“The Ugly Sister with a sweet tooth?

Food Consumption as an Indirect Tax Base in New Zealand 1840-2010”

By Judith Pinny

Submission date: 19 March, 2010

Resubmission date: 25 June 2010

Abstract:

This paper explores the history of food tax policy in New Zealand in the context of asymmetric paternalism, and outlines the historical pattern of direct and indirect taxation. The paper concludes that the rationale for food taxation was initially a

source of government revenue, and later protectionism. The incentive to influence behaviour is a relatively recent phenomenon in respect of food taxation. Food

taxation has not been an asymmetrically paternal policy between 1840 and 2010, although the interrelated family welfare packages, tied into taxation are paternalistic.

Keywords:

Paternalism, food tax, history of taxation, tax policy, indirect taxation

Acknowledgements:

The author thanks her PhD supervisors, Professor Kevin Holmes and Dr Lisa Marriott, for their helpful comments and continuing support.

Judith is an Assistant Lecturer in the School of Accountancy, Massey University, Wellington, New Zealand. Contact details: Telephone: 64-4-801-5799 X6802; j.pinny@massey.ac.nz. This paper forms part of her PhD in progress through Victoria University of Wellington, New Zealand.

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“I never can think of direct and indirect taxation except as I should think of two

attractive sisters who have been introduced into the gay world of London, each with

an ample fortune, both having the same parentage... Necessity and Invention... and I

frankly own... that as a Chancellor of the Exchequer... I have always thought it not

only allowable but even an act of duty to pay my addresses to them both”.

William Gladstone’s Budget Speech to the British Parliament 18611

1. Introduction

This paper will explore the taxation of food in New Zealand over the period 1840 to

2010 with respect to the theoretical framework of asymmetric paternalism2. An

asymmetric paternalistic policy creates large net benefits for those who consume a

lot of the product or are naïve users, but little harm on those that consume smaller

amounts and are more rational in their decisions3.

Against the background of the relative popularity of direct and indirect taxation4, food

taxation which was once the focus of revenue gathering5 is now integrated into the

whole fiscal framework of taxation and welfare6. Food taxation broadly includes all

foods and drinks, but specifically excludes alcohol which is subject to excise taxation

in many countries, including New Zealand.

Section two develops the concept of paternalism and asymmetric paternalism.

Section three analyses the development of tea and sugar as a tax base. Section four

addresses cultural change and its impact on food consumption, both in New Zealand

and internationally. Section five examines the history of tax food policy in New

Zealand. Section six concludes, that historically New Zealand food tax policy does

not have examples of asymmetric paternalism, but further investigation is warranted

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into the use of taxation as an asymmetrically paternal policy to encourage healthy

eating.

2. Paternalism

The theoretical framework for this paper is asymmetric paternalism. Paternalism

allows for a stronger body (originally the father) to make decisions on an individual’s

behalf.

Paternalism arises in many contexts – political, managerial, medical and, most

recently, economic. In the political context, this means that the state is assumed to

be in a better position to make a decision for, or to influence, individual choice.

Early behavioural management researchers believed that managers should be

paternalistic.7 Management research differentiates between paternalistic leadership

which focuses on the welfare of the employee, and authoritarian leadership which is

more controlling, without the welfare motive. Both types have a power inequality in

the relationship. Paternalism in an economic context has developed in the newer

field of behavioural economics, which combines traditional economics with

psychology. For example, the rationale for an excise tax8 is to influence behaviour.

Operating on an aggregate policy level, paternalism is the behavioural approach to

welfare economics.

The acceptance or otherwise of the behavioural economists’ new methodological

frontier has been the subject of much debate, in respect of which the handbook

edited by Caplin and Schotter (2008, pp. 42-43) attempts to provide a forum for

divergent views.9 The debate is informed by the contribution of Gul and Pesendorfer

(2008) who refer to the newer methodology as neuroeconomics,10 in preference to

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behavioural economics. Gul and Pesendorfer argue that the neuroeconomists are

concerned with hedonic or true utility (being process based), rather than the

traditional economists’ view of choice utilities (being product based).

Pure paternalism requires regulation (by banning or quantity restriction), rather than

taxation. A more moderate or liberal view is to impose a tax which does not reduce

the number of choices available, but only changes the relative choices, with no

coercion, hence the term “libertarian paternalism” coined by Thaler and Sunstein

(2003). This type of paternalism grew from the study of retirement plan enrolments

and whether people were better to “opt in” or “opt out” of retirement savings

schemes.

O'Donoghue & Rabin (2006) discussed types of paternalism when they developed a

model for optimal sin taxes which incorporated individuals’ self control problems. If

people with self control problems are not sensitive to tax changes then the tax will

redistribute income away from them without the corresponding behavioural benefits.

In the context of food, an asymmetrically paternalistic tax creates large net benefits

(being less obesity and consequent illness after the payment of the tax) for those

who consume a lot of the product (unsophisticated consumers) by reducing their

consumption, but has little harm on those who consume smaller amounts and are

more rational and sophisticated in their decision making, as discussed in Camerer,

Issacharoff, Loewenstein, O'Donoghue, and Rabin (2003).11 In the case of a food tax

the benefits are lower disease incidence and lower health costs for the consumer of

unhealthy foods (and for society).

