Understanding GST/indirect taxation and tax policy

Posted: January 21, 2015 by Admin in Capitalist ideology, Class Matters, Economics, Poverty & Inequality

Econ-Cartoon4From time to time we hear from the current government about how wealthy people pay their ‘fair share’ of tax or even account for most of the tax take.

However, as one of the wealthiest people in the country, Gareth Morgan, has pointed out, wealthy people aren’t really taxed all that much because this country taxes income rather than wealth.  In recent years he has called for wealth to be taxed, to make for a ‘more equitable’ system.

On the left, activists frequently call for tax changes too.  Last August, veteran activist John Minto, in his capacity as Economic Justice spokesperson for the Mana Movement – at the time in a political alliance with multi-millionaire Kim Dotcom – did some calculations comparing what a minimum wage worker paid in tax with what prime minister (and multi-millionaire) John Key pays.  Key is so wealthy he decided to forego drawing a prime ministerial salary).  John Minto found that “a minimum wage worker pays a ten times higher tax rate than the Prime Minister.”

A minimum wage worker paid 28% tax. Key, on the other hand, paid 2.8% tax.

In a press statement, Minto said, “The minimum wage worker on 40 hours per week earns $29,640 and pays $4,207 in income tax and $4,149.60 in GST giving a total tax of $8,356.60 or 28% of income.

“On the other hand the Prime Minister earns $428,000 from his PM’s salary along with this year’s $5,000,000 increase in his wealth (according to NBR’s rich list) which gives him a total income of $5,428,000. On this total income he pays just $132,160 in income tax and approximately $21,400 in GST giving a total tax of $153,560 or 2.8% of income.

“This is a national embarrassment. Those least able to pay are under a heavy tax burden while the super-rich pay peanuts.

“The National government and its attack bloggers refer to the working poor as scum, bludgers and ferals but it’s clear the real problem is with the top 1% of income earners who get all the benefits of taxpayer funded facilities and services but don’t pull their weight paying for them.

“Cleaners, fast-food workers, hospitality workers and security guards are all heavily subsidising the lifestyles of the superrich.

“These figures show we need an overhaul of our tax system so the Prime Minister and his rich-list colleagues pay their fair share.”

John is certainly right about the inequity of the tax system, but what does ‘fair share’ mean when, after all, workers’ labour-power is the source of the new, expanded value that is created when we produce commodities (goods or services, tangible or intangible, that are produced to be sold on the market for a profit)?  The problem here is that redistribution through the tax system does not deal with the fundamental cause of inequality.  This is because the inequality arises not from the sphere of distribution but from the sphere of production.

Below we’re reprinting a piece we ran back in August 2011, just after the blog was set up; it tries to demystify tax, including explaining the qualitative difference between GST/indirect taxes on the one hand and income/direct tax on the other.  And it notes that we should be focused on dispossessing the capitalists as a class not fixated on how to make them pay their ‘fair share’ of tax, which is a mystification of the process of exploitation.

by Philip Ferguson

Last year the National-led government raised GST (goods and services tax) from 12.5% to 15 percent,* while lowering income tax for all and also reducing company taxes.  Key and his pals presented this approach – lowering direct taxation and increasing the tax on consumption – in a populist way, as if it would benefit workers.  Key added that the Working for Families package could be increased, along with some other measures, to help offset any losses for lower-waged workers and the minimum wage was  increased (minimally) by 25c an hour.  Once again, there was nothing for beneficiaries.

This article consists of three parts – in the first part we’ll look at indirect tax, most specifically GST; in the second part we’ll look at direct tax, both PAYE and taxes on companies and profits; and, finally, we’ll look at why National tinkered with tax tightening for some capitalists, notably those in the property market.

GST

The first thing to note about GST is how it affects people on lower incomes the most.

GST was introduced into New Zealand by the fourth Labour government, back in 1986.  At the time it was set at 10 percent.  Whereas a similar tax in Tory-ruled Britain, VAT, excluded basic family items, the only things Labour here excluded from GST were financial services, real estate transactions and the operations of very small firms.  The low-waged and beneficiaries were to be especially screwed over by it.

The imposition of GST significantly raised the level of indirect taxation.  The proportion of government income derived from indirect tax rose from 22.5 percent before GST to 33.2 within just the first two years of the new tax.  In 1989, Labour increased GST to 12.5 percent and imposed extended it to cover  all goods and services.

Victoria University economist Bob Stephens has pointed out the overall effect in the 1980s of the partial replacement of income tax by indirect tax.  Between 1982 and 1988, “effective average tax rates including GST for couples on average earnings with two dependents increased from 18.7 percent to 24.1 percent.  Average tax rates for similar couples on three times the average income declined from 40.3 percent to 34.9 percent.”  So we can see that indirect tax means the wealthy pay less of their income in tax while workers, especially the poorest, have more of their income taken in tax.

