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Oct 18, 2011

Productivity needs a shot in the arm — why not a GST boost?

Iin a political climate where people are craving leadership, and Australia’s productivity needs a desperate shot in the arm, advocating a tax swap should be opportune, writes Adam Creighton, a research fellow at The Centre For Independent Studies.

No tax provokes as much irrational trepidation among our political leaders as the GST. The federal government and opposition have ruled out changes. Even the relatively academic Henry review wasn’t allowed to broach it.

Admittedly, Australians did not exactly embrace a tax on goods and services. Paul Keating’s comprehensive consumption tax — known as Option C at his 1985 tax summit — was strangled at birth. John Hewson boldly advocated a GST from opposition and lost the “unlosable” 1993 election. John Howard took a GST to the 1998 election and just scraped back in to office, losing the two-party preferred vote. An economically illiterate Senate then mangled it, insisting “fresh food” be exempt, for instance.

But more than 10 years on, few complain about the GST. Indeed, which surveys find a majority of Australians would like the GST repealed and their income tax jacked up? None that’s credible.

Drawing conclusions from three data points is foolish. Keating’s tax was thwarted by a timid prime minister. Hewson’s advocacy was no match for Keating’s relentless rhetoric, and Howard’s earlier undertaking to “never, ever” introduce a GST hobbled his campaign. By contrast, across the Tasman, John Key’s government last year increased the rate of GST by 2.5% to 15%, and cut income tax, with little protest.

Keating, Hewson and Howard were not political masochists, they were trying to inject commonsense into Australia’s tax policy. They wanted a tax system that would make Australians more prosperous. Our income tax did, and still does, severely penalise saving. For example, a worker who chooses to forgo some mindless consumption and save instead has his income taxed twice — when he earns it and the income it generates when he saves it. That savings income should be compensation for inflation and a reward for patience.

Taxing saving is not only immoral but economically damaging as well. The Henry review reckoned raising income tax causes about three times as much damage to welfare as lifting the GST, quite aside from the absurd level of complexity that income tax fosters, from which a vast cadre of rent-seeking lawyers and accounts hang.

So the political class’s beloved “working families”, perhaps about 10 million voters, would in fact be naive to reject a GST-for-income tax swap — assuming every dollar of extra GST revenue were used to cut marginal tax rates, especially the lower 15% and 30% rates. The shift only needs clear political advocacy and will.

The best GST reform would be to remove the exemptions on food, education, health, etc, and not increase the rate from 10%. A round figure is not its only virtue: a tax’s economic damage is roughly the square of the rate, and the existing exemptions distort consumption patterns and add complexity. Removing them would probably raise an extra $15 billion a year, enough to make substantial cuts to lower marginal tax rates.

The welfare lobby will bleat regardless — what about “the poor”? What about people “on benefits’?

It’s true that in general people on lower incomes will spend a larger proportion of their incomes on food, although not necessarily fresh food that is GST exempt — look at how obesity rates and junk food consumption correlate with income. Nevertheless is it fair that poorer people who prefer to dine out be punished, whereas the uppity family who prefers “organic” home cooking benefit?

It is absurd to try and tailor every tax to ensure progressivity — especially as blunt an instrument as a consumption tax. The carbon tax, tobacco and alcohol taxes, car rego and train tickets all fall disproportionately on people with lower incomes too. Income tax will still exist to maintain progressivity in the overall system. It is better to collect revenue simply and efficiently and then debate how best to redistribute it.

The only opposition to sound GST reform is the welfare lobby (which is weaker to the extent fewer people are on welfare). But even it should reconsider its position. If it were genuinely concerned with low-income groups, it would agitate for tax reforms that enhance the economy’s long-run prosperity, which benefits everyone. This includes levying efficient taxes, which encourage saving, investment, job creation, and fewer public servants.

Today, in a political climate where people are craving leadership, and Australia’s productivity needs a desperate shot in the arm, advocating a tax swap should be opportune.

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53 thoughts on “Productivity needs a shot in the arm — why not a GST boost?

  1. Tom Jones

    What is not stated here is the regressive nature of the GST and the impact on poor families is far greater than on the rich. What is being argued here is that the poor should subsidise the rich. Income tax is fairer as it means that people pay tax in accordance with their means. Expecting higher levels of GST will not be compensated by lower income tax for those who don’t reach the tax free threshold such as age pensioners. Of course the writer would probably argue that pensioners should be encouraged to work and to stop being a drain on society.

    Food is about survival and rightly fresh food was left out of the equation in the first place and people will rightly reject the self serving arguments in this piece of class warfare demanding that they pay more GST and have it on food as well.

  2. Perry Gretton

    @Tom Jones: You’ve summed it up well. It’s not just pensioners but self-funded retirees, part-time workers who barely make a living wage, and those on welfare who are more adversely affected by goods and services taxes.

    The Howard government progressively reduced the tax rates for high earners, and there’s much to be said now for raising the upper thresholds to provide a more equitable contribution by wage and salary earners.

  3. Modus Ponens

    Lets restore the capital gains tax to tax the entire profit, and remove negative gearing concessions and use that money to reduce taxes on income in the 15-30% range.

    If we still want to reduce taxes that punish income and (moderate) savings, then we can talk about expanding the GST, but it shouldn’t be the priority.