The central issue is the structure of the choice architecture. Free choice does not

always produce the best outcomes for the individual or society. To improve this

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decision making, paternalistic policy must address what decision is likely to be made,

and whether a better outcome can be achieved through a level of coercion.

From the perspective of a fat tax intended to change behaviour, asymmetric

paternalism is far less restrictive than the pure paternalism of regulation, and allows

the government an opportunity to “nudge”12 rather than forcing the consumer into

better purchasing patterns. Banning fatty foods is a non-libertarian paternalistic

approach whereas a sufficiently high tax is an instrument that would particularly

safeguard the heavy eaters of fatty foods but in relative terms impose little cost on

the light eaters and so is an asymmetrically paternalistic fiscal instrument.

Anand & Gray (2009) further develop the paternalistic arguments by returning to the

political dimension suggesting that the choice of paternalism is also a social choice

in a “deliberative economy”, made by electors who decide the degree of intervention

in the economy. The degree of paternalism is constrained politically by the election

cycle, and lobby groups.13

3. The Development of Sugar and Tea as a Tax Base in the United

Kingdom

The British Government in the 1800s needed a stable revenue base to finance the

expanding empire from products with a relatively inelastic demand on which to

impose an indirect tax. Britain was a nation of tea drinkers so a broad base could

potentially be established by taxing sugar and tea which are complementary

products. In addition sugar was an ingredient in beer14 and winemaking which

increased demand and taxing sugar allowed the government to tax another product

associated with alcohol. However with the emancipation of slavery in the West Indies

in 1833, the prime suppliers of sugar to Britain, this meant that the world supply was

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now down which lead to an increase in price (United Kingdom Parliamentary

Debates (UKPD), 1844, p. 165). The British Government could potentially apply

paternalism to two vulnerable groups. On the supply side, by protecting the group of

ex-slaves in the West Indies, and on the demand side, the working class in the

population were proportionately the largest consumers of sugar (and tea). Supply of

sugar was an issue, as sugar from Louisiana was a potential additional supply, but to

import from the South of the United States where slavery still occurred was to

compromise the British principles too much, and so was not an option. Tea and

sugar were imported products and were easy to tax as they both entered the country

at one place and incurred the Pert [sic] of London tariff (UKPD, 1914, p. 812).

Sugar was first taxed in the United Kingdom in 1850. The general duty on sugar was

repealed in 1874, but a tax remained until 1880. The duties on sugar and tea were

imposed in Britain by an annual taxing act (UKPD, 1861, p. 585). As stated by

Gladstone ‘While the duty upon tea is more than 100 per cent and the duty upon

sugar is over 50 per cent the supplies of both articles are abundant; the

consumption of them both in ordinary years … shows a decided disposition to

increase which led to the imposition of extra rates” (UKPD, 1861, p. 578). Gladstone

was aware of the differences between direct and indirect taxation and was not

comfortable with enacting the duties for more than one year. Gladstone realised the

regressive nature of the tax on basic foodstuffs to the working class with larger

families, but he was loath to widen the income tax base, and lacked a viable

alternative to the tea and sugar revenue base.

In 1901 the general sugar tax was reintroduced, with no drawback (or rebate) for

brewers using sugar in manufacturing.15 In 1914 the tea duty was debated by the

tariff reformers, led by William Hewins who stated “They (the Government) are

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retaining at the moment the preposterous duties on food of which the Labour Party

complain. There is no justification for those duties except they bring in a lot of

money. You could not get so much out of the working class by any other means…No

housewife would deliberately pay over directly the money she now pays for tea…

The duties are preposterous.” (UKPD, 1914, p. 812)

Phillip Morrell supported Hewins by adding that the Chancellor “had not found it

possible to do anything to deal with some of those taxes which fall principally upon

the poor, and especially, of course, the Sugar tax...It is a tax, bad not only in degree,

but it is bad in kind” (UKPD, 1914, p. 823). Concerns about the inequity of the excise

tax were now apparent to the elected Members of Parliament.

Rowland Hunt confirmed the regressivity of taxation: “You tax the tea of the poor

woman from £75 to £100 on every £100 worth, whilst on the imported £100 of a rich

woman there is no taxation at all, and the poorer she is, the cheaper the tea, the

more you tax her” (UKPD, 1914, p. 870). Imported luxuries were not subject to

taxation, but the poor who spent a high proportion of their money on food were

proportionately taxed far more than the rich.

Through the 1800s sugar had gone from a luxury item afforded only by the rich, to a

product consumed in quantity by the entire British population. As Mintz (1985, p.

185) noted “tobacco, sugar and tea were the first objects within capitalism that

conveyed with their use the complex idea that one could become different by

consuming differently”. Tea and sugar are “like alcohol or tobacco they provide

respite from reality, and deaden hunger pangs”(Mintz, 1985, p. 186). For the working

class they provide the substitute for food in a world where many are still hungry. The

habit has become ingrained in the 20th Century, now food is mass produced and

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plentiful, the additional calories provided by sugar (and fat) contribute to the obesity

epidemic.

4. Cultural Change and its Impact on Food Consumption

Whilst this paper is not of a sociological nature, it is nonetheless timely to comment

on changing eating habits in New Zealand as part of the New Zealand psyche, to

show that the New Zealand diet is a dynamic, rather than a static, phenomenon.

