By Michael Janda
Online business reporter with the ABC.
Reposted from The Drum
Increasing the GST is widely presented as the logical, perhaps the only, solution to Australia’s revenue shortfall, but it is a deeply flawed tax and there are better alternatives, writes Michael Janda.
It is presented as a fait accompli that a GST increase is good economics, even if it is poor politics.
However, the tax only fulfils one-and-a-half of the widely recognised principles of good taxation – efficiency, equity and simplicity – and even that assessment might be generous.
The GST is rather efficient at collecting revenue without disrupting economic activity – in economist speak, it has a low marginal excess burden, or deadweight costs.
A recent Treasury paper estimated its marginal excess burden as being 19 cents – that is, for every extra dollar of tax raised 19 cents of economic activity is lost.
While that is a lot better than stamp duty, which costs the economy upwards of 70 cents for every extra dollar of tax, it is a lot less efficient than land tax (such as council rates) which actually adds around 10 cents to the economy for every extra dollar raised.
The reason that land tax is so efficient is that it does not distort economic behaviour – people cannot increase or lower the supply of land in response to the tax, while people can (to some extent) avoid buying or selling properties to minimise stamp duty.
In fact, land taxes encourage the most economically efficient use of land, because you are paying the same tax on it whether you leave it vacant or build 50 apartments there.
Plus Treasury reckons that foreign land owners would pay about 10 per cent of it, hence the net benefit to Australia.
The GST is also not that much more efficient than taxes on labour income (if levied at a flat rate, like GST) and is actually less efficient than a flat tax on unearned personal income (such as capital gains or dividends).
Treasury explains it thus:
The taxation of labour income and GST both affect the real purchasing power of wages, with a similar incidence on labour supply.
In other words, they may target you at different points, but both income tax and GST take money from your pocket and you may alter your economic behaviour to avoid or minimise them.
Overall, the GST does tick the efficiency box, but there are other taxes that score better or equally on this front.
On simplicity, the GST gets half a tick.
On one hand, it is undoubtedly simpler than the raft of indirect federal sales taxes it replaced, each with varying rates and exemptions.
However, Australia’s GST suffers from its restricted scope, with exemptions for health, education and fresh food.
While these exemptions seem straightforward, there are many areas where they add complexity for business.
The border between fresh food and cooked/transformed food is notoriously arbitrary.
As is the distinction between condoms (GST exempt as a health product) and tampons (apparently not a health product).
Then we get to optometry. Prescription lenses are GST free, but the frames that they are held within are subject to the tax. Normal contact lenses are GST free, but coloured contact lenses are considered fashion, not health, products and subject to the impost.
If the increase in GST was delivered through applying it to everything, then that would see the simplicity box ticked.
However, the public discussion seems to have moved much more towards raising the rate rather than extending the tax base.
This leads us to equity because, perhaps counterintuitively, widening the base by including health, education and fresh food is likely to be more equitable than simply raising the tax rate.
That’s because higher income households tend to spend more on private health and education that would attract the tax, while genuinely low income households are largely reliant on free public services.
But, even if the base were broadened, the GST is an inherently regressive form of taxation.
Lower income households need to spend most of their income to survive, while higher income earners can save quite a bit.
Since the GST taxes spending, but not saving, it takes a greater proportion of poor people’s income than it does of rich people’s.
The GST is inherently indiscriminate – it taxes people on high, middle, low or no incomes equally on everything they purchase that is subject to the tax.
No compensation program can hope to completely erase the inequities that the nature of this tax creates.
A good, if slightly facetious, example is children.
If an eight-year-old, whose income is $5 a week pocket money from mum, goes down to the corner store to buy an ice cream she will pay GST.
Will she be compensated if the GST goes up from 10 to 15 per cent and her ice cream costs $2.30 instead of $2.20? Probably not, unless her mum kindly adjusts her pocket money.
Does our eight-year-old even get a say on whether the GST should rise? No, she cannot vote – a classic case of taxation without representation.
There are many other tax changes out there that would improve economic efficiency, increase the simplicity of the tax system and specifically target higher income earners with the capacity to pay.
For example, abolishing or reducing some of the generous superannuation tax concessions, closing off tax deductions used for negative gearing strategies or introducing a broad-based federal land tax.
So when you are weighing these options against increasing the GST, you should think about the children.