Online shoppers beware: getting that cheap paperback from Book Depository could get a lot harder. But, it will depend on just how the government goes about taxing direct-to-consumer imports.

If Inland Revenue or Customs can come up with better ways of collecting GST on low-value imports, they should lower the GST threshold. But much of what we have heard so far about alternative systems sounds like wishful thinking. So let’s walk through the issues.

In principle, if it were no more expensive to collect GST on goods coming in from overseas than it is to collect it on domestic retail, there should be no threshold and GST should apply to goods and services consumed in New Zealand, regardless of whether they are imported directly by consumers or bought from local retailers. But collection at the border is a bit tougher.

Existing systems require that goods be held at Customs pending GST payment, imposing hassle and delays. Customs loads processing charges on to the higher-value shipments that attract GST or duty. Each imported parcel attracting any GST or duty also faces an import entry transaction fee of $29.29 and a biosecurity levy of $17.63 on top of any GST or duty.

These fixed costs, if imposed on lower-value imports, would effectively kill off those lower-value imports. That $15 book from Book Depository or Amazon would be a lot less attractive if Customs applied a $47 transaction charge to collect the $2.25 in GST.

Because all real-world systems for applying GST at the border are more cumbersome than the ones for collecting it on domestic purchases, we are in a world of trade-offs. The current system causes some inefficient distortion of purchases away from domestic retailers in favour of imports. It also results in some erosion of the tax base, forcing the government to rely more heavily on less efficient taxes.

Both of these distortions are real and weigh in favour of collecting GST at the border. But, as University of Auckland Professor of Statistics Thomas Lumley points out, a lot of people seem to be overestimating the tax revenues forgone. Nevertheless, the greater the economic distortions caused by either of these factors, the more willing the government should be to lower the threshold.

On the other side, cumbersome and costly border collection mechanisms prevent Kiwis from buying things from overseas even if those purchases had nothing to do with the GST price difference.

When I buy from foreign retailers, it is because they offer products that are not easily available in New Zealand, or that are only available here at a price premium well in excess of the 15% GST. When those kinds of purchases are deterred because getting goods across the border is a hassle, the country is not made better off.

And so the threshold for collecting GST at the border has to balance inefficiencies. Set the threshold too high and too many people will be encouraged by the 15% price difference and the losses from tax base erosion will be too great.

Set it too low and too many people will be discouraged from importing even when importing is best. And the pivot point between the two will be determined by how painlessly GST can be collected at the border.

But what about the effects of imports on the company tax base or on income taxes? Neither of those really should enter into the balance. Instead, we should think about online shopping from abroad as being rather similar to buying cars that are built abroad.

Better to buy abroad

Every car bought in New Zealand that was built somewhere else, which is now all of them, means New Zealand forgoes the company tax that would have been paid by a domestic car manufacturer, and the income tax that would have been paid by automotive workers. But because other places are better at building cars, New Zealand does better by buying cars from abroad. Workers and companies here specialise in other things instead and pay tax on those other activities.

While company tax from automobile manufacturing would increase were the government to ban car imports, the government’s coffers would not be better off for it.

As 19th century economist Frederic Bastiat might put it, we have to watch not only for the seen effects of a drop in company tax from domestic retailers when people shift their shopping abroad but also for the unseen effects of increased company tax elsewhere as workers and resources shift into other sectors.

With low shipping costs from abroad, substantial economies of scale, and easy internet sales, it just might not make sense for some forms of retail to be based in New Zealand – just as it does not make sense to make cars here.

There are substantial benefits from easy direct-to-consumer imports. Even shoppers who do not buy from abroad can benefit from lower prices when domestic retailers face foreign competition. We also gain access to a much broader range of goods than could otherwise be available in a small market. And so we come to the critical importance of better tax collection methods at the border. The easier it is to collect GST on goods coming in from abroad, the lower the GST threshold should be – if the government is trying to balance things up in the way I described above.

But wishful thinking abounds.

Some proposals expect foreign retailers to happily collect tax on behalf of the New Zealand government and to put special stamps on packages destined for New Zealand showing that the tax has already been paid.

Too much hassle

Perhaps larger retailers like Book Depository or Amazon would find it worthwhile, and especially if New Zealand were part of a larger system for international sales tax collection. But it is wishful thinking to believe that smaller foreign retailers, who are often already reluctant to get involved with foreign shipping, would want the hassle.

Would you agree to deal with a foreign country’s tax system for the sake of a place making up only a tiny fraction of your sales? If few foreign retailers were to sign up, then proposals imposing substantial border costs on low-value shipments from unregistered sellers could do far more harm than good.

Other mechanisms, like those that would have domestic shippers collect tax as part of shipment, could prove feasible – but still require careful assessment.

If the government can come up with a way of collecting GST at the border more efficiently, then it could reasonably lower the threshold. But we need to be wary of proposals that seem more likely to block imports than to level playing fields.