In New Zealand post-World War II families were large (with an average of 4 children)

and women prepared most food in the home. Not all of this food was healthy – home

baking was high in fat and sugar content. Home preserving of fruit and vegetables

(including jam making) was the norm.

The introduction of the Pill in 196016 widened female choices with respect to family

size and ability to work. In 1972 equal pay for women was introduced17. Increasing

female participation in the workforce created a greater demand for ready- to-cook

meals and eating out. American fast food chains arrived in the 1970s – Kentucky

Fried Chicken in 1970-71 (Bailey, 1999, p. 265) and McDonalds in 1976 (Dando,

2009).

In the 1970s the demise of sea travel and replacement by air travel, now affordable

by not just the rich New Zealander, expanded the palette of the traveller who was

now more likely to eat out at the growing number of ethnic restaurants, also due to

the increased number of migrants living in New Zealand. From a few Chinese

restaurants in the 1960’s grew a wide range of international restaurants.18

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This summary shows the rationale for the changing eating habits of New Zealanders

over time, with an increased reliance on easy to prepare meals and eating out

(including takeaways).

The study by Cutler, Glaeser, & Shapiro (2003) attempts to explain the rise in obesity

in the US since 1980, from the perspective of changes throughout the 20th Century.

Their treatise was that increased obesity is due to the technological improvements in

food preparation (including vacuum packing, freezing and microwave cooking).

These resulted in a shift from individual to mass food preparation (by food

manufacturers), which takes advantage of the division of labour. The consequence

was reduced time spent in food preparation in the home from the 1970s, which was

widespread by the 1980s.19 This particularly gave women (who showed a large

increase in obesity figures20) more time for other activities, most notable being the

shift to paid employment. Critically, the reduction in food preparation time did not

assist the people with food self-control problems, because they had quicker access

to more food (which was cheaper due to mass production). Cutler et al concluded

that the increased consumption of food, resulting from higher incomes generally,

tended to be more snacks, rather than increased portion sizes. Internationally, highly

regulated countries, particularly those with agricultural protectionism, tend to have

lower levels of obesity. This is because these countries have higher food prices from

protectionism, and hence consume less. Regulation also tends to inhibit the

introduction of new technology, so there is less mass production of food products in

these countries (Cutler, et al., pp. 111-112)

Bleich, Cutler, Murray, & Adams (2008) built on Cutler et al’s argument and also

proposed rising urbanisation as a factor, as it gives people greater access to a wide

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range of food, and urban dwellers are more likely to undertake less physical

activities.

5. History of Tax Food Policy in New Zealand

The Treaty of Waitangi21 was signed in 1840 and the new Government needed a

means of financing its activities. The fledgling economy was goods based, and

British migrants were used to the imposition of customs duties on alcohol, tobacco,

tea and sugar from their time in Britain as shown in Section 3. Once customs offices

were established these would be relatively easy to collect. When New Zealand

separated from New South Wales in 1841, spirits, wine, tea, sugar, flour and rice

were subject to an ad valorem22 tax. The other revenue earner for government

during the 1800s was the sale of Crown Land (Goldsmith, 2008, p. 18). This peaked

in the 1860s as shown in Figure 1 by the sharp increase in “Other” which included

government land sales.

Figure 1 shows the relative importance of direct and indirect taxes to the New

Zealand Government’s revenue between 1840 and 1990. Indirect taxation was

dominant from 1840 through to 1910. The income tax started to assert its dominance

as a direct tax in the 1920s, then the introduction of the Sales Tax in 1932 was

fiscally successful for government (as shown by the peak in the indirect tax portion of

the graph) in the environment of the Great Depression. After 1940 income tax was

always the predominant earner for government to the height of 1980 where it

provided 74% of government revenue, however this was on the back of a 66%

personal marginal tax rate which was unsustainable with leakages in the tax base

through non-cash remuneration being untaxed (until Fringe Benefit Tax was

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introduced in 1985). An inconsistent sales tax which lacked necessary controls to

firm up the tax base was replaced in 1986 with the introduction of Goods and

Services Tax (GST) which renewed favour back towards the indirect taxation ‘sister’

to a degree as shown by the rise in indirect taxation following a trough in the early

1980s. GST was not only a tax on a wider range of products, it had the side effect of

being extremely difficult to avoid with very limited exceptions (notably, not including

food), requiring businesses to properly account for their input and outputs. As GST

was accounted for at each point in the production chain, this provided a control

which the previous wholesale sales tax lacked. With the impending rise in GST to

15% on 1 October 2010, and a compensating reduction in personal tax rates, this

upward trend in indirect tax as a percentage of government revenue will continue.

Figure 1

Source: Adapted from tables 1-15 in Goldsmith (2008) which were sourced from the New Zealand Official Yearbook, and New Zealand Treasury Tax outturn data.

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Whilst the tax base in New Zealand in the 1860s was defined - basic foodstuffs,

alcohol and tobacco - customs duties were regressive as a person with no children

paid little tax relative to the person with, say, twelve children, who was paying tax on

the food consumed by their entire family. No one paid tax on luxury items such as

jewellery. As in Britain, the excise taxes satisfied Adam Smith’s canons of simplicity,

efficiency and certainty but had no equity consideration for the poorer classes. Tax

money was spent on administration, law and order in urban areas, roads, and the

establishment of schools and hospitals (Goldsmith, 2008, p. 27). There was no

concern for paternalism and social welfare.