This becomes even more clear if we compare someone on the dole and a top company CEO.  If an unemployed person is getting $200 a week on the dole and they buy something which costs $100 plus GST, then they are paying $12.50 in indirect tax and this is 6.25 percent of their total weekly income.  If a top CEO on $3 million a year salary buys the same item for $100 and pays the same GST, her or his indirect tax payment only makes up about 0.0002 percent of their weekly income!

When GST is accompanied by reductions in direct tax – income tax, in particular – then it’s not hard to see why the rich favour indirect tax such as GST.

However, there is another vital aspect to the proposed series of changes in the tax system, whether GST or direct tax is involved.

Workers’ labour-power under capitalism becomes a commodity and, like all other commodities, its value is determined by the socially necessary labour that goes into creating it.  Basically, this means that the value of workers’ labour-power is the value that is required to house, cloth, feed and otherwise maintain the worker in a sufficient state to turn up to work each day to produce profits for the employers.  If that value translates into $500 a week, this is the value of the worker’s labour-power and will be roughly reflected in the wage.  The worker, however, can create a value much greater than this – say a thousand dollars worth of goods or services.  The extra $500 is surplus-value, and in the hands of the boss.  (To simplify matters, I’m disregarding the part of total value that comes from the use of machines, raw materials, rather than adding that on to the $1,000.)  In good times, and with strong organisation, the tax on workers’ wages (PAYE) has to come out of surplus-value and therefore lessens the amount of surplus-value that the boss can convert into profit.

During boom periods, the bosses are OK about this because they have so much surplus-value and they are prepared to buy peace with the working class.  However, when capitalism goes into slump, the capitalists want to cut down on anything which reduces the amount of surplus-value they can convert into profit.  They do this in a number of ways – eg, by cutting government expenditure on health and education, since this is financed out of surplus-value, and by shifting tax from being a deduction from surplus-value into being a deduction from the value of labour-power.  Indirect tax is a useful weapon for doing this.

Now, instead of the worker getting the $500 value of their labour-power per week and, say, $150 income tax coming out of the $500 surplus-value, there may be only $100 direct tax coming out of the $500 surplus-value and $50 indirect tax coming out of the worker’s $500 wage.

What has happened is that the worker’s share of the $1,000 has fallen from $500 to $450, while the bosses’ share has risen from $350 to $400, and the government continues to get $150.

Moreover, GST allows the bosses to immediately pass on costs.  In this sense, it doesn’t really cost the bosses anything.  If they pay GST on some item they need for their factory or office, that cost is factored into the cost of their finished product.  A product costing $100 plus $12.50 GST, making a total of $112.50, will now simply cost $115, because the GST has risen by $2.50.   Workers, on the other hand, cannot simply ‘factor in’ GST to their incomes, because they don’t set the price of their labour-power.  You can’t turn up at the job and tell the boss that you’re now charging him an extra 2.5% for your capacity to work.  Or, in the case of beneficiaries, turn up at WINZ and tell them they have to pay you an extra 2.5%.

Demystifying tax cuts

To many people increasing GST while lowering direct forms of tax seems like taking with one hand and giving back with the other.  So, why bother?  Especially when National is not just cutting company tax and income tax for the wealthy, but everyone’s income tax.  Why, for instance, would they cut the tax of low-paid workers, if all they want to do is make the rich richer?

There are two main reasons why the capitalist class and their parties, whether National or Labour, favour  tax cuts: one is to do with the actual workings of the capitalist system and the other is to do with capitalist ideology and its role in social control.

The first issue is bound up with the workings of a capitalist economy such as New Zealand.  As we’ve noted above, under capitalism workers are paid less than the total value of the commodities which they produce.  The rest is surplus-value, which is converted into profit by the capitalist.

However, each capitalist does not get back the full surplus-value produced by their workers.  Some of it goes to other capitalists – bankers, landlords and so on – and some of it goes in tax to the government.  This latter includes company tax, individual capitalists’ taxes and the pay-as-you-earn tax of their employees.

The less total tax is paid, the more surplus-value there is to be converted into private profit for the capitalist.  This includes cuts in the tax on workers, since tax on workers in developed capitalist countries like NZ generally comes out of surplus-value.  So tax cuts, including for workers, reduce the drain on surplus-value for the capitalist.

Of course, this also means less money for the government to spend on public services, services which often benefit workers since they can’t afford to pay for private health, education and so on.  The money spent on public services is often called the ‘social wage’.  So, with tax cuts, the workers get more money in the hand, but end up losing part of the social wage.

When workers’ wages have been held down the way they have in New Zealand in recent decades, workers will often be keen to get any kind of increase in income.  Workers see and experience immediately more money in the hand and may not think about the potential loss of part of the social wage.

So employers prefer tax cuts because they don’t cost them anything, and then, on top of this, they get the biggest tax cuts anyway.

By contrast, workers’ wage rises cut into the surplus-value of their exploiters.  Wage rises mean that part of the surplus-value which they have produced is returned to them at the expense of their exploiters, rather than at the expense of government social spending.

