GST Reform: Higher, Broader or Both?

Thursday 3 April 2014 @ 11.22 a.m. | Taxation

In an article reporting on suggestions by the WA State Government that a GST rise was needed back in August 2013 prior to the last election The Conversation pointed out that:

"[t]he question remains, however, would it be good policy to increase the GST or to change the GST tax base?"

Recent statements by former Treasury Secretary Ken Henry who recently stated that the GST will have to be raised in the future and  the statement today (3 April 2014)  by Treasury "boss" Dr Martin Parkinson who suggests that the GST should be applied more broadly,  indicate that the question about GST still remains high on the debating list of economists and tax lawyers.

The Head of Treasury's View

Dr Parkinson is reported in today's press as having suggested in a recent speech to the Sydney Institute that the GST should be applied to more areas of daily expenditure, for example, to health care. As well, he is reported as suggesting that the fuel excise should be indexed to see it increase in line with increases in inflation.

The change to a more broadly based GST and fuel excise is justified by Dr Parkinson because without such changes the government's revenue source would increasingly become more reliant on personal income tax, which is "less efficient than consumption-based taxes" like the GST and fuel excise.

Indexation is an important part of the case being made because without indexation of consumption based taxes, like GST and fuel excise, the governments revenue take declines even more quickly. As Dr Parkinson is reported to have said:

"We will move even further in this direction [into economic decline] if, as we anticipate, the relative share of total indirect taxes, including GST, continues its long-term decline, . . . Contributing to this decline is the non-indexation of fuel excise, unlike other excise rates, and a rising proportion of consumption outside the GST net, for example, in increased health expenditure".

The argument for indexing and a broader base considers that continued increases in the "personal income tax burden" will effect hardest lower and middle income earners with higher marginal and average tax rates and will result in less not higher productivity or to use the jargon - "adverse labour force participation impacts" - at the other end of the scale it will increase the incentives for high income earners and the wealthy to minimise their tax.

Reliance on direct and indirect taxes, as well as income taxes, has "changed little since the 1950s" according to Dr Parkinson, who is also quoted as saying that:

". . .[r]esearch consistently says that reduced reliance on income taxes and increased reliance on other, more efficient sources of revenue, including indirect taxes, can support higher growth and higher living standards by increasing workforce participation and lifting productivity . . ."

The Former Treasury Secretary's View

Preceding Dr Parkinson's views above were those of former Treasury secretary Ken Henry who a recent "7.30 Report" indicated his view that it was almost inevitable that the GST would need to be raised in the future and further warned that budget cuts would not be enough to fund spending on new social programs such as, the NDIS and the Gonski Reforms to education.

In the same interview, Mr Henry also defended the mining tax and warned the current government against replacing the carbon pricing scheme. He also pointed out that, viewed with hindsight, tax cuts handed out by earlier governments had been a mistake because of the pressure they had put on the current federal budget. This mistake, Mr Henry argues, had created a structural budget deficit making "lifting the GST rate . . . inevitable" and necessary to shore up not only future Commonwealth budgets, but also the budgets of the states.

Reaction

The Federal Government has remained consistent with it's pre-election view that it would not seek to increase GST, although it has allowed it to be considered in the overall review of the tax system which it is currently undertaking.

The opposition has reacted to Dr Parkinson's comments through Treasury Spokesman Chris Bowen who is reported as saying that the ALP "will not support any changes to the GST, although [the ALP] agrees on the need for tax reform". Mr Bowen's reported view is that: "There are too many taxes raising not enough money . . ."

Then there is the reaction expressed by The Conversation in its pre-election 2013 piece on GST mentioned above, that the GST is a "regressive tax" which some argue is viewed as a positive feature, in that it forces low income earners to make more of a contribution to the public purse than does an income tax. Those that argue its a negative feature worry about the so-called fiscal illusion aspects of the GST especially, how raising GST rates is very easy, especially once it has been done a first time. The fear being that:

" . . . [i]f community acceptance of changes to the GST were to occur, very quickly we’d find ourselves paying more and more in GST. That is very much the European experience".

Ahead?

It would seem that even with all the talk of "heavy lifting" the real and difficult reforms to tax required for the Australian economy remain very much an "elephant in the room" which only the experts like Dr Parkinson and Ken Henry are willing to raise publicly while the political party camps all continue to avoid them - at least publicly anyway.

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