The 1860s heralded the New Zealand wars which required money to fight. Increases

in taxes were the obvious source. Customs duties on alcohol, cigarettes and tea

were increased by 50%. Other duties increased by 25% (New Zealand Parliamentary

Debates (NZPD), 1864, pp. 157-182). This led to increased leakage from the tax

system, through smuggling, and the growth of illicit distilleries.

Reaction to these policies caused the voters to vote out Edward Stafford’s

government in 1869. The new premier, Edward Fox was assisted by Treasurer,

Julius Vogel. An early policy was to impose duties on imported cereals and flour to

protect local farmers. Stafford, now in opposition, opposed protectionism, after

correspondence with economist, J.S. Mill, who advocated free trade, but suggested

in a new country, such as New Zealand, subsidies might assist the development of

new industries. Stafford succeeded as the grain duties were never passed

(Goldsmith, 2008, pp. 42-43).

Vogel changed the basis of tariff allocation in 1873 when custom’s receipts had

plateaued. Large reliance was still placed on alcohol and cigarettes as revenue

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earners. New Zealand had, unusually at this time, adopted a specific basis23 rather

than an ad valorem basis. Change to an ad valorem basis in 1873 was intended to

minimise the tax leakage. However Mr Johnston queried the net advantage of the

change: “Whilst it was desirable to introduce the system of ad valorem duties in

order to assimilate the tariff in New Zealand to that in Australian colonies he has so

fixed the percent for duty that there would be no extra taxation on the people”(NZPD,

1873, pp. 198-199).24 British sugars were also levied a specific excise tax of 2d per

pound of weight (NZPD, 1873, p. 404).

By the 1870s customs duties were seen as regressive (Goldsmith, 2008, p. 51).

Although the rich spent more on food and drink there was an upper limit to this, and

it was a smaller proportion of their total income.

The New Zealand Government was beginning to flirt with the ‘sister’ advocating

direct taxation, but the mindset of proportional taxation was still firmly entrenched in

the government’s psyche. Mill’s “equality of sacrifice” was seen to confirm the

continuity of proportional taxation, not promote progressivity. Tea was taxed at 30%,

and sugar at 25% (NZPD, 1877, p. 234) – these taxes were paid proportionally more

by the poor, yet the wealthy benefited by increases in land values. In 1878 duties on

tea and sugar were reduced, helping the poorer classes (Goldsmith, 2008, p. 62).

The Liberal Government came to power in 1890, and introduced the first progressive

taxes into New Zealand. 1891 saw the broadening of the tax base to include an

income tax, which was a progressive addition to the tax system compared to the

current excise taxes on basic necessities. This was contemplated by Sir J Hall who

stated “Upon the principle adopted in the English income-tax-although we carry the

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principle much further – whatever is necessary to enable a man to live in ordinary

comfort should not be taxed?”(NZPD, 1891, p. 349)

The income tax was in part the result of rising popularity of the temperance

movement which led to a consequent reduction in gross alcohol receipts and hence

excise duties. It was suggested by temperance advocates that the substitute was

tea, so tax should be increased on that to compensate, but this was a fallacious

argument as alcohol has a relatively inelastic demand, so other beverages are not a

likely substitute. In 1896 Prime Minister Richard Seddon also became the Treasurer.

In his 1900 budget duties were removed from rice, salt, and coffee, and reduced by

half on tea, which looked after the working classes, by tackling the costs of basic

foods.(NZPD, 1900, p. 384) Ward was elected Prime Minister in 1906 and continued

the trend of removing duties from sugar, molasses, treacle, figs and tea, if they were

sourced from the British Empire (Goldsmith, 2008, p. 114).

The first tax recognition of the family unit came under the new Reform government

led by Massey in 1913 when a £25 exemption for each child under 16 years was

introduced (Goldsmith, 2008, p. 118). This reduced the regressivity of the income tax

system and was a move towards the welfare state.

World War One saw a rise in income tax rates from 7% to 37.5% (Goldsmith, 2008,

p. 123). Consequently income tax surpassed the role of customs duties as the

largest revenue earner for government. The other direct tax ‘sister’ had risen in

prominence after an inauspicious start. However against this trend was the

reinstatement of customs and excise duties on tea in 1918. The higher level of

income taxes, justified by the war, became the norm in the peacetime that followed.

However the resurgence of international trade in the 1920s led to an increased tax

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share from customs duties. Locally produced food had never been taxed, however

imported “food and non-alcoholic drinks which accounted for 20 per cent of customs

revenue in 1891, only produced 4 per cent in 1929” (Goldsmith, 2008, p. 154).

Customs duties were used as a tool for protectionist policies. The general trend was

to reduce or remove tariffs on necessities. Preferential (lowest) tariffs applied to

British goods at a rate of 20% in 1921, whereas foreign goods incurred the rate of

30%. In 1927 the foreign rate rose to 40% (Department of Statistics, 1931, p. 316).

