A modest proposal for internet tax parity

New Zealand currently runs a de minimus rule exempting low-value imports from GST. Inland Revenue has reckoned that collection costs outweigh the taxes collected and so it's pointless charging our 15% GST on items valued at less than $400.

NZ book retailers, among others, think that this exemption is the main thing driving people to Book Depository and other online international online retailers. There is much outrage about unfair tax treatment. Toby Daglish made the typical case for distortions that can arise when imports aren't subject to GST while domestic goods are. And he's right, as far as he went with it. But he didn't go far enough.

And so we come to my modest proposal.

If you import goods from abroad subject to GST, the goods get held up by Customs on arrival into New Zealand pending payment of GST. You then need to arrange separate payment of the GST. This can involve a drive across town to the postal outlet holding the item pending payment. If we subject foreign goods to GST, we solve one distortion while inducing another one - potentially a larger one.

And so here is my proposal:

BE IT RESOLVED THAT, henceforth, all goods imported from abroad will be subject to GST. In order to remove all possible distortions, however, we must introduce a new regime for the domestic purchase of any good that could have been purchased from an international retailer. Henceforth, shoppers will pay the ex-GST price of those goods at the retail outlet but must travel across town to a licensed depot to pay the GST component and pick up the good. The customer will be notified on the good's arrival at the depot but a minimum of a four-day waiting period applies.

Doing so will ensure a level playing field between New Zealand retailers and their foreign competitors. Everyone is subject to GST, and everyone is subject to the hassles of dealing with Customs for payment of GST. Anything else would be distortionary. And distortions are bad.

Or we could stick with the status quo. I'm cool with either one.

Dr Eric Crampton is a senior lecturer in economics at the University of Canterbury. He blogs at Offsetting Behaviour.

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