[youtube http://www.youtube.com/watch?v=VdnWbhk-8bQ?wmode=transparent]

Thinking more about my previous post on the exemption of ‘healty food’ from GST sales tax…

Removal of 15% GST from a price is not a 15% discount, it’s a 13% (in the same way that going from 12.5% to 15% GST does not mean a 2.5% increase in total cost)

So dropping 2% on the saving right there – would we even see an drop in cost at the point-of-sale, and how do we know? Immediately, on day 1 we’d probably have to see a change, but in reality pricing is arbitary and it’s often set with GST included – that fish at the supermarket for $17.99 a kilo isn’t charged at $17.99 because it’s really priced at $15.64 with GST added. It’s just costed at that price because it’s what people will pay and it offers an acceptable profit.

Once the price is reduced it seems likely that it will gradually settle at around the same price it used to be (what the market will pay) – the prices aren’t based on fixed markup models so they are fluid, at every stage of the process the product’s price is likely to be increased a little to cover costs and because it can be. End result is that we’ll be paying similar prices for food products (certainly not the 15% or 13% off we’d be hoping for) but the business involved are making more profit, and the country is missing out on a very significant amount of taxation income that has to be made up for elsewhere (one estimate put it at $330m per year, but I bet that wasn’t taking into account all the ambiguity in the definitions as written).

The idea of encouraging lower-income consumers to make healthier food choices is good, but this is a very very poor way to go about it. It’s a very blunt stick for a very complex problem, and not a very well thought out blunt stick at that.

GST (Goods and Services Tax) is a flat sales tax that’s applied to almost all goods and services sold in New Zealand. As I write this the rate is set at 12.5%, but is being raised to 15% in November.

A bill is before parliament from Maori Party MP Rahui Katene that seeks to exempt ‘healthy food’ from GST. The idea being that by effectively cutting the cost of healthier foods by 15% it will encourage people to make healthier purchasing choices.

I think it’s a bad idea for two reasons really…

Simplicity

One thing that NZ’s sales tax has going for it, compared to some other systems, is that it is a flat tax that’s applied to pretty much everything. The only things currently exempt from GST are quite simple services (financial services, property rental, goods for export) – for the most part everyday consumers know that they will pay GST on everything at a standard rate.

Adding exemptions for various subcategories of retail goods add a massive amount of complexity to the system.

It also adds a massive compliance cost on business. All food products have to be judged agains the definition of ‘healthy’ and have their GST rate set approriately. For supermarkets this probably isn’t a big deal, they have complex systems to deal with these things. For smaller stores this will be much more complex – without detailed inventory and sales tracking it will be a lot more difficult for small businesses to properly calculate their GST returns – while previously they know that their GST taking was 12.5% (or 15% from November) of their total takings as all goods were taxed equally, now they can no longer rely on that calculation.

Ambiguity

The problem with the concept of ‘healty food’ is that it’s something that is somewhat subjective, and it’s an individual product judgement, not something that can easily be applied to entire classes of good.

As proposed at the moment the definition of ‘healthy food’ is:

• fruit and vegetables (including fresh, frozen, canned, and dried)
• breads and cereals (including all bread, grains, rice, and pasta)
• milk and milk products (including cheese, yoghurt, and plain milk, but excluding ice cream, cream products, condensed, and flavoured milk):
• lean meat, poultry, seafood, eggs, nuts, seeds, and legumes

Goods and Services Tax (Exemption of Healthy Food) Amendment Bill

There are obviously lots of things that would be included in the list above that aren’t necessarily healthy. And then there are complex situations where an items applicability isn’t clear.

Some examples, that I can think of now… What about canned fruit in syrup? Also most dried fruit is actually very high in sugars. Cheese is healthy? All bread is included, so that would include an iced “boston bun”? And the delightfully sugary caramel scroll I get from Baker’s Delight? Yoghurt is included, but ice cream is not, so what about frozen yoghurt? Also, is there a clear definition of lean meat? All cereals are included – does that include cereal-based breakfast foods (breakfast cereal)? If so where is the line drawn? I’m guessing that Fruit Loops aren’t healthy.

Benefit

Yeah, people should buy and eat healthier food – but will they? I’m not convinced they will. Initially it will be popular as suddenly there’s effectively a 15% cut on a wide range of foods, but once we’ve adapted to that then it will still just be the usual price. Also retailers are going to have to recoup the costs of administering these changes, which will probably be in the form of quite broad price rises across many products.

A study conducted in New Zealand, on this very topic, concluded that the removal of GST on healthy products (a much more specific set, based on nutritional information of individual products) did eventually result is a slight increase in the purchase of those goods, but based I my reading of the study it seemed less than impressive.

At 6 mo, the difference in saturated fat purchased for price discounts on healthier foods compared with that purchased for no discount on healthier foods was –0.02% (95% CI: –0.40%, 0.36%; P = 0.91). The corresponding difference for tailored nutrition education compared with that for no education was –0.09% (95% CI: –0.47%, 0.30%; P = 0.66). However, those subjects who were randomly assigned to receive price discounts bought significantly more predefined healthier foods at 6 mo (11% more; mean difference: 0.79 kg/wk; 95% CI: 0.43, 1.16; P < 0.001) and 12 mo (5% more; mean difference: 0.38 kg/wk; 95% CI: 0.01, 0.76; P = 0.045). Education had no effect on food purchases.

Effects of price discounts and tailored nutrition education on supermarket purchases: a randomized controlled trial

Effectively those who received discounts on healtier foods did initially make healthier purchasing choices, but after a year of these discounts the difference was much less pronounced (they became used to that pricing).

Insanity

After posting the write-up above this I was discussing the weird confusing items that would be exempt in this with my wife (who is smarter than me, and sitting beside me)… It started with the idea of buying salad at McDonald’s – they wouldn’t be able to charge GST on it… Then it went crazy…

“Poultry” is healthy according to bill – so that means no GST on KFC, it’s just chicken with a grain-based coating. Fish is healthy, and so are vegetables, so no GST on Fish and Chips. Many burger patties are lean meat, and beyond that they are bread, vegetables and cheese, so many burgers are healthy and therefore GST exempt.

Pizza is a bread base, with a tomaro base, cheese, often lean meat or chicken… So that’s GST free.

I can have fried eggs on toast, with baked beans and chips every single night – all healthy and GST free.