GCT, PAYE which is better? Part 2

We continue looking at the area of proposed reforms in regards to the General Consumption Tax (GCT).  In an effort to reduce the rate of GCT being charged consideration is being given to charging GCT on items that were previously free of tax.

This of course will cause major problems as different interest groups will fight to retain their non GCT status.  In part one, we considered the possibility of having different rates for GCT as does currently exist for a few items.  I mentioned that items that do not attract GCT are in effect using different rates of GCT, in this case zero.  Once again the main issue in deciding on what attracts tax or not is based on the theory of who can afford to pay.  The current list includes all of the basic food items as well as a select group of items that are considered essential for low income families.

I have a lot of issues with the tax rate being the same for all persons regardless of income levels.  I am probably from the old school but the idea of the wealthy paying a little more in order to help those less fortunate appeals to me.  It is difficult to determine which items should remain free of GCT because it presupposes that we know which items the poor will buy.  This does not always work out as the poor may buy items such as cigarettes and alcohol that one would think they can’t afford.  It is likely that any choices made will upset some persons.  The good side of having a reduction in the GCT rate is that this will be one cost reduction that gets passed on to the consumer.  Since the GCT does not belong to the seller but is simply collected on behalf of the government the base price of the product will remain unchanged but the total price (including GCT) goes down with immediate effect.

One additional provision for GCT is the proposed granting of immediate credit on purchases of capital goods for all taxpayers and not just the manufacturing sector.  The current system of having to track GCT on capital items for periods up to 24 months in length is extremely cumbersome.  If taxpayers can get their credit immediately it will reduce the financing cost of equipment and thus represents an additional savings to the business.

As one can see the reform of GCT is very complex and is compounded by the vast number of items which are affected.  Even though one rate would be simpler to understand and calculate; we should not reject the idea of using different rates to affect consumption patterns.  We must be sure that the new regime does not reduce GCT for the wealthy and place an additional burden on those who are already struggling to survive.