Australian goods were included under the British preference until 1922 when New

Zealand signed the Tariff Agreement (New Zealand and Australia Ratification Act)

which allowed 129 items to be free of duty or subject to a preferential tariff. However

if the rate was lower than the British preferential rate the difference in duty must still

be paid under the British preferential tariff. This was not a simple taxation system,

and applied inter alia to confectionery and wine. A rate higher than the British

preferential rate applied to preserved fruit and pasta so the New Zealand consumer

never benefitted to the true extent from the Australian Agreement (Department of

Statistics, 1931, pp. 329-331). A reciprocal agreement was signed with South Africa

in 1907 with similar concessionary rates granted by each country. This particularly

affected the importation of dried apricots, wine, maize and preserved fruits

(Department of Statistics, 1931, pp. 328-329).

Taxation of flour was problematic, as it was both imported and domestically

produced. A system was developed to equalise the price so that if the domestic price

for flour rose, then there would be a compensating drop in the customs duty on

imported flour (Department of Statistics, 1931, p. 318). Less reliance was placed on

the revenue stream from alcohol and cigarettes, due to the strong influence of the

temperance movement in reducing liquor consumption in New Zealand society.25

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The growth of motor vehicle industry provided a new source of taxation which took

the pressure off food taxation as a revenue source. Cars were a luxury imported item

that were easy to tax in multiple ways, and broadened the tax base. Cars were

already subject to a tire [sic] tax, annual licence fees and a customs tax on

importation, the Motor Spirits Tax Bill 1927 sought to tax petrol at 4d per gallon

(NZPD, 1927, p. 761).

In 1933 a 5% wholesale sales tax was introduced in New Zealand but basic locally

manufactured foodstuffs were exempt from its application. As Mr Harris noted “I

specifically exclude from taxation foodstuffs of local manufacture. I do not propose

that imported foodstuffs should also be exempted because I think that if people

import foodstuffs they can reasonably be expected to pay tax on them”(NZPD,

1933b, p. 503). The sales tax was not without opposition – Mr Jull suggested instead

of the 5% tax, “The whole of the extra revenue might be obtained by the increased

customs duties upon tea and sugar”(NZPD, 1933b, p. 510). Rev Carr was against

this, stating “If ever there was a time when Mrs ‘Arris of Evening Post fame needed

her cup of tea it is now, the time will soon come when in the worker’s home, tea will

be an impossible luxury”.26 Clause 12 of the Sales Tax Bill contained the schedule of

exemptions from sales tax, tea, sugar, currants, sultanas, baking powder and ice

cream did not survive the vote to make that list (NZPD, 1933b, pp. 646-650).

The Customs Tax Amendment Act 1933 increased the excise duty on sugar by 1d

per pound unless it was treacle, molasses or maple syrup (NZPD, 1933a, p. 733).

Sugar was therefore subject to both a sales tax based on price and a specific excise

duty based on weight.

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The Depression heralded the need for the welfare state – initially the state made

relief payments to the unemployed, and then the “dole”27 (Goldsmith, 2008, p. 175).

Savage came to power as the first Labour Government Prime Minister in 1935 and

focussed not so much on tax revenue as a minimum standard of living for all – a

minimum wage, and access to education, healthcare and pensions. This change in

the approach to government was described by Armstrong (1994, pp. 118-120) as

“social democratic consensus” - the state regulated the economy in a paternalistic

way. Indeed the provision of social welfare liberated many people’s lives from

poverty, and so the paternalism was well targeted.

Although an election promise was to scrap the sales tax, this never eventuated

(Goldsmith, 2008, p. 177). An ambitious welfare package had to be financed from

somewhere. The correlation between the tax system and relief via a minimum

standard of living was taking its first tenuous steps in a long relationship. The

achievement of attempting to eliminate poverty has now with the benefit of hindsight

led to an intergenerational poverty cycle in some cases, and a blurring of the line,

between someone’s needs and their right to live a middleclass lifestyle funded by

other’s taxes. Restrictions on imports led to reduced customs revenues, so petrol

excise taxes were increased to 40% and income tax rates also rose in 1939

(Goldsmith, 2008, p. 189).

World War Two economic policy was dominated by Keynesian macroeconomic

theory. Increased taxes would reduce consumption, so the government could

maximise production and employment without inflation. The standard wartime

government response was price controls, subsidies on essential products, and

coupons required to purchase certain products. Fraser, who replaced Savage as

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Labour Prime Minister, increased sales taxes in 1941 from 10% to 20% over a range

of items, including some foods (Goldsmith, 2008, pp. 199-200).

A means tested family benefit was introduced pre WWII, but in 1946 the universal

family benefit was introduced at £26 per child per year, showing paternalism of the

state, although an untargeted benefit is not the preferred policy option since the

family benefit was abolished in 1991(St. John, 2002), and a welfare system was

introduced which calculates payments based on income and is administered through

the tax system. However as a nation with a low birth rate and population base, it

provided a limited incentive for procreation, which given the resultant post-war baby

boom must have been a successful government policy. Notably the £50 exemption

from income tax for each child was retained, so for wealthier families each child

provided two benefits to income (Goldsmith, 2008, p. 208).

Subsidies on milk, butter and bread and for various industries cost £18 million by

1951. This was an untargeted policy which was difficult to remove, without leaving

any taxpayer uncompensated for its removal. In the 1953 budget sales tax was

removed from soft drinks, a total reversal of the current international trend to reduce

obesity by taxing soft drinks (Goldsmith, 2008, p. 225).

