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Online GST and NZ retail

I met up with an old Christchurch friend over the weekend. I’m not sure if he knew that I’d been writing about the perils of applying GST at the border or not, but he brought up a couple of pretty telling anecdotes.

Out shoe-shopping for his 8 year old son, he found the retail shop didn’t have a pair of the preferred $170 sneakers in his son’s size. They could get them shipped in, but at an added $40 shipping cost. He pulled out his phone, pointed to the site in the US that would ship him the identical shoes, delivery included, for $80 – all he asked was that they not load on extra delivery charges for shoes that were out of stock. The clerk shrugged and said he could go shop online elsewhere if he wanted. My friend pointed out that he preferred buying at domestic brick and mortar, and that the store was throwing away not just this sale, but a stream of sales for expensive shoes that his son grows out of every 4 months or so; another shrug.

He later went to buy a stupidly expensive set of speakers. The local brick and mortar had it at double the shipped cost of ones that would come in from abroad. Again, local brick and mortar wouldn’t or couldn’t budge. The price difference was in the thousands of dollars. It was stupidly expensive, but only half as stupid if shipped in from abroad – including the GST hassles at the border.

I really do not believe his experience is unique.

There are two classes of problems caused by not charging GST at the border on lower value imports.

The first is the complaint from retailers that it causes an uneven playing field. But the cost difference between domestic retail and foreign import, including shipping, too often dwarfs the 15% GST. People are willing to put up with a bit of hassle when it’s a $2000 saving on a set of speakers. But a big hassle in importing a pair of shoes might dwarf the $130 savings and tilt the playing field strongly in favour of the domestic retailer when it shouldn’t.

The more substantial problem is the erosion of the tax base when lots of people very reasonably shift their shopping to buy lower valued items from abroad. But it’s a false economy to save the tax base by imposing GST at the border in ways that cost more to collect than the collected revenue is worth. You can load those processing costs onto the purchaser, as we currently do with transaction fees on higher valued imports, but it would be more than a little silly to charge people $29 in processing costs (plus the biosecurity levy) to collect $20 in GST. And further, as Seamus Hogan points out, the real test is not whether the collection costs exceed the revenues collected – it’s whether the collection costs are less than the improvement in economic efficiency that you get by removing distortions. That is a tougher hurdle for proponents of applying GST at the border because most current proposals do more to tilt the field against imports, by causing hassles at the border, than they do to level any current unfairness.

Seamus Hogan proposed a fairly radical shift to the tax system to allow GST to be collected on imports – by taxing exports. The maths on it work: a tax on exports is exactly the same as a tax on imports. But I wouldn’t want to be put in charge of explaining the Lerner Symmetry Theorem in an election campaign flier. If we have to do something, though, it’s a pretty decent something.

Meanwhile, Treasury has produced this handy infographic showing the distribution of the income tax burden. It would be nice to see it augmented to include GST.

About Eric Crampton (88 Articles)
I'm Head of Research with the New Zealand Initiative.

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  1. Guest post – “That doesn’t seem e fair to me.” - Retail News

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