What is a regressive tax? Why is GST considered regressive?

A regressive tax is when the least well-off contribute a greater proportion of their income than the most well-off.

GST is a regressive tax because those with the lowest incomes pay a greater proportion of their income in GST compared to those with higher incomes. This is because the GST rate (15%) is the same for everyone, but the least well-off spend a greater proportion of their income on things that are subject to GST than wealthiest people.

For example, suppose a person is earning $50,000 per year and saving $5000 per year. They spend 90% of their income and pay GST on all (or the majority of) this spending. This person pays approximately 13% of their whole income in GST. By contrast, a person earning $250,000 per year, and saving $100,000, spends 60% of their income on which they pay GST. This person pays 9% of their income in GST.

Those on the lowest incomes are much more adversely impacted by increases in the cost of living—particularly inflation in food and energy prices because they have no buffer in their income that would otherwise be allocated to savings. When the cost of living increases, so does GST.

GST is difficult to replace because it is spread across a very broad tax base (everyone who spends money in New Zealand) and is a reliable and significant source of revenue. However, if the tax mix is overly skewed towards regressive taxes, it can reinforce inequality and wealth concentration at the top and place too much pressure on working people particularly those on lower incomes. We need an overall tax system that is progressive—i.e. that requires the wealthiest to pay proportionally more than the least wealthy. It would be better to reduce the rate of GST and raise the lost revenue through more progressive taxes like income and wealth taxes and to provide a refund of the GST, which families on the lowest incomes pay. The Inland Revenue Department has shown how a “low-income GST offset” like this could be provided.