Milk was the focus of government subsidies for many years. From 1937 to 1967 half

a pint of milk per child was delivered to all New Zealand schools each day. The NZ

Milk Board, established in 1953, set the price of milk for consumers and producers,

with a subsidy bridging the gap through to 1976. (Statistics N.Z., 2009). In 1985 the

government consumer subsidy on milk was removed, in anticipation of the Family

Support welfare package, introduced concurrently with GST, in October 1986.

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In February 1967 consumer subsidies on wheat, flour and butter were also removed

(New Zealand Taxation Review Committee., 1967, p. 81).

The Ross Committee28 Report on the New Zealand tax system in 1967 did not

address food taxation directly, other than the subsidies just discussed. It took a wider

perspective, suggesting reduced corporate and income tax rates, and abolishing

land tax which did not occur until 1992 (Inland Revenue Department, 1990, p. 9).

Increased revenue would be derived from a new comprehensive sales tax, and a

wider tax base through taxation of the business activities of charities and educational

institutions and the taxation of fringe benefits, and increased excise taxes. The

dominance of the income ‘sister’ had passed, and the tide was turning back towards

indirect taxation. The Ross Committee saw the need for expenditure taxes as they

were easier to change, and so gave more flexibility to the tax system. The

Committee also for the first time acknowledged the complex interrelationship

between the tax and the welfare system, through the concept of negative income tax

– a guaranteed basic living allowance for each family affected by age and family size

(New Zealand Taxation Review Committee., 1967, Chapter 12). Social policy was

now in a relationship with the tax system, but it was not until 1986 that the “marriage”

would occur.

Prior to the introduction of GST, wholesale sales taxes were applied to some items,

often in a somewhat haphazard fashion. The McCaw Committee Report (1982) dealt

with perceived unfairness in the tax system. They recommended a tax similar to the

British VAT system, and also tackled the massive leakage to the tax system which

occurred by way of Fringe Benefits, but failed to directly address food taxation. A top

personal marginal tax rate of 66% was the legacy of the Muldoon government29. The

new Labour government cut the top marginal tax rate to 48% and funded this by

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introducing GST at 10% on 1 October 1986. Low income families were helped by the

introduction of family support, and a guaranteed minimum family income.

One contentious area was the potential exemption of food from the GST net. In

1985 the National Party came up with the “Extax” idea which would exempt basic

foods (Douglas, 1989). Roger Douglas, the Labour Government’s finance minister,

claimed there would be issues with definition which would be an inefficient use of

resources. The advantages of definitional simplicity outweigh the equity of a GST

tiered rating scale. Recent examples confirming this include the Australian Tax

Office’s 33-page publication “GST Food Guide”(Australian Taxation Office., 2009),

which is comprehensive but still subject to clarification in some areas. There have

also been a number of definitional court cases in Britain.30

Indirect taxes contributed 31% of total tax revenue in 1988, 18% from GST and 13%

from Customs and Excise taxes. From 1960 to 1980 75% of tax revenue was from

income tax, so the popularity of the indirect tax ‘sister’ was returning.

On 1 October 1989 the GST rate on all items (including food) rose to 12.5 % and has

stayed there for 21 years. However it will rise to 15% on 1 October 2010.

In the 2008 Parliamentary elections there was some discussion regarding removing

GST on basic foods, which was supported by the Maori Party31 and gained

widespread media attention.32 The Green Party supported a free fruit in schools

programme and supported a tax on soft drinks.33 In 2010 the Maori Party introduced

a bill into Parliament to exempt healthy foods from GST. The definition of “healthy

foods” in the bill included milk, bread, cereals, fruit and vegetables ("Goods and

Services Tax (Exemption of Healthy Food) Amendment Bill 140-1," 2010) . This is in

contrast with the international trend of zero-rating food rather than making it an

20  

exempt supply. The rationale behind this is that if food is exempt then retailers are

unable to claim input tax credits on their costs and would pass the cost of GST onto

the consumer.34 Food only retailers would no longer qualify for GST registration.

With zero-rated foods, retailers will be able to claim input tax credits and the cost of

food would fall by the fraction of GST in the cost.35 The Labour Party is currently

investigating removing GST from fruit and vegetables, (Kidson, 2010).

The 2001 McLeod Tax Committee attacked the “sin taxes” as economically

unjustifiable, and tackled the issue of the deadweight costs of tax revenue.

Behavioural responses to taxation were now an accepted part of the Treasury

approach, but it is difficult to accurately measure them. Although the McLeod Report

ignored the issue of food taxation, it did address the issue of using the tax system to

change behaviour, particularly in respect of alcohol, tobacco, gambling and petrol

(McLeod Taxation Review Committee, 2001a, pp. 19-20). The Ministry of Health

made a submission on “sin taxes” encouraging a healthy lifestyle, and supporting

future excise tax increases. However the McLeod Committee concluded that

corrective taxes were inconsistent with, and thus difficult to reconcile with overall tax

framework of fairness and efficiency (McLeod Taxation Review Committee, 2001,

pp. 40-41).

Since 1986 the close relationship of welfare and taxation meant that this was a

severe limitation on the 2009 Tax Working Group (TWG) making comprehensive

suggestions. The family unit had been paramount for negative taxation (or tax

credits) since 1986.