    And Tom Jones you are wrong in assuming that income tax is fairer – it is the rates that make it either fair or inequitable. When lower income earners (mothers or unemployed moving into part time work) face effective tax rates of 60 cents in the dollar while those earning over $180k only pay 45% on all income OVER $180k – you have got a distortion.

    If you push up the higher rates and pull down the lower rates with money raised through a wider GST base, it would be a fair trade off, but there are fairer ways of raising revenue.

  4. mattsui

    Here we go again.
    Where is the link between tax rates, particularly sales tax and productivity?
    Is it really necessary to include remarks about “the uppity family who prefers “organic” home cooking” (everyone knows “organic” foods are cost prohibitive any way so the point is moot) while pretending to advocate for low income diners (wtf?).
    The Author completely ignores the position of the states (remember them?) in his race to tax spending. GST revenue is intended to be returned to the states and any tampering with GST Federally will cause much nashing of teeth at COAG meetings.
    I agree that the GST should be part of any tax reform discussion – it’s not untouchable. But the suggestion that an increase in the basic cost of living through an increse in consumption tax is somehow a gift to low income earners?
    Typical of the disingenuous rogues at the CIS.

  5. David Hand

    It has often made me wonder why politicians of all persuasions shy away fron any change to the GST when it is such a key stream of revenue that operates in such and efficient (for the ATO) way. Tom’s contribution puts it all into perspective. Politicians would be in for a deluge of left elite hand-wringing about the regressive nature of the tax and Wayne Swan simply doesn’t have the stomach for those “hard decisions” that pepper his rhetoric but not his policies.

    Every rent-seeker from book lovers, to academics to union hacks to organic food marketers wouls march the streets in passionate defence of the poor and disadvantaged should a change to the GST be contemplated. If that doesn’t knock it on the head then emotional articles by people who are “ashamed to be Australian” or “ashamed of the selfishness of Australians” would appear in organs like Crikey.

    So I understand Wayne’s timidity.

    I will just make this point. Our society needs to have enough people generating wealth in order for it to be redistributed to the disadvantaged and though this leads to inequality, it is the only proven way for our society to function well. Taxation policy needs to be designed for the middle 80% of us – those who pay the most tax and generate most of our GDP. If you try to design it for the bottom or the top, you mess the whole thing up. The best thing for the low income set are special measures such as benefits and allowances not a distortion of the whole system to everyone’s loss.

    A consumption tax like the GST should be as broad as possible in order to play its part in the revenue mix the governments need. I’m not sure about the connection to productivity but I am confident it would incentivise people to work harder in a way that pushing up the marginal income tax rate would not.

  6. Ed

    Another load of crap from the CIS. Why crap? Because any article by a so called research fellow that uses “welfare lobby” and “bleat” in the same sentence deserves no better. Why is it the disingenuous who always resort to the poll tax/consumption tax to raise revenue? Personally I would not mind an increase in the GST if it was accompanied by removal of negative gearing on residential property, removal of tax breaks on unearned income, removal of family trusts as tax avoidance schemes and increase of capital gains tax to income tax levels.
    But wait on. If we removed all those tax breaks for the financial elites we wouldn’t need to increase the GST.

  7. Sean Doyle

    @MATTSUI: Presumably by “poorer people who prefer to dine out be[ing] punished”, Creighton refers to the brutal price hikes soup kitchens patrons suffered when the GST was introduced.

    As pointed out by others, cuts in income tax to compensate for GST rises aren’t actually very generous for people whose income is under the (rising) tax free threshold. As for this:

    Um, actually we as a society do try to tailor such charges/taxes to ensure progresivity by having concession public transport tickets and different car rego arrangements for people on lower incomes. Far from absurd, I think there should be a fair bit more of it. The carbon tax will fall hardest on those who use the most carbon, which tend to be well off people who can afford to operate high carbon emitting objects in the first place.

    Nice of you to conflate tobacco and alcohol taxes with public transport and car rego too. Some people recognise that alcohol, and in particular tobacco, aren’t exactly an essential of life and costs society far more than it benefits, therefore justifying the government’s efforts to recoup some of the expenses these drugs force upon it. But I guess we’ve got to keep the sponsors happy, eh Andrew?

    Really now Crikey, I’m all for diversity of opinion that challenges my own stances on issues, but given that this article is little more than assertion driven bollocks, I demand that any such future articles of similar ilk be published through the filter of a FDOTM cartoon.

  8. Sean Doyle

    Oh feck, someone fix the luddite’s HTML code please.

  9. Perry Gretton

    “The best thing for the low income set are special measures such as benefits and allowances not a distortion of the whole system to everyone’s loss.”

    @David Hand: On what objective basis is it best? Recent experience shows that “special measures such as benefits and allowances” are directed to the middle class. Someone obviously thought that was “best” for the middle class.

    There is no natural state of taxation, direct or indirect. Systems are designed to collect revenue sufficient to meet policy needs without encouraging too much in the way of avoidance. They may also have a social objective in ensuring that the burden is shared equally according to the capacity to pay. However, it’s very difficult to “incentivise people to work harder” via taxation. Apart from the nexus between productivity and taxation being questionable, productivity is affected by other factors, not the least being investment in new equipment.

  10. John Bennetts

    Tom Jones is dead wrong to assert that GST is regressive and that income tax is fairer.

    Can’t he read?

    Quote: “The Henry review reckoned raising income tax causes about three times as much damage to welfare as lifting the GST.”

    This is pretty plain to me. He’s arguing against his own team in this debate.

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