August 13, 2009

Horse 1024 - GST is Hateful

I shuddered when I heard rumours in the newsagent's this morning that if this Carbon Emissions Trading Scheme takes off, then it would mean imposing a higher rate of GST. Admittedly it's only a rumour and the only article I could find on the piece was this offering from Brisbane's Courier-Mail, which being a News Corporation publication is as reliable as trying to predict the results of horse races based on the contents of your handkerchief.,23739,25912087-3122,00.html
KEVIN Rudd wants to effectively increase the GST by a quarter to 12.5 per cent. That's in year one - after that it could go to 15 per cent and even higher, completely outside any control by the Parliament.

The reality is, the awful truth is thus and facts are that...

The GST is a regressive tax.

Regressive? A regressive tax is a tax imposed in such a manner that the relative tax rate decreases as income increases. In simple terms, a regressive tax imposes a greater burden on poor people than on the rich.

Assume for me if you will that we have 4 people, all earning Ÿ30,000, Ÿ40,000, Ÿ60,000 & Ÿ100,000.

If a weekly budget includes Ÿ250 in rent, Ÿ50 in petrol, Ÿ30 in electric bills, Ÿ10 in water bills, Ÿ10 in services rates and Ÿ100 in groceries then all up that would be Ÿ450/week or Ÿ23,400 a year. At a 10% GST that works out to be Ÿ2340 in tax.

But we'd also have to assume that as people's income increases, then obviously they can spend more right? Well almost, but not quite. For as people's income does go up, although they might buy nicer things, their absolute capability of buying stuff stops at some point. No-one for instance can fill the car with petrol anymore than full. No-one can buy more groceries than they can fit in their house.

So instead of Ÿ23,400 being spent for each of our four consumers, they might in fact be only able to spend Ÿ23,400, Ÿ24,440, Ÿ24,960, Ÿ26,000 and therefore pay Ÿ2340, Ÿ2440, Ÿ2496 and Ÿ2600 in GST respectively. Or if you will...

Ÿ30,000 = tax Ÿ2340 = 7.8%
Ÿ40,000 = tax Ÿ2440 = 6.1%
Ÿ60,000 = tax Ÿ2496 = 4.1%
Ÿ100,000 = tax Ÿ2600 = 2.6%

Obviously I'm making assumptions all over the place here but as an illustration it works well enough.

The question is "Is this equitable?" "Is it fair?". Quite frankly, I don't think that it is. Especially considering that in the majority of cases, people's wages are not determined by them; in fact the poorer a person is, the less power that they have to determine their wage. The inverse of this is also true, in that if you give poorer people extra cash in the form of a stimulus payment, the more likely they are to spend it, simply because they need to survive.

In essence, to increase the GST from 10% to 12.5% as possibly suggested means that the tax becomes more regressive and therefore falls even harder on poor people:

@10% GST

Ÿ30,000 = tax Ÿ2340 = 7.8%
Ÿ40,000 = tax Ÿ2440 = 6.1%
Ÿ60,000 = tax Ÿ2496 = 4.1%
Ÿ100,000 = tax Ÿ2600 = 2.6%

@12.5% GST

Ÿ30,000 = tax Ÿ2925 = 9.75%
Ÿ40,000 = tax Ÿ3055 = 7.63%
Ÿ60,000 = tax Ÿ3120 = 5.20%
Ÿ100,000 = tax Ÿ3250 = 3.25%

The burden is still three times harder on poor people than on the rich at a rate of 12.5% than at 10% but what this doesn't tell you is that the total amount of money that they have at the end of the year is even tighter than it was before. It decreases from Ÿ4260 to only Ÿ3675, and the poorer you are the more hurtful that is.

I'm still convinced that the GST in principle is a hateful hateful tax, but fiddling with it to hurt poor people harder from a political party which was elected on rhetoric of "Working Families", "Working Families" & "Working Families" is nothing short of scandal.



Anonymous said...

what is a Y thing?

Rollo said...

The numbers would work the same no matter if you used £, €, ¥, $ or any current you desire. Y is used by economists in theoretical equations for Income (Yncome sic), to distinguish it from I (Investment) and i (Interest).

Ÿ is a good character for income because it isn't currency specific.