The TWG did not cover excise taxes in its brief and was required to provide revenue

neutral solutions36 to the National Government. However the TWG’s background

21  

paper on changing the rate of GST did contemplate the exemption or zero-rating of

food (TWG, 2009, pp. 12-14). It was seen as a less targeted instrument as, although

in relative terms the lower income people spend a larger proportion of their income

on food, in absolute terms the wealthier people spend more on food, and so with this

policy would received more benefit. In the 2006/07 Household Economic Survey,

food comprised 20% of the GST base. If the rate of GST was increased to 15% but

food excluded it is projected that less revenue would be earned than by continuing

with the status quo. The TWG also looked at removing GST from all foods except

restaurant meals and takeaways. Although it has a more positive effect on equity it

did not make a significant difference to the distribution of GST. The final report of the

TWG stated that “removing food from the (GST) base makes almost no difference to

the distribution of tax across income levels but loses 20% of the GST revenue”

(TWG, 2010, p. 47).

These conclusions were confirmed in the report of the 2025 Taskforce, “while low

income people spend a larger proportion of their incomes on food than higher

income people do, most of the GST on food is raised from high income people.

Exempting37 food would, over time, hurt those it was designed to help, as well as

adding considerable complexity and avoidance possibilities” (2025 Taskforce., 2010,

p. 100).

6. Are there examples of Asymmetric Paternalism in New Zealand

Tax Food Policy?

New Zealand tax policy shows an interesting circularity as the popularity of indirect

taxation in the 19th century has returned to a limited degree since 1986. In the 1800s

economies were goods based and it was easiest to tax “things” to raise the

22  

necessary government revenue. The definition of income was not well developed38,

and the only form of indirect taxation was through excise taxes. At this time there

was no concept of the welfare state, and government revenue was used to develop

infrastructure. Food taxation was restricted to imported products but sugar and tea

were not luxury items, and tax on them was regressive. The budget in 1900 was the

first sign of paternalism, as duties were removed on basic foods, and halved on tea.

Paternalism was a policy focus when the government first gave a £25 exemption per

child in 1913 but this was a description of an early welfare policy not a food policy.

Reinstatement of customs duties on basic foodstuffs in WWI was a contrary trend to

paternalism – anti-paternalism. The first purely paternalistic policy was enacted

under the welfare state of Savage in 1935: a minimum standard of living for all with a

minimum wage, access to health care and superannuation, and education. This

policy making approach was further consolidated by the introduction of the family

benefit – means tested prior to WWII but universal from 1946. There was also a £50

exemption from income tax for each child. Direct food subsidies of milk, butter and

bread were paternalistic, however the removal of sales tax on soft drinks were not,

given the high sugar content and potential contribution to obesity. Similarly the high

fat content of the free school milk, and the lack of adequate refrigeration, provide a

question as to the paternalism of what was a well-intentioned policy that fell down in

the practical implementation.

The recognition in the 1980s of the complex relationship between provision of

welfare and the tax system led to the concurrent introduction of GST and Family

Support. The optimal balance between the two ‘sisters’ of direct and indirect taxation

has been an issue for governments since 1840. The dominance of direct taxation up

to 1986 was unsustainable. The advantages of indirect taxation in creating a broad

23  

base, with less opportunity for tax avoidance has brought the indirect tax ‘sister’ back

into prominence. Although it is unlikely that she will ever be the dominant ‘sister’

again her role in revenue gathering and behavioural change ensures her continued

existence in the tax framework. However the extent of the welfare assistance created

problems which the government of today is grappling with – intergenerational

dependence on negative taxation, which for some leads to disincentives to work as

the abatement of the tax credit leads to high marginal tax rates for some. Fifty

percent of New Zealand families are, in 2010, net receivers from the New Zealand

tax system which means that half the families are not receiving Working for Families,

but are in fact working for other people’s families.

7. Conclusion

The various types of food taxation between 1840 and 2010 were not examples of

asymmetric paternalism. The motivations of government were initially revenue

gathering, and later also protectionist. While the evolution of the welfare state could

be shown to be paternalistic, and food was an integral part of any household

expenditure, food taxation could not be isolated as an asymmetrically paternal policy.

Indirect taxation has changed from a focus of excise tax on specific foods to a focus

on the general consumption tax which incorporates foods. The ‘sister’, who

contributed to revenue by consuming sugar products in the nineteenth century, is

back in favour with the introduction of GST, and perhaps a specific food tax to

discourage consumption of fatty foods in the future.

In New Zealand where obesity is a growing problem the use of taxation as an

asymmetrically paternal policy to influence what people eat, by encouraging healthy

and discouraging unhealthy foods, and the quantity of food consumed, warrants

24  

further investigation as a policy instrument, with a view to the introduction of a fat

