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 Indeed, which surveys find a majority of Australians would like the GST repealed and their income tax jacked up?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

    Lady WP

    Firstly, I don’t think anyone has suggested a complete removal of income tax.

    But to consider the maths. Let’s say we increase GST to 25pc, eliminate income tax, and provide a fixed rebate of $5000 dollar per taxpayer,

    A person who earns 20,000 and spends it pays Nil tax.

    A person who earns 20,000 and saves some gets a net refund of tax.

    A person who earns 150,000 but spends 200,000 due to a penchant for fast cars and credit cards pays 50,000 tax.

    A person who earns 150,000, spends 100,000 and donates the rest to Greenpeace pays 25,000 tax.

    The way I see it we end up with a much simpler system (which benefits everyone) and everyone’s a winner except for the person with the fast car fetish.

  2. Lady White Peace

    STREWTHA yes it could work but I think we need to look at a slightly more generous amount for the lowest income person. no one can save if on $20.000pa unless they have their own (paid off) pad ,car,furniture etc. $140 pw just for food. Another $150pw ( possibly more now) for gas, elec, phone, council rates and water rates, home and car insurance plus rego. Only leaves $110 pw week for fares to and from, or petrol. Doctors/dentist/pharmacy/ dog or cat food, and the odd newspaper,magazine,book and there would be nothing left to save. Oh and I did forget shoes and clothing…even a pair of shoes pa and 3 new pieces of clothing…..oops forgot underwear and stockings….well there you go not only nothing to save, but not enough for the basis necessities.

    If I were the Treasurer AR I would not tax anything under $30000 and i would give a fixed rebate of $5000 pa to be used for educational purposes. We don’t want to end our days being dumber than is absolutely necessary.:)

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