The arguments for exempting basic foodstuffs from GST

I came across an excellent paper which looks at "Sales Tax Equity Again: By Age Groups and Income Classes"

http://pfr.sagepub.com/cgi/content/abstract/6/3/343

It is American based, but none the poorer for that, because it has a wealth of data to draw upon, and it examines in detail, using empirical methods, and what the result is on different age groups and income classes of including a sales tax on food or excluding it.

The conclusion was that for "each age group the rate schedules based on the food-taxed structure are generally more regressive than those based on the food exempt structure". Indeed, "The exclusion of food from the base substantially reduces sales tax regressivity for each age group. This finding is not surprising; other studies which investigated the equity effects of food exemption, regardless of characteristics such as age, have obtained similar results."

All taxes hit different groups at different rates; a regressive tax, like GST, will always hit the poorer harder than the richer. But what is significant is the extent to which this occurs with food taxed; remove food from the equation, and while the tax still displays some inequity in its effects, that regressive impact is considerably reduced.

The report also highlights pertinent facts regarding exempting food from sales tax.

(1) The principle of horizontal equity ("equal treatment of equals") is violated generally for each of the three age groups, in that each group bears varying sales tax burden at comparable income levels, whether subject to the food-taxed or food-exempt structure.

(2) In most income classes, the burden is usually the highest for families with heads in the 35-44 age group, followed by the under-25 group, and then the 65-and-over group. This phenomenon holds particularly in the lower income classes.

(3) These horizontal inequities are less pronounced under the food-exempt structure than under the food-taxed structure.

(4) For each age group the tax burden differentials under the two structures are greater in the lower income classes and narrower in the higher classes. This is to be expected, since food expenditures tend to be a larger fraction of the lower income budgets than of the higher income groups.

Having seen these details, I am personally convinced that the GST on food is a tax which effects mainly the poor and vulnerable sections of society, and while support can be proffered (albeit with the ritual humiliation of a 20 page means test), it is by no means clear that this will mitigate the effects of GST sufficiently, and it is clear that it certainly will only help the very poor.

Those on the margins, perhaps pensioners owning their own home, or with small private pensions, or those earning just enough to be outside the support limits, will face this burden.

And if you are interested, in the USA, to cushion the effects on the poor, twenty-seven of the forty-five states that levy a general sales tax exempt food purchased for home consumption. Another three states tax food at reduced rates.