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GST: no longer a growth tax « Previous | |Next »
October 1, 2011

George Megalogenis is one of the better columnists in the News Ltd stable. He discusses policy issues instead of politics, and he does research instead of the polemics against, and yelling slogans about, the Gillard Government. It makes a welcome change from the superficial nonsense that is routinely peddled by the mainstream media.

His Swan needs to read the bottom line; the GST is burning a hole in his budget column in The Australian is a good example as it highlights one of the issues that needs to be addressed in tax reform. The Australian tax system does require an overhaul to facilitate a more productive economy.

In his column Megalogenis raises an important issue:

The GST was supposed to abolish inefficient indirect taxes and take the weight off income taxes. It was also meant to leave the states better off, because the GST replaced the annual begging-bowl festival of the premiers' conference. The GST achieved all three goals for a while, but the past few years have seen John Howard's proudest reform lose its value to the nation.

The temptation on the Coalition side is to blame every red mark on fiscal policy since 2007 on Labor, but the GST is unarguably the Coalition's baby. At the peak of its revenue-raising powers in 2002-03, GST collections were worth 3.9 per cent of gross domestic product. The final Peter Costello budget in 2007-08 left them at 3.7 per cent. Next financial year, they will be 3.4 per cent. The gap of 0.5 per cent of GDP may well be the difference between federal surplus and deficit in 2012-13.

Simply and directly stated: the GST is no longer a growth tax. That has implications for the states since they depend on the commonwealth for nearly a half of their revenue.

It cannot be laid at the door of the Gillard Government because the GST was the Coalition's baby and three of the nation's four biggest states - NSW, Victoria and Western Australia - are already in conservative hands. Every dollar Canberra doesn't raise from the GST is one more dollar the states have to find elsewhere in their own budgets.

Megalogenis also give us an explanation for why the GST is no longer a growth tax. The advice in this year's budget is that the GST is losing ground because the items not in the base - food, rent, health and education - have experienced faster price rises than the goods and services that are taxed.

Megalogenis also highlights the significance of the GST 's decline for the federal government and states:

Swan and the conservative states have a mutual reform interest in the GST. Swan needs to restore federal revenue as a share of GDP, while the states know they have to secure their budgets beyond the phony accounting of property and gambling booms. Voters in NSW and Victoria, in particular, dismissed their Labor governments because they had not spent enough on public infrastructure. If Barry O'Farrell and Ted Baillieu want to avoid history's stain of being do-nothing premiers, they need more revenue from Canberra so they can open their wallets on behalf of their states.

So Australia has a policy problem that rises above the current right left polemics hostilities. Should there be a 12.5 per cent GST? Or a GST with an expanded base? What should be done with the inefficient indirect taxes (eg., stamp duties) of the states? Should the GST continue to be used to take the weight off income tax?

These are issues that should be included for discussion amongst others in the two-day tax forum this month. A tax forum discussion paper has been released.

| Posted by Gary Sauer-Thompson at 9:50 AM | | Comments (9)
Comments

Comments

The Federal Treasurer, Wayne Swan, has emphatically ruled out any change to the GST.

The prime purpose of the GST was to act as a regressive tax on all citizens of lower incomes and privilege those on higher incomes.
It constituted then and now a deliberate transfer of tax responsibility away from the richer and on to the poorer.
Simultaneously the Howard COALition, in brazen pursuit of its class war, gave billions of dollars [a key word being 'gave'] to the richer in tax cuts and super subsidies, decreased the % of tax paid by companies and allowed the share of national income of wage and salary earners to decline as the share of profits and dividends increased at the expense of most of the public.
In the past ten years or so we have seen a decrease in the net income of lower earners relative to the greater share of the national pie given by fiat to the richer segment.
The result has been a significant increase in inequality of wealth and income in Australia along with a significnt increase in the % of people living below the poverty line.
2 separate but related phenomena.

Cutting GST altogether and substituting a heavily progressive lift in marginal rates on those who earn way above the mean/media/mode incomes would be the only democratic equitable action to take for a government and society that values equality of opportunity and justice.

It won't happen.
Ain't even looming vaguely on the agenda horizon.

"Free speech' and all that, as practised by the media moguls, has 'disappeared' equity as a social issue.

fred,
What if the tax free threshold was raised to $24,000? Would that change things?

George
Bracket creep is one of the problems.
With inflation and general rise in incomes the tax free threshold would need to be raised at least every quarter year.
The problem is GST is a fixed rate, all pay the same tax and its regressive. 10% [whatever] of a low income which has to spend a large fraction of that income on essentials eg food transport housing clothing has far greater impact than the same flat rate on a high income which has a greater discretionary income to play with, a higher net income.
The poor may have only a few dollars, or less, per week to 'play' with after essentials, the rich have only a few hundreds or thousands.
One of the disguises that the right uses is to selectively quote average income figures, far more meaningful are median or mode figures or to look at those who are below or above average.
Its a con game. Check out detailed ABS stats on income distribution and I reckon you'll be surprised at how many people earn so little in Oz.
One in 9 live in poverty and most pay GST at much the same rate as the other 8 in 9.

The simple answer is to get rid of GST and replace it with the higher marginal rates for high incomes that it replaced.
But that is politically unacceptable, the media would scream, even tho' Australians pay a low rate of tax cf other developed countries. Notably excluding the US of course who provided the model for Howard's attacks on the poor and the US citizenry is currently reaping the whirlwind.
The notion of the social contract was demolished in the Bush [the elder]/Howard/Blair era and poverty in those 3 countries has been accordingly exacerbated.
I recently flew on United Airlines who kindly point out to their passengers that 1 in 6 Americans suffer from hunger and ask their passengers to donate loose change.
Nice eh?
I remember when Gareth Evans raised the talking point of raising marginal tax rates and the media jumped all over him.
It just ain't on.
Should be.

The two speed economy was effectively entrenched with the collapse of Rudd's government through indecision over its last six months and Gillard's ending of the earely reformist mood of Labor with its retreat from the mining industry and the Murochists over the resources tax.
Labor CAN do this sort of work, it needs to get down to work, now, now that Gillard's honeymoon period is over and stop being distracted by the right's faux issues.

We are stuck with the GST. There is no going back to a pre GST world. So tax reform, if it has any relevance for us, has to make the tax system fairer.

Why not impose impose a tax on transactions in financial markets--a financial transaction tax (FTT)?

How about a congestion tax? The Henry Review recommended that Australia adopt congestion charging to deal with urban sprawl. Since it is private vehicles that cause most of the congestion, why not charge people for clog the roads for using them – and then funnel that money into better public transport.

or a property tax instead of stamp duty? The Henry Tax Review wanted to radically reform the entire state-based stamp duty system altogether, replacing it with a broad-based land tax which would have been far more efficient and more equitable. Labor ducked.

As Ross Gittens points out one of the ground rules Wayne Swan laid down for the tax forum was that all proposals for tax reform had to be ''revenue neutral'' - if you cut one tax you have to increase another by the same amount.

You'd like to pay less company tax? So we'll increase the rate of the GST to cover it; and increase the rate and remove the exemptions for food, education and health care.

Corporate Australia wants to increase GST revenue far enough so that Australia could also afford to abolish the payroll tax business keeps whingeing about.