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Ask the economists: should the GST remain a sacred cow?

The states are crying out for more cash — so should the sacred cow of the GST remain untouched? New South Wales Premier Barry O’Farrell is leading the charge for kick-starting the debate on increasing the GST and expanding its coverage. Federal political parties aren’t having a bar of that, unwilling to even raise the prospect of GST reform in the face of a hostile public. So what do the experts think?

Steve Keen, associate professor at the University of Western Sydney:

I’m not opposed to the idea of broadening the GST tax base or increasing its rate. One of the weaknesses of the Australian taxation system is that states are inordinately dependent on revenue from property speculation for their tax receipts — via stamp duty in particular — which gives them an enticement to actually want to cause asset price bubbles, since it increases their tax take.

We’d be far better off if governments weren’t dependent on property speculation for their income stream, and one way to do that is to enhance what they get from economic activity via the GST. Then we’d have them operating with an incentive to increase economic activity, which is a lot better than having the incentive to cause property bubbles. A GST rate rise would be good if it reduces reliance on stamp duty. I think there would be public protest, however.

Warren Hogan, chief economist at ANZ Research:

I think it’s unusual that taxation reviews in Australia in recent years have excluded the GST. The GST is a critical tax base for the public sector in Australia and that tax base appears to be shrinking because of changes in the economy, because of technology and because the original set-up was not broad enough. I think the breadth of that tax base needs to be looked at, and then there needs to be some serious discussion about whether that tax rate needs to move, not just higher on a permanent basis but also in connection to something that’s flexible over time, so when governments find revenue problems emerge because of economic conditions, they can raise it. And where those economic problems dissipate, they can pull it back. That would obviously require a lot of discipline. The politics of the GST have been problematic from the start, and that’s essentially the reason it’s been excluded from taxation reviews.

The first thing that needs to be done is that the base needs to be looked at critically; the international internet retail purchases under $1000 being GST-free. We have to take a long view on that. Essentially the GST base is shrinking because more and more retail activity is occurring in that space which is GST-free. The argument against putting GST there is that the cost of putting it in place is more than the revenue it raises, but what is that based on? Revenue for the next year or two, or the next 20 years? What projections about the extended online retailing is that assuming? This needs investigation in a more systemic way.

Reform requires political leadership, and ultimately that has to come from the federal level. I’d imagine that any review, any serious analysis and consideration of changing GST arrangements would have to be led by the federal government.

The consumption boom is over. That was a 1990s-2000s story. That was a Western consumer boom, and the GST was established in the midst of that. So consumption as a proportion of economic activity is going to be lower, and is now lower, than it was back then. Those two structural changes going on in the economy may necessitate that there should be a higher GST rate. The other thing is that it should be on everything. Why are there exemptions? We need to address that.

John Quiggin, from the University of Queensland’s School of Economics:

It’s clear that the states need substantially more revenue to deliver the basic services voters expect, notably including taxation, or else they need to shift some responsibilities back to the Commonwealth. There are three main options, which I list in order of preference:

  1. A Commonwealth takeover of TAFE, funded by an increase in income tax/reduction in tax expenditures;
  2. Repair of state revenue base through reductions in concessions on payroll and land tax;
  3. An increase in the rate of GST.

In terms of political feasibility, the second is probably a little easier than the first.

Alan OsterNAB chief economist:

The general economic rule is that the broader the coverage the lower the rate would have to be. But we’ve been through a pretty torturous election a few years ago about this, so I think it would be really difficult to reopen that can of worms. But in principle, basically broaden the base, don’t exclude anything and that means you can get much more.

It’s something people can look at, but you’d have to have a whole-of-government approach, the states and the feds, and I suspect it’s very difficult. It was set up that way — set up to be almost impossible to change it.

If you’re thinking about raising more revenue to essentially fund some other project then obviously it is a potential revenue raiser. The problem you’ve got is every state and both houses of Parliament have to basically agree and I think the chances of that happening are very small. The states won’t be able to do it in isolation.