On the ideological side, there is also a good reason why the ruling rich prefer tax cuts.  Capitalist society is divided into two major classes – an exploited class (workers) and an exploiting class (employers).  Although the employers are very aware of this – and they use a whole armoury of legislation to maintain their position – they don’t want workers to think in class terms.  That might lead to workers waging a serious class struggle for the ownership and control of all the wealth working people produce.

Rather, the capitalists want everyone to think that we all belong to the same social group.  We are all merely ‘consumers’ or we are all really ‘taxpayers’ (or both).  Indeed when leading ‘new right’ politician Roger Douglas set up his own political party in the early 1990s, he called it the ‘Association of Consumers and Taxpayers’ (ACT), instead of the Association of Capitalist Exploiters (which is what it really stands for).

The idea of low prices and low taxes promotes this kind of consciousness, as against workers’ class consciousness.  Of course, what Warehouse-level prices mean in a capitalist economy is subsistence wages for workers in China and other places that the Warehouse imports commodities from.  And what low income tax and low company taxes mean in a capitalist society is high indirect tax – Roger Douglas, after all, was the architect of GST, a huge tax-gathering mechanism which hits workers hardest – and high prices for a range of services which were once provided for free by the state.

Taxing some capitalists more?

One of the major points of discussion about tax in recent months has been about increasing tax on property investments.  Why would National, traditionally the party which was most upfront about arguing in favour of private enterprise, be talking about this?  And, after all, Labour in its recent nine-year spell in office never seriously floated the idea.

The answer to this is that the biggest problem facing any capitalist government in New Zealand right now – and by that we mean any parties in government who are managing NZ capitalism – is the level of productivity growth here in recent years.  In fact, pretty much ever since the Employment Contracts Act (see graph of NZ and Australian productivity growth).  Sluggish productivity growth undermines the competitiveness of NZ Capitalism Ltd globally.  It produces a rather stagnant, low-wage economy, with unsustainable booms in the financial sector and other parts of the economy which don’t produce surplus-value.  The booms turn to busts, and have to be paid for out of the real economy.

The gains in productivity that can be made by simply making workers work harder and longer – the main form of productivity gain introduced under the fourth Labour government in the 1980s and continued in the early years of the fourth National government in the early 1990s – appear to be exhausted.  As Auckland University Business School economics associate professor Dr Rhema Vaithianathan has noted, “We spend longer at work yet produce less value” (Sunday Star-Times, business section, August 7, 2011).

Yet New Zealand capitalists remain relatively reluctant to follow the other path to more substantial productivity gains – namely, substantial investments in new plant, machinery, technology, research and development.  As long as large profits can be made out of the artificial economy – and making profits is the bottom line – many NZ capitalists continue to invest there.  Yet profits in the artificial economy exist through sucking surplus-value out of the real economy and keep the real economy sluggish.  The artificial economy, precisely because it is artificial – ie it doesn’t produce surplus-value and is based on paper values that rise far above the real value contained in its products – is especially prone to boom-bust cycles.  And busts in the artificial economy leave debts which still have to be paid, sucking further surplus-value out of the real economy and making the real economy even more sluggish.

John Key and Bill English and their chief financial advisors are well aware of the problem.  That’s why they are looking at measures that force investment out of the artificial economy and into the real economy.  The simple fact is that the market doesn’t work particularly well when left to its own devices.  The capitalist state is essential for regulating not only class conflict and maintaining social stability, but also for regulating capital flows and managing a chaotic system.

Given that many property investors and speculators currently support National, it can be hard for the Nats to tax the property sector more.  On the other hand, Key and English know that they have to force investment out of the artificial economy and into the production of new, expanded surplus-value.

Either way, however, the workers lose.  Investment in the artificial economy leads to job losses in the real economy; investment in the real economy means that workers create more and more value while receiving proportionately less of it in the form of wages, even when wages rise.  And rising wages would still be offset by an increase in GST.

For workers, even when the system gives with one hand (wage rises), it takes away with the other (GST and price rises).  The only way out is for workers to take control of the economy and plan investment, production, distribution and exchange on the basis of what we need to have a good and secure life.

Illustrations

A majority of New Zealand workers work 40 hours and more a week – longer than in the 1960s for a lower standard of living; yet making workers work harder and harder and longer hasn’t solved NZ capitalism’s productivity problems.

 

 Labour productivity, Australia and New Zealand; the above chart appears in Phil Teece, “In pursuit of the flexible workplace”, Australian Library Journal, vol 50, no 4.  The Employment Contracts Act encouraged NZ capitalists to make workers work harder and longer rather than invest in new technology and machines to make workers more productive.  This lifted profits in the short term but undermined NZ capital’s global competitiveness in the longer term.

 


Source: Statistics New Zealand, Research and Development in New Zealand 2004, p4.  Public institutions (government and higher education) contribute more to R&D in NZ than the private sector, especially since a chunk of government spending on R&D (eg crown enterprises) is counted under the heading “Business”.  This is the reverse of the OECD average – across the OECD the private sector contributes more.

  • Keep in mind this initially appeared on Redline in August 2011.

Further reading:
What is exploitation?
How capitalism works – and doesn’t work
How capitalist ideology works

 

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