Raise the GST: the conversation we have to have?
By Rémy Davison
With eight months left on his contract, Treasury Secretary Martin Parkinson decided to jump into the GST debate on Wednesday night. In a speech to the Sydney Institute, Parkinson declared the federal budget could not return to surplus unless the tax mix became biased towards consumption taxes.
That’s code for “raise the GST”.
The flying circus continued on Thursday. The ink had barely dried on Parkinson’s speech when RBA governor Glenn Stevens weighed into the fray. Stevens said:
Here I refer to the very important speech given last evening by my colleague, Treasury Secretary Martin Parkinson. Our situation is not dire by the standards of other countries but neither are the issues trivial. A conversation needs to be had.
The first time is happenstance. The second is coincidence. If a third senior bureaucrat calls for a tax debate, it’s coordinated enemy action.
The GST has been at the crux of the Australian taxation debate for 30 years. It undermined Paul Keating’s reform agenda at the 1985 Tax Summit; it destroyed John Hewson’s political career in 1993; and it almost consigned John Howard to the dustbin of history as a one-term prime minister in 1998.
Treasurer Joe Hockey was clearly aware of the content of Parkinson’s speech. However, both he and foreign minister Julie Bishop ruled out GST changes.
This is consistent with Hockey and prime minister Tony Abbott’s position during the 2013 election, even as current and former Liberal premiers and cabinet ministers urged consideration of the broadening of the indirect tax base, as well as GST rate rises.
In 2013, WA Premier Colin Barnett was slapped down for stating that state premiers “in private” support GST reform.
Of course they do. Never stand between a state premier and a GST increase.
The taxation conundrum
Consider this: would you rather pay more taxes to get the public services and infrastructure you want?
Or would you prefer to see budget cuts, while governments maintain or reduce current taxation levels?
Of course, the Commonwealth government could simply borrow more (which it does via bond issues, not from foreign banks). In fact, according to Stephen Koukoulis, the federal government could comfortably double the fiscal deficit and not worry about its credit rating.
Or the Commonwealth could address the issue of Base Erosion Profit Shifting (BEPS) by corporations transferring revenues to low-tax jurisdictions. But we don’t have space to get into that here.
Broadening the taxation base
As the name suggests, the GST taxes the consumption of goods and services. A major reason for its introduction was that services – from tattoos to tailors – routinely did not attract services charges at all. As services comprise 80–90 per cent of the Australian economy, governments were clearly missing out on an enormous, virtually-untapped revenue source.
Prior to the 2000 implementation of the GST, high-value professional services could evade the GST. In order to raise revenues, state governments levied a raft of wholesale sales taxes (WSTs) that applied to financial securities, leases and mortgages.
The GST replaced most WSTs, although states and territories continue to realise considerable revenues from a range of duties, including the much-loathed stamp duties on most property sales.
Regressive vs progressive
When the ATO isn’t busily paying Sir Rupert $800 million, it is actually in the business of tax collection. However, it relies primarily upon sole proprietors and enterprises to collect payroll and GST revenues. In 2011–12, the GST accounted for 13 per cent of total taxation revenue, versus individual income taxes, which comprised 39 per cent of the tax cake.
Since the 1980s, there was a broad consensus between the major political parties that Australia should maintain a progressive income tax system, albeit supplemented by a system of indirect taxation. Low-income earners pay little or no tax, while high-earners pay up to 45 cents in the dollar in income taxes.
But critics argue the GST is regressive. From 2000, the GST taxed consumption explicitly, thus widening the net considerably. Put simply, that means average income earners (around A$76,000 currently) will pay not only income tax, but virtually every dollar of their net income that they spend on goods and services is taxed at 10 per cent.
If a consumer saves, rather than consumes, and earns interest, the ATO will target those earnings as income tax.
Treasury forecasts cited by Dr Parkinson show that income taxes will exceed 50 per cent of total taxation revenues by 2023/24 due to wage-inflation bracket creep. This, Parkinson argued, was insufficient to cover fiscal shortfalls, as well as undesirable.
Dr Parkinson argues that the federal government’s tax review should consider increasing the GST in order to lower the taxation burden on corporations and individuals.
The Henry Tax Review also made this point: namely, that comparatively high rates of income tax and corporate tax were welfare negative relative to the revenue gains governments made in tax collection.
Don’t tax too much
As the Laffer Curve tells us, find a Goldilocks solution. Tax too little (0%) and government will raise no revenue. Tax too much (100 per cent) and the government still gets zilch, while Paul McCartney is forced to record the worst of his 1970s output on a boat in the Virgin Islands to avoid taxes. Get the tax rates just right.
Income tax cuts were the modus operandi of the Howard government. But both ALP and Coalition governments have backed themselves into a corner. Once income tax cuts became the “new normal”, particularly under former treasurer Peter Costello, it became politically impossible to raise them again.
What about raising corporate taxes? That just sends business the wrong message and they start laying off people to make their displeasure known.
And we already know what happens if governments dare to impose mining and/or resources taxes that aren’t fully tax-deductible.
That leaves increasing the GST: paid by you, the over-burdened and unfortunate consumer.
What are GST rates in other countries?
Dr Parkinson argues we should look at New Zealand. NZ started with a 10% GST in the 1980s, but ultimately increased it to 12.5 per cent and then 15 per cent, while cutting income taxes.
Now, to frighten you, here’s a table of GST (Value-Added Taxes) rates charged in the European Union (see table below).
Scared much? You should be. This is the future. Your future.
The UK started with 10 per cent and now levies VAT at 20 per cent. Germany’s standard rate is 19 per cent and France’s is 21 per cent. Of course, like Australia, there are exemptions. But it would be tempting for a Commonwealth government to include items currently on the GST-free schedule. Like (some) education services, fresh foods and (some) medical services.
As governments compete for investment, they flatten corporate tax rates as different tax jurisdictions engage in a race for the bottom.
To offset these revenue losses, governments have increasingly relied upon increasing indirect taxes, the burdens of which fall largely upon individual consumers.
If you believe Australian governments will never increase the GST, I have an excellent harbour bridge in Sydney to sell you…
No magic pudding
It is impossible to develop a tax system that combines an optimal mix of efficiency, equity and incentive. There is no such thing as a tax regime without losers.
The Australian taxation system rewards winners. But it is also peculiarly distorted: it provides perverse incentives to engage in property and securities speculation at the expense of investment in the real economy; it is structured so the states and Commonwealth engage in lowest common denominator bargaining over GST revenues, leading to a hollowing-out of state finances and underinvestment in critical state services and infrastructure; and it exacerbates this problem via a ramshackle system of fiscal federalism that promotes the uneven distribution of financial resources among states, rather than equity.
None of these distortions will be addressed simply by increasing the GST.
Dr Rémy Davison is Senior Lecturer in International Relations in the School of Social Sciences, and Associate Director of the Monash European and EU Centre.
This article originally appeared on The Conversation.