dollar earned was paid to the Government, resulting in people spending two-thirds of their time trying to avoid doing just that. The tax base was narrow with a huge burden falling on salary and wage earners, who paid 75 per cent of all tax.

GST was an attempt to broaden the tax base and future-proof the tax system from the change to a more service-focused economy.

The trade-off for the introduction of GST was the reduction in income tax rates. The Labour Government had a clear majority in 1986 and was able to bring in a GST system without many exceptions and at a single rate - initially 10 per cent, but changed to 12.5 per cent in 1989.

In the 20 years that have followed, there has been some tinkering around the edges, but fundamentally GST in 2006 is not that different from the GST of 1986. Does that mean GST has been a successful tax? Yes. And the general silence in the political arena about GST can be seen as support for this.

While there are still occasional calls for GST to not apply to council rates (the "tax-on-tax" argument) or populist calls to remove GST on petrol, no party in Parliament today has a policy to remove GST or even fundamentally change it.

It is often called a regressive tax, most affecting the poor who spend most of their income, and the Alliance has called for its removal on food.

GST does have some regressive elements, however. Overseas studies have shown if you remove GST from certain major sectors of the economy, such as basic food supplies, then lower income earners do not actually significantly benefit as the quid pro quo is often a higher GST rate on other supplies in order to collect the same amount of GST.

And then there is the issue of greater complexity. What would be a basic food item? Is it six or more muffins, but not five or less, as is the case in Canada. Or in Australia where plain bottled water is free from GST, but not if any fruit flavouring is added to it (even though if you purchased a bottle of plain water and a bottle of fruit juice and mixed them yourself GST would not apply).

In Britain children's clothes are free from GST, but what are children's clothes. Is it just the small sizes, or is it something else? Compliance costs, especially for small businesses, are compounded.

So as part of the 20 years' reflection on GST undertaken by professionals, academics and interested parties, it is clear New Zealand is far better off with the GST system it has today, and it is likely GST will be around for 20 more years in basically the same form.

* Allan Bullot is one of three specialist indirect tax partners at Deloitte and advises exclusively on GST.