tax.39

25  

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Notes  

1 United Kingdom Parliamentary Debates (1861, p. 579). 2 Asymmetric Paternalism was first coined by Camerer, Issacharoff, Loewenstein, O'Donoghue, & Rabin (2003). 3 Asymmetric Paternalism is the theoretical framework for the PhD thesis entitled “Fat Taxes or Skinny Subsidies? – Taxing Food in New Zealand” for which this paper forms a chapter. It was selected because a potential fat tax is intended to change behavior, particularly for large consumers of fatty foods. 4 The incidence of taxation is classified into direct (where the burden is on the person who is intended to bear it e.g. income tax) and indirect (where the tax is levied on one group (businesses) but passed onto another group (consumers) e.g. Goods and Services Tax). 5 Excise taxes were in the 1800s based on easily measured items. The widespread consumption of food (relative to other items) made it a popular tax base internationally for governments. 6 Since 1986 the New Zealand tax system has delivered welfare through a “Working for Families” package which is calculated through the tax system. 7 For example,  Munsterberg (1913) cited in Pellegrini & Scandura (2008, p. 567). 8 An excise tax is a indirect tax on the purchase of particular products often to discourage their consumption. 9 This handbook was the result of an Economic Methodology Conference at New York University in 2006 to which the key researchers were invited, including, inter alia, Camerer, Glaeser, Loewenstein and Rabin. 10 In the wider economic spectrum, neuroeconomics is not used interchangeably with behavioural economics, but as seen as a separate, but related, discipline. 11 Asymmetric paternalism has also been called “cautious paternalism” (O'Donoghue & Rabin, 2006) and “light paternalism” (Loewenstein & Haisley, 2008). 12 An example of asymmetric paternalism from Nudge by Thaler and Sunstein (2008) is  sunlamps, which people should only lie under for a short time. However those who fall asleep under the sunlamps get burnt (unsophisticated users) and may need a “nudge” to improve their decision making. A government regulation that requires all lamps to have a timer switch for automatic shutoff will not affect the sophisticated users, but will help the unsophisticated users to make better decisions and avoid long term harm. 13 For a food tax, lobby groups would include manufacturers of fatty foods. 14 Sugar was used in brewing as a substitute for malt. 15 A drawback is a rebate (in part or in full) given by government on customs duties when the product is used as part of a manufacturing process. 16 The combined oral contraceptive pill was introduced into New Zealand in 1961 http://www.familyplanning.org.nz/About/History/1960.aspx. 17 The Equal Pay Act 1972 removed discrimination, based on the sex of the employee, in the rates of remuneration for all New Zealanders. http://www.legislation.govt.nz/act/public/1972/0118/latest/DLM407770.html  Equal pay in the Public Sector was passed in the Government Service Equal Pay Act 1960 http://www.legislation.govt.nz/act/public/1960/0117/latest/DLM325949.html?search=ts_act_Government+Service+Equal+Pay+Act+1960_resel&p=1&sr=1’ 18 For further insights into New Zealand culinary history see  p 265 Bailey and Earle(1999).   19 For example, 8% of American households owned a microwave in 1978, but by 1999 83% of households owned one. 20 For example Table 1 of Cutler et al shows Increase in weight by population group from the 1970s to the 1990s to be an increase over the period from 18% to 32% of the single female population classified as obese, compared to an increase from 9% to 18% for single males. 21 The Treaty of Waitangi was signed on 6 February 1840 between representatives of Queen Victoria and the Maori people, and gave Britain sovereignty over New Zealand. For this paper Article the second is important as it gave the Crown exclusive right to purchase Maori land. Maori dissatisfaction over these land purchases has led to Treaty Claims and the establishment of the Waitangi tribunal in 1975, but this is beyond the scope of the present paper. 22 Ad valorem excise taxes are levied on price, whereas specific excise taxes are levied on weight or volume 23 Specific basis was in 1873 referred to as measurement duties (NZPD, 1873, p. 379) 24 Time of supply was also an issue, with “Mr Thomson asking the Commissioner of Customs whether the ad valorem duties are calculated on the value of the goods at port of shipment or the port of delivery?”The responses was port of shipment, which led to a lower taxable value (excluding freight and insurance charges).(NZPD, 1873, p. 257) 

30  

                                                                                                                                                                                         25 Although Prohibition was never passed in New Zealand, the Temperance movement had an impact in reducing the level of alcohol consumption. 26 The nutritional value of sugar in the 1930s was also commented on by Rev Carr “Doctors say sugar is one of the best heart foods; and if ever heart foods were needed it is today” (NZPD, 1933b, p. 523). 27 “Dole” is the colloquial term for unemployment benefit 28 The Taxation Review Committee 1967 was chaired by L.N. Ross and commonly known as the Ross Committee 29 Rob Muldoon was prime minister of a National Government from 1975‐1984 30 See, for example, Pilgrim(2009) which describes the Marks and Spencer’s teacake VAT case. 31 The Public Health Association advocated the removal of GST on fruit, vegetables, bread, cereals and milk, and this was supported by the Maori Party. 32 A 23,000 signature petition calling for the removal of GST on basic foods was presented to Parliament on 3 October 2008 by the Residents Action Movement. www.stuff.co.nz/4714876a6160.html?source=RSSeditorspicks_20081003  (accessed 20/04/09) 33 Other political parties responses can be seen in the report by Fight the Obesity Epidemic New Zealand Inc. (2008) 34 Food costs may drop slightly, but not by the fraction of GST in the price. 35 Currently one ninth or about 11%. 36 The overall mix of tax proposals must not increase or decrease the total government revenue (TWG, 2010, p. 9).  37 The 2025 Taskforce discussed exempting food, but probably meant zero‐rating it. 38 New Zealand’s first income tax act was the Land and Income Tax Act 1891. For a discussion of the development of the concept of income with particular reference to New Zealand, see Holmes (2001).  39 Fat Tax refers generally to a tax on the fat content of food (above a certain level).