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Eric Crampton writes –
I hadn’t thought about this one until a helpful email showed up in my inbox.
It’s pretty obvious that income tax thresholds should automatically index with inflation – whether to anchor the thresholds in percentiles of the income distribution, or to anchor against a real consumption bundle.
But what about the threshold for filing GST?
My correspondent notes that when GST was first set in 1986, the threshold was $24,000. $24,000, CPI-adjusted to today’s dollars, is $65,000. But the GST filing threshold is $60,000. So should it go up? There’s a petition before Parliament on it.
That’s a far more fun question than inflation-adjusting income tax thresholds.
The threshold for filing GST, as I’ve understood things, tries to balance the cost imposed on small businesses against revenue lost from failing to impose GST. If, as a small trader, you do not file for GST, you cannot claim back the GST on your inputs. The government loses only the 15% of the value that your firm adds in transforming inputs into goods or services for others – not 15% of your turnover.
If you’re at the threshold and purchase inputs equal to half your turnover, then not filing means that the government misses out on 15% of $30,000: $4500. If it costs that business more than $4500 to deal with the GST system, then making them file destroys value.
When the threshold was set in 1986, accountancy software like Xero didn’t exist that lets you submit GST by clicking a button, so long as you’re keeping the rest of your accounts up to date in there – which many companies would want to be doing to simplify their year-end company accounts.
So the question isn’t whether inflation has reduced the real value of the filing threshold as compared to 1986. The question rather is whether inflation has reduced the real value of the filing threshold by more than tech has reduced the real pain of filing GST for small traders. Filing GST can still be painful. But I have no sense of how much less painful it is now than it would have been for a small trader in 1986.
If tech has simplified things enough, you could even imagine a case for reducing the filing threshold rather than increasing it.
I wonder whether anyone’s able to compare the pain of small-trader-filing for GST in 1986 as compared to now. Is it 10% easier? 50% easier? Or has something else dumb happened that made it actually harder despite tech?
I don’t have any answer here. Just the way of framing the question. The relevant question isn’t inflation per se. It’s the real value of the filing threshold relative to the cost of filing.
That’s a far more fun question than inflation-adjusting income tax thresholds.
The threshold for filing GST, as I’ve understood things, tries to balance the cost imposed on small businesses against revenue lost from failing to impose GST. If, as a small trader, you do not file for GST, you cannot claim back the GST on your inputs. The government loses only the 15% of the value that your firm adds in transforming inputs into goods or services for others – not 15% of your turnover.
If you’re at the threshold and purchase inputs equal to half your turnover, then not filing means that the government misses out on 15% of $30,000: $4500. If it costs that business more than $4500 to deal with the GST system, then making them file destroys value.
When the threshold was set in 1986, accountancy software like Xero didn’t exist that lets you submit GST by clicking a button, so long as you’re keeping the rest of your accounts up to date in there – which many companies would want to be doing to simplify their year-end company accounts.
So the question isn’t whether inflation has reduced the real value of the filing threshold as compared to 1986. The question rather is whether inflation has reduced the real value of the filing threshold by more than tech has reduced the real pain of filing GST for small traders. Filing GST can still be painful. But I have no sense of how much less painful it is now than it would have been for a small trader in 1986.
If tech has simplified things enough, you could even imagine a case for reducing the filing threshold rather than increasing it.
I wonder whether anyone’s able to compare the pain of small-trader-filing for GST in 1986 as compared to now. Is it 10% easier? 50% easier? Or has something else dumb happened that made it actually harder despite tech?
I don’t have any answer here. Just the way of framing the question. The relevant question isn’t inflation per se. It’s the real value of the filing threshold relative to the cost of filing.
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This article by Dr Eric Crampton was first published on Offsetting Behaviour
Point of Order 