GCT, PAYE which is better? Part 1

This is probably the most difficult part of the existing tax policy to change as there are a variety of opinions about what is the best way to use this tax. The arguments are centered mainly on whether direct taxes, such as Pay As You Earn (PAYE), or indirect taxes, for example, General Consumption Tax (GCT) are better.  Some argue that it is easier to collect the direct taxes as they are deducted at source and paid over to the government.  Others argue that persons who do not work or who are self employed often avoid paying these taxes so the only way to get them to pay tax is by using indirect methods.

Persons who pay income tax pay about 31 per cent of their income above the threshold limit.  In addition they pay 17.5 per cent on almost everything else that they buy.  This means that they are paying almost 50 percent of their earnings in taxes.  There is no doubt that this is too high for the average person and there is a need to reduce the levels.  When I examine income tax in a later article we will address my concerns in that area but my focus today is on GCT.  There are two proposed new rates for GCT in the green paper section 5.3; 12.5 per cent and 15 per cent.  I think however that these rates are still too high unless the tax threshold is significantly increased as well.

One of the obvious problems of reducing the rate of GCT is that any revenue given up must be earned elsewhere either through raising other taxes or by increasing compliance.  Another question that arises is whether or not the GCT on items should all be at the same rate.  Currently the GCT on telephone equipment and calls is at 25 per cent and for electricity it is at 10 per cent and there are concessionary rates for the tourist industry.  Of course items that do not attract GCT are another rate, that is, 0 per cent.  The idea behind all of this is the concept of progressive taxation which is based on the concept that the wealthier should pay higher rates of tax than those who are struggling to get by.  This again is another concept on which opinions vary significantly. 

In the second part of this article we will look at the implications for reducing the number of items that do not attract GCT.  There could be an argument for using different GCT rates as a means of discouraging the purchase of such items.  For example energy efficient items could attract lower rates than those items that consume large amounts of electricity.  It is likely given the wide views on the area of GCT that whatever is proposed some will find disfavour with but the aim as always must be to find a method which is fairer and more equitable than that which currently exists.