Nevertheless, one thing has kept it in the policy debate: it’s an economically ‘efficient’ way to raise tax revenues. Some taxes are particularly inefficient: for instance, a tax on corporate profits makes some foreign investors think twice about setting up a business in Australia. These inefficient taxes slow economic growth. But, because it taxes spending on goods and services, the main effect of a GST is to reduce overall spending and increase saving. That could actually be a positive in a capital-hungry nation like Australia.
So, in focusing on the broader issue of the most appropriate mix of taxes for Australia, both now and in the future, the subject of whether the GST should be reviewed has come under scrutiny.
The gains from GST reform were identified in the two most convincing big-picture economic reform analyses of 2012. In a June 2012 report called Game-changers: Economic reform priorities for Australia, the Grattan Institute’s John Daley named tax mix reform as one of three major reforms that would significantly raise Australia’s growth rate. Gary Banks made the same argument in a landmark November 2012 speech, Productivity policies: the ‘to do’ list, at the end of his term as Productivity Commission chairman. And Professor John Freebairn, another of the biggest names in Australian economic policy analysis, argues that GST reform “could be one of the most effective and easiest options to help reverse Australia’s lagging productivity growth”.
[breakoutbox][breakoutbox_title]Beyond the GST[/breakoutbox_title][breakoutbox_excerpt] Other issues in the Budget spotlight[/breakoutbox_excerpt][breakoutbox_content]
- Have a mature debate about real taxation reform across all bases of revenue.
- Create a special concessionary tax rate for small business. The concession would compensate for the impact of regulatory compliance on small business and encourage entrepreneurship.
- Make financial planning advice fees fully tax deductible. That will let more consumers get affordable financial advice and ultimately cut down Australians’ reliance on government-provided retirement benefits.
- Make more of the reforms set out in the Henry Tax Review to encourage growth and entrepreneurial activity. Develop long-term strategies based on the review.
- Review the Fringe Benefits Tax to ensure it lines up with contemporary business practice and to reduce the cost of compliance. This can help cut business costs substantially without costing the government much.
- Raise the superannuation contribution cap, so that people aged 50 to 60 can contribute up to $50,000 per year concessionally and over-60s can contribute up to $75,000.
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The case for expanding the GST is not just that we need more tax at a time when revenue
from corporate taxes, stamp duty and many other taxes is falling. Most of those who argue for GST reform want a tax system that does as little as possible to get in the way of a functioning economy. And that leads them to suggest using extra GST money to cut a range of Australia’s most economically disruptive taxes.
For some, such as Daley, that means raising $31 billion in new GST revenues to fund income tax and corporate tax cuts (and to compensate those who would otherwise lose out from this change in the tax mix). Daley wants to “broaden the GST base” by taxing almost all the goods and services now exempted from the GST, including education, health and fresh food. Daley argues that such a reform could add $20 billion to Australian GDP by 2022.
Others suggest targeting even more inefficient and poorly regarded taxes, such as insurance levies, vehicle stamp duty and commercial conveyancing duties. More than most taxes, these hit a narrow range of activities and encourage people to change their ‘normal’ patterns of behaviour. For instance, as Bank of America Merrill Lynch chief economist Saul Eslake points out, stamp duties discourage builders from building new homes and discourage people from moving to places where they might find better work. As a result, these taxes do a particularly good job of cutting economic efficiency.
Abolishing these troublesome taxes may offer an even bigger bang for the tax reform buck than cutting income and corporate taxes. Even if the GST’s base was not broadened, official 2009/10 figures suggest a 5 per cent increase in the GST rate (raising more than $20 billion) could fund their removal.
Many business groups emphasise that any revenue raised as a consequence of changes to the GST must be used to lower or remove inefficient taxes and to legitimately increase productive capacity in the economy.
[breakoutbox][breakoutbox_title]The harsh politics of the GST[/breakoutbox_title][breakoutbox_excerpt]
Both sides of the political fence have avoided arguing for either a broader or a higher GST since its introduction in 2000. Neither of the major parties sees the GST as a vote-winner, so there’s no political interest in improving it.
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Both sides of the political fence have avoided arguing for either a broader