The Optimal Threshold for GST on Imported Goods (WP 16/01)

Abstract

This paper examines the determination of the optimal threshold value for Goods and Services Tax (GST) for imported units arising from internet orders. The concept of an optimal threshold is wider than simply the maximisation of revenue net of administrative costs. At the optimal threshold, the marginal cost of funds from GST is equated to the ratio of the marginal value of public funds to their marginal social value, reflecting the value judgements of a decision maker. The marginal cost of funds allows both for compliance costs and the marginal excess burden arising from a small increase in the threshold. Illustrative numerical values are reported, showing the sensitivity to administrative costs, the demand elasticity and, importantly, value judgements.

Acknowledgements

I am grateful to Eina Wong and Norman Gemmell for discussions during the preparation of this paper. I should also like to thank Matt Benge, Steve Cantwell and Penny Mok, who provided helpful comments on an earlier version.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.