More On GST and Food

July 22nd, 2010 by Dylan Leave a reply »

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.