Menu lock

Federal

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 Indeed, which surveys find a majority of Australians would like the GST repealed and their income tax jacked up?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.

We recommend

From around the web

Powered by Taboola

53 comments

Leave a comment

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

  1. davidk

    What a thoroughly nasty piece.
    “The bleating welfare lobbbyand pesky poor people and those on benefits.Tey all eat rubbish food anyway so we might as well taxthe fresh stuff too. Why not tailor every tax to ensure progressivity? Much better than tailoring them to maintain the status quo I would suggest.

  2. Terry O'Loughlin

    “whereas the uppity family who prefers “organic” home cooking benefit”
    I find this appalling. Does he mean the better-off are per se “uppity”?
    Nasty indeed.

  3. mattsui

    The better off are uppity food snobs – Fact!
    Financially vulnerable families live on junk food – Fact!

    CIS – Taking the think out of think-tank.

  4. Liz45

    @ADAM C- 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?

    Taken a look at Hockey, Clive Palmer and Gina lately? Just to pick on 3 who readily come to mind? What sort of food can they afford, and what sort are they eating? There’s lots of people on moderate/high incomes who are either overweight or obese! Your comment is plain stupid! Perhaps it’s too much expensive wine? Long lunches? Laziness!

    I’m a pensioner. I do not have any money in savings nor do I receive any money from super etc. Why should I pay the same for essentials and utilities as a person on heaps of money. Your concern re people being able to save is another bit of discrimination. I pay some on electricity, gas and phone each fortnight in order to avoid big bills. The ‘service fee’ on these accounts is at times higher than say the gas I use – in summer? This is unfair! Being able to save is a dream. I don’t buy rubbish food or drinks etc and the last time I had dinner out my future daughter in law paid for me! My budget only runs to a sandwich and a coffee – once a fortnight perhaps? I raised three sons and never brought rubbish food or soft drinks.

    The GST was the first instance where pensioners and others on low incomes are taxed unfairly. You don’t seem to bother about us. Perhaps we should be dispensed with – at a certain age?

    After Howard introduced the GST he then went on to remove the surcharge on about 600,000 incomes above $100,000 to the tune of $2.3 BILLION. It could be argued that the pensioners and low income earners are contributing to this ‘gift’ to the wealthy at our expense! (Daily Telegraph 2005).

    And you’re advocating raising it! What’s your income? How much are you worth?

  5. David Hand

    Perry,
    I too can’t quite see the connection between taxation and productivity. I think the writer may have had in mind the huge chunk of an extra dollar earned that goes to the tax man when you are on the top marginal rate.

    Successive governments have reduced this by both reducing the rate and increasing the threshold where it kicks in and this has the benefit of reducing the incentives for tax avoidance and minimisation. I also agree with Ed’s point about tax lurks for the well off that damage government revenues. I’m no fan of negative gearing.

    My point about benefits and alowances for the poor was more to do with the distortions that would flow through the whole economy if GST is tailored for the poor. It’s better to charge GST on milk and then give a pensioner free milk than keep milk exempt. The middle class welfare you refer to is a red herring.

  6. Perry Gretton

    The reason food is exempt from GST is that it’s an essential. Personally, I’d add utility bills to that, as they disproportionately affect the poor.

    I don’t like the free milk approach because the potential recipients would be treated as welfare beneficiaries, which many are not at the moment. And welfare comes at a cost, too.

  7. AR

    I was esp bemused by the claim the exemptions on food, education, health, etc, … distort consumption patterns. Yeah, definitely coz spending on food, health etc is entirely discretionary, only fat, rich bastards need to eat and then be treated for obesity.
    VAT/GST or MoM, – consumption taxes arose on the Continent, specifically the Latin countries where tax evasion on INCOME is a normal as breathing.
    I think that it was F. Scott Fitz, living it up in ante bellum Paris who wrote, ”the rich are different” to which Hemingway replied, “yes, they have more money”.
    A dead cert proof is coz they SPEND it so tax it and let the rate compensate for lying about income.
    Unfortunately that’s not what we got here, income remains (also in UK post VAT).
    I would happily pay a higher rate of GST, maintaining exemptions for fresh food (an esp. nasty little aside about the poor & uppity diets but what else would one expect from a reptile of the CIS) assuming every dollar of extra GST revenue were used to cut marginal tax rates, especially the lower 15% and 30% rates.
    Make that ONLY the lower two rates AND increase the rate above $150K and I’m all for it.
    Easily done by also removing negative gearing, the greatest iniquity of the whole taxation system, giving to those that have and taking from those that have not.

  8. StrewthAlmighty

    David H

    Your point is a good one. Getting rid of the exemptions and making a compensating increase in pensions, low income offsets, welfare etc would also do the trick.

    Just to clarify….

    A consumption tax is not actually a regressive tax. It is a flat tax.

    It can be regressive with respect to income but only to the extent one assumes that the higher earner saves more (which might be true “on average” but is certainly not always true – there are plenty of high income earners living well beyond their means).

    The person that does pay a “penalty” rate of tax is the over-consumer (poor or rich or in-between). Personally I think this is a good thing since it counter-balances the tendency of Governments and consumers to live beyond their means.

    When our Govts can save and our population has a tendency to massively in-debt itself the last thing we need is a tax system that encourages borrowing and consuming rather than saving and patience. You can add things like “negative gearing” into this silliness – a specific tax concession for borrowing and consuming – the only one who argued this was a good idea at the tax forum was the property spruiker!

    In fact if we could eliminate the existing incentives in the tax system for people to over-consume perhaps we would find we don’t even need a carbon tax at all to reduce our CO2 emissions?

  9. mnenomic77

    Centre for “Independent” Studies as usual they only seem to be able to read from the neo-liberal bible. It is absurd to argue that welfare recipients will be better off by having less disposable income, which inevitably is the result of an increase in GST. Next they’ll be saying that the poor will benefit from the abolition of the minimum wage because it will “improve” productivity. When neo-liberals use a broad brush and say the “economy” will be better off what they really mean is the the average wage will increase, but inevitably the income gap will to, and the poor end up worse then they were, with the rich even richer, creating the convenient illusion that “average” income is rising. Want to raise tax revenue, bring in a robin hood style tax, tax bank transactions, bring in a super-wealthy tax, bring in higher resource taxation. But please don’t impose imposts on those who are struggling.

  10. David Hand

    George Orwell wrote with great insight about the use of language in a totalitarian society and it is interesting how such techniques are used today. Specifically, I refer to “Neoliberalism” so beloved by the left elites. “Neo” is designed to create the impression that it is a new unwelcome phenomena, whereas the underlying principles modern economic thinking have existed for thousands of years. It is the social elements of economic management such as Keynesianism (much of which I agree with) that has only been around for about 70 years that truly deserves the title “Neo”.

    Could someone who uses the term “Neoliberalism” explain what aspects of it are new? After all, free markets were not invented by Margaret Thatcher.

Leave a comment