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 Indeed, which surveys find a majority of Australians would like the GST repealed and their income tax jacked up?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

    Strewth …

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

    Did anyone else notice that? Oh dear. Where does one begin?

    Otherwise an interesting discussion…

    I had this strange silly notion that the GST distribution deal we worked out with the states was supposed to lead to all these absurd archaic State taxes on economic growth being swept away. Was I dreaming? What happened?

    Rather than urging the government to commit political suicide, why isn’t the CIS fella focusing some energy on getting the States to live up to their side of the deal and get off the back of economic growth and activity. Yet now we see them pulling swifties on mining royalties and clinging like a tick to the economy.

    The Commonwealth pushes the accelerator, the States slam on the brakes. Henry Parkes – you bastard!

  2. Tim Vernum

    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

    Only if you’re so blind an economist that you believe money => happiness.

    Income disparity is as much of an issue for low-income groups as raw purchasing power. Once people reach a certain level of income, such that their needs are well covered, and they have enough control of their financial position to not be in fear of destitution, their issue becomes one of social inclusion and cohesion.

    If you live in a community where everyone can afford food on the table and roof over their heads, and a couple of drinks at the pub on Friday night, then everyone is generally happy with their economic position, despite the fact that they can’t afford 65″ TVs or overseas holidays.

    However, if some members of the community become more prosperous, and start to be able to afford the TV and holiday, it sows discontent. And when it gets to the point that 80% of people have those things, and only 20% don’t, then those 20% start to have issues. Yes, we can cast that as envy and coveting, but we can also cast it as community members feeling as though their are not receiving a fair share of the wealth. And it’s not always TVs and holidays. It’s could also be music/sports lessons for their kids, private schools, private health insurance, etc.

    Simply increasing the overall economy’s prosperity, without doing anything to reduce income disparity, is not necessarily a benefit to the poor.

  3. Perry Gretton

    My take:

    Neoliberalism is a political rather than an economic concept. It combines generally socially progressive (i.e. liberal) views with an emphasis on economic growth.

    Neoconservatism is focused on returning to traditional values, i.e. those that preceded the post-war liberal views.

  4. FunkyJ

    Books weren’t exempt from GST, despite many arguing at the time they should be, and now look many major book retailers are still about in Australia…

    Sure, it was a technological shift which caused bookstores to decline, but you can bet your balls that if books were GST-free people would have taken longer to consider shopping online at Amazon or the Book Depository.

  5. David Hand

    Hey, Perry,
    What do you think the difference is between “Neoliberalism” and “Liberalism” and what do you think the difference is between “Neoconservatism” and “Conservatism”?

  6. Peter Ormonde


    I will try yet again…

    I stuck a post on here at 10.03am. As a small test I called the Father of Federation Henry Parkes a B*st*rd… not an utter B*st*rd or a proper B*st*rd which would have been insulting. He was just a silly B*st*rd. That post is still awaiting moderation.

    When I saw this annoying little moderation message on the post, I wrote a second message for the consideration of your good selves. It was not offensive or rude in any way and it made a couple of decent points.

    It ran something like this: Now yesterday on Crikey I was called a pederast by one of your anonymous abusive trolls. This went straight onto the site without a blink – I use my real name here. I am publicly identified.

    But use that most irreverent of Australianisms – the B word – and the post is swept up into the arms of Sister Mary Moderation for a moral evaluation.

    This reflects the American origins of this closed holy order of moderators … a moralistic culture where the B word is regarded with alarm and where, I might add, your old veiled reference to the Lord Redeemer (Crikey) would be hauled before the good mod-bot sisters for a full cavity search.

    You are thus lending the yanks a helping hand in grinding the rough edges off our public discourse … trimming off the uncouth bits and shoehorning us into the American mold. Top job.

    That second post – making the very legal points outlined above – has been deleted in its entirety.

    So now I am adding this addendum:

    Not the mainstream meeja perhaps … but mainstreaming the public language is apparently quite OK. So apparently is calling a nice old bloke like me a pederast.
    Apologies all round for all of it please.

    I expect both this post to be published and the publication of the now legally requested apology. Pronto.

  7. Policeman MacCruiskeen

    ‘Ello, ‘ello, ‘ello boi jayzuz do I smell the hint o’ a breach of the law with even tha possibility o’ a breach o’ the peace as well. This talk of’cavity searches and breaches has The Truncheon fair twitchin’. Up against tha wall Croikey and spread ’em.

  8. Perry Gretton

    David, the difference between neoliberalism and liberalism is the emphasis on growing the economy as a key feature (like New Labour in the UK). Neoconservatism differs from classical conservatism in its radical nature.

    These definitions are how I believe them to be. Others far more versed in political science may challenge, refine, or refute them.

  9. David Hand

    Thank you for your comment. It is possible that modern economic and political thinking differs from more traditional views.

    The other possibility of course is that the term “neo” is simply a construct of the left elite to isolate the current enemy, the economic leaders of the free world, into some sort of radical clique that can then be demonised without resorting to awkward parallels with the past. After all, if modern economics is based solidly on long established principles such as those articulated by Adam Smith, it is harder to oppose than if it is some flaky idea invented yesterday.

  10. David Hand

    Hey Peter,
    I share your pain. I was moderated completely out of the discussion following Bolt’s court case.

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