Posted by etheorist at 2:20 PM
The textbook case for the GST is clear - it is in lieu of the direct income taxes. (1) Would the implementation of the GST means a corresponding reduction in the income tax, both personal incomes and corporate incomes? If it is not, and if it is not tax neutral and if it is to increase tax revenue, then there will be a net withdrawal from the system. If consumption is going to be the growth driver as investment falters, then you ain't got an economic strategy for growth.
(2) The counter-argument is that the GST is a replacement for the current SST the Sales and Services Tax. GST is argued to be more efficient than the SST. The SST is imposed at the manufacturing stage and its cost impact escalated through the supply chain. We all know that. The SST was preferred because it is easier to implement, especially the sales tax. The services tax is a bit messy as businesses start charging customers the services tax even when they do not have to, which means they are pocketing the receipts. The simple services tax cannot be properly implemented. Now, the preference is for a wide-ranging tax net on goods and services at every level of the supply chain, with GST being collected and GST refunded. Every firm now needs an HR section to sieve through every bill and make sure they are properly accounted for and submitted. This army is also required for the customs which is responsible for implementing the GST. All these are fine, because they have to be done and other countries are doing it - although I now hate shopping in London and then have to queue up at Heathrow (in fact, the agency sent me a cheque and my banker says it'll cost me more to cash it!). All these may create a minor surge of economic activity. But my major concern is that surely this adds cost to firms and the argument is that GST is better than SST because the GST has no escalation costs in the supply chain. Concept without reality.
(3) To complicate the implementation, there is also zero-rated items and sectors which I am surely everybody will try to get into, with or without the approval of whoever is the approving authority. This will create the same problem with subsidy which the government trying to abolish in the midst of selective handouts. This is clearly selling to the general public. Now the problem is this: if the majority of the voters are poor, and the government is concerned about it, then the government is presiding over a failing economy. Are we seeing an economic strategy of how to fail an economy?
I think we are in great danger of mistaking management consultants for economists, and if they are so clever, they should all be taking a proper job rather than hopping from one to another the success of which cannot be traced. The reason for the dire of proper investments in this country is that there is a lack of clarity in economic policy, except for the consistency in punishing the locals who save, invest and work hard.