"Compared to GST, income tax is easier to avoid". I'll take your word for that. In my opinion the higher an indirect tax, the more avoidence comes into play.
"How much for cash" will become even more of a catchcry. How does that increase the Governments tax take? Let's put GST up to 39% and see how much more they collect!

KWJ - You and I aren't economists, and fail to grasp the wider theory behind this article.
That was the gist of the repost I received the last time I commented on this blog on an article written by Infometrics. Adolf Stroombergen and Gareth Kiernan have a more acedemic way of looking at the world than me.

good old wiki.

'til they squeak'

In economics, the excess burden of taxation, also known as the distortionary cost or deadweight loss of taxation, is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. It is assumed that distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay. Excess burdens can be measured using the average cost of funds or the marginal cost of funds (MCF) . Excess burdens were first discussed by Adam Smith.

now for the excel function....

Hi Nicholas - if its any consolation I have a PhD in physics and I think Adoolf's posts fail the common sense hurdle every time too. His pronouncements on school standard testing remains an all time favourite example of know-it-all economist mis-applying empirical economic tenet's (its not a model unless it (a) gives an accurate numerical answer and (b) that answer changes depending upon input parameters).

In this case a "model" that can achieve a prediction accuracy to the closest 100 jobs that will be provided by a single taxation policy change is either in the crystal ball category or a crock of sh*t. Given the complete absence of details of this 'model", I know which view I tend to....

On the other hand i have at last found one statement he writes that i can agree with:
" Throwing out the mess that is Working for Families...."
Amen to that...

I think it's great...the more they raise gst...the more I get for my free range eggs...and spare veg...and the extra fish caught..and eels...and for fixing the odd car..and painting the occasional house..not to mention the odd bit of handiwork inside a few houses..all in all it has to be said the higher they put gst the more work for me...for cash.

It is quite correct that the higher the rate of GST the greater the incentive there is to avoid it, the "discount for cash syndrome" But that is not the full extent if you avoid GST then anybody but a fool is also forced to under declare their income for Income tax. Thus if an increase of GST from 12.5% to 15% results in just one person doing jobs for cash it follows that for every $100 not going through the books the actual tax loss is $15 GST + $21 (if tax rate 21%) in income tax thus the Government has lost $36.

Avoidance/evasion, in the real world would anybody seriously decline to do a "cash in hand job" if offered? Scenario "how much for cash?" answer "sorry mate cannot do that" reply "ok see you bye bye... next please" You cannot feed your family with morals!

So if I have $112.50, after PAYE, and need to get the toilet unblocked, and I pay the plumber $100 buck cash to do the job, I have $12.50 to spend down the pub on a beer. If I pay him through the books I have no beer money, so I don't pay GST as there is no purchase. The plumber has his $100 to buy 8 beers at the pub, regardless of GST ( ie: he charges/pays GST through his books) but still has the same $100 cash. What have I missed?

The pub pays $1.39 GST on your $12.50 beer.
If the plumber puts the $100 thru his books he pays GST of $11.11 and has beer money of $88.89.
If the plumber doesn't put it thru his books, he as beer money of $100 and the pub pays GST of $11.11.

The Govt ends up with $12.50. The difference is how the $112.50 (less GST) is split between you, the plumber and the pub.

Hi Nicholas - buying beer with your extra 12.50 will set you back GST + liquor tax. better idea would be to put it on the mortgage (GST-free) - that way the government definitely does lose out. Or you could buy a homebrew kit from trademe or overseas e-bay (both GST-free).

The point being that GST works well as long as cases of avoidance are isolated and far between. As soon as the incentive to avoid rises it is possible for an entire black economy to emerge with no-one paying GST along the whole chain - much as happens in a number of southern european countries that find themselves in the PIIG muck at the moment.

I'll work through your numbers, NevilleWC, but my inference was that I would pay $112.50 to go through the books, not the $100 in your example. ( that's how the service cost remains unchanged at $100).
As I see it - cash - 9 beers get consumer ( me and the plumber); through books only 8 (just the plumber). That's GST on one less beer for the government?

I'm not against GST (or another form of consumption tax) but why do we need more tax to pay for an over size govt and more debt that's created off shore and which interest is to be paid? There has to be a better way...

Wally - do you paint under the counter................ or do you just leave it bare? :)

Hands down one of the better posts I've come across.