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  • 1
    Mack the Knife
    Posted Tuesday, 18 September 2012 at 4:54 pm | Permalink

    All these funding shortfalls for infrastructure etc are a direct result of Howard and Costello wasting 11 years of mining boom to porkbarrel for votes rather than improve the country.

    To have the GST rate lifted means effectively all the tax cuts he gave out are having to be paid back

  • 2
    Posted Tuesday, 18 September 2012 at 5:32 pm | Permalink

    Join the rest of the OECD in having probate duty, remove the outrageous concessions on superannuation, remove the concessions on capital gains tax, extend capital gains tax to all property including residences and remove the exemptions from fuel excise. Once you’ve done that you can then consider the regressive broadening or increase of the gst.

  • 3
    Liz45
    Posted Tuesday, 18 September 2012 at 6:34 pm | Permalink

    The damned cheek of O’Farrell! He’s the one who insists that an inflated price on our utilities accounts states the (incorrect) amount attributed to the carbon price, but now he wants to increase our cost of living via hiking up the GST. Introduced by Howard, the first time any Australian govt has taxed pensioners and others on low incomes. What a bloody hypocrite!

    He has no mandate to do any of the things he’s doing/done, and certainly the Federal Govt lacks a mandate on increasing this already unjust tax. That a person relying totally on a pension is charged the same GST on electricity/gas etc is most unjust. When it’s considered that the upper middle to rich people have lawyers etc to ensure that their wealth is almost untouched! Even self funded retirees get a tax break that’s more than my annual income. So, is it fair to charge pensioners and low income the same GST? Let alone increase it!

    He has no mandate to even look for uranium reserves, let alone mine the stuff; nor to cut almost $2 BILLION from education and sack people who mostly help those who are vulnerable. God help us from Abbott if this is an indication of what conservative govts do?

  • 4
    Pinklefty
    Posted Tuesday, 18 September 2012 at 10:02 pm | Permalink

    As Gavin Moodie pointed out, the GST is regressive. Its major problem is that the burden is disproportionately borne by the poor and any increase will only worsen this.

    However, I see little merit in plundering deceased estates. The social burden imposed by retiring baby-boomers (and others) should be substantially eased by encouraging superannuation contributions — not stifling them — with the benefits to be taken as pensions.

    The family home ought to remain exempt from capital gains tax and fuel excise exemptions should be removed, except where the need for a ‘level playing field’ can be established (i.e. shipping).

    The big (and best structured) candidates for providing revenue increase are personal income tax and company tax, including resource rent tax. Good luck on finding any collection of politicians with the will, the guts and the collective death wish necessary to tackle reform in this area. (Principle? … you have to be joking!)

    The beauty of increasing GST is that the problem will be disproportionately borne by the poor. There is no point mollycoddling all those single mothers and lazy bastards or they’ll have no incentive to get decent jobs. The political consequences of hitting these bludgers are minimal, so I’m betting that soon after the next election — budget time at the latest — if other revenue sources prove insufficient we’ll see a hike in GST.

  • 5
    Posted Wednesday, 19 September 2012 at 8:16 am | Permalink

    The extremely favourable tax concessions for superannuation are overwhelmingly taken by the wealthy, most of whom would never qualify for a means tested pension anyway, so tax expenditure on superannuation is a dead weight loss - ie, revenue forgone for no change of behaviour.

    Most other transfers of wealth attract tax in the hands of the recipient, so why should gratis transfers on death of the transferor be exempt?

    The exemption of the family home from capital gains tax has distorted investment from productive investments to unproductive investment in excessive houses, and has inflated house prices.

  • 6
    Posted Wednesday, 19 September 2012 at 8:20 am | Permalink

    We agree that the gst is regressive, but didn’t Howard compensate pensioners for introducing the gst? Mightn’t one assume that pensioners would be similarly compensated were the gst to be extended or increased?

  • 7
    Liz45
    Posted Wednesday, 19 September 2012 at 10:59 am | Permalink

    @GAVIN MOODIE - As a person on a DSP pension at the time of the GST introduction, the more wealthy pensioners received more monies from Howard than people like my mate (aged pension at the time) and myself. We weren’t wealthy enough for the best ‘compensation’ - from memory in excess of $1000? I didn’t receive it! Mine was a few hundred at best - as was my mates! We were in the majority!

    The ongoing middle class welfare has extended to such an extent, that so-called self funded retirees tax concessions will outdo the pensions etc of Centrelink - it’s already almost $30 Billion and expected to rise over the next few years. When this is added to those millionaires in receipt of family benefits and aged pensions, it’s easy to see who the real ‘bludgers’ are! As I’ve learnt recently, some wealthy retirees tax concession can exceed $20,000 per year, more than the annual income of many pensioners?

    Those who support the conservatives never bring up these situations when they decry the pension/benefit yearly cost to taxpayers. When this is also added to the Billions$$$ clever lawyers assist wealthy companies to dodge their taxation responsibilities, plus the Billions to the Superannuation industry, it’s clear to see who are ‘draining’ the public purse - and it sure as hell are NOT people like myself. What adds insult to injury, no mention of the always trying to make ends meet, is the reality that I have to pay the same GST as these wealthy Australians. I raised three kids who all have excellent jobs involving responsibility and skills etc, they and their wives are taxpayers also- I’m proud to say that none of them have achieved their status by ‘leaving footprints in the shoulders of others’?

    These are just a few of the examples where pensioners are not compensated, but are actually forced into further poverty in many cases. I live in public housing, the envy of many, in an area that is sought after; I’m one of 9 children; I’ve raised three now adult sons, I save money by sewing almost all my own clothes; I have a small appetite; I’m used to jostling dollars, but some people on a pension pay more than 50% plus on private rent - how they survive I do not know? My eldest son gave me this computer (new) (my third from him), a car and pays my broadband access, my youngest just gave me an Iphone - I’m blessed, but thousands at least are not so fortunate!

    Incidentally, even though I’m in public housing, I pay 25% of my income in rent! I heard on ABC radio that most people who pay rent pay about 19% of their income in rent, and those who pay a mortgage, 20%? So when it’s boiled down to actual income, people who only have a fortnightly pension, with only limited assets (furniture, car etc) are certainly not bludging off the taxpayer at all, quite the contrary!

    Prior to the ‘07 Election Howard’s spending spree amounted to a million dollars every couple of minutes - maybe more! None of these morsels were to the poorest people in the country. Indeed, the conservatives have voted against every effort by the present Govt to remove just a couple of blatant handouts to the rich - private health insurance ‘gifts’ is one notable example. Abbott has said that public education receives an unjust amount of funding from the commonwealth? Imagine what he’d do if elected?

    The dental program introduced when Abbott was Health Minister has blown out to over $90 million per month - it’s once annual budget. It has been rorted, because I was one of the people who was charged extra and got it back from the Dentist concerned after actions undertaken by Medicare! I was NOT the only patient - there were many such incidents and even more complaints in the Illawarra. I have no doubt of the national ‘carnival of money’ that some unscrupulous dentists enjoyed - at taxpayers expense - again! The same wealthy pensioners have rorted this system (cosmetic dentistry?) at the expense of others not financially endowed!

  • 8
    Pinklefty
    Posted Wednesday, 19 September 2012 at 5:09 pm | Permalink

    Polite nod to Liz45.

    Gavin Moodie, I don’t think that we fundamentally differ on superannuation. In keeping my post brief I may have given the wrong impression. By all means stamp out the rorts, but be careful not to throw the baby out with the bathwater. We need a superannuation structure that makes most people pay for their retirement over the course of their working lives. As we live longer this becomes more important. On top of a basic levy people should be encouraged to pay more (sacrifice now, benefit later) and I prefer the carrot to the stick.

    Deceased estates are a tempting source of funds that other nations happily use, but, to me, it feels a little like interfering with a corpse. It’s probably just a psychological inhibition.

    There are good reasons for not taxing the family homes of poorer people, and selectively applying GST to the homes of wealthier people would only create greater distortion to housing prices.

    Progressive taxation is the way for me, but trying to persuade the middle-and-upper-class beneficiaries of government handouts that they need to start making sacrifices is a difficult proposition to sell. Perhaps ‘The Gruen Transfer’ could try it on ‘The Pitch’.

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