Lower Income Taxes Is The Key For Savings

“The Savings Working Group’s has suggested raising GST to 20 percent and lowering personal income taxes, to help encourage saving. Moving the tax tax burden is a good idea, but the salient point is not so much to raise GST as to lower income taxes,” says Steve Thomas, Researcher at Maxim Institute. “If the government also looks at its spending levels, this may not require as substantial a rise in GST as the group are suggesting.”

“The Group’s figures indicate that if GST were increased to 20%, and the extra revenue were used to help fund a reduction in the top tax rate to 29.2%, it would generate a 5% increase in the stock of private savings in the long-run,” Thomas says.

“But it must be remembered that the main issue is not that GST needs to be raised, but that personal income taxes need to be dropped. In the Group’s scenario, the Government still collects the same overall amount of tax” Thomas points out. “The Group, and the Government, should also consider the impact of lowering the total tax take could have on savings, by trimming back operating expenditure.”

“For example, increasing the GST rate to 20%, and cutting government operating expenditure to 30% of GDP, could help to fund greater reductions to personal income tax rates than to just the top rate. This sort of move would stand to improve savings because high personal income tax rates are one of the things that affect whether people choose to save,” Thomas concludes.

“Tax is always impacting on people’s financial decision. If it is collected through investment it weakens people’s incentives to invest. If it is attached to consumption it discourages consumption. So by applying tax to the point at which people spend—through GST—the government would be discouraging spending and encouraging savings,” says Thomas. “While there would be other consequences that might be harmful for parts of the economy, for savings this would be a good thing. GST is an efficient and fair tax, and it is neutral to savings.”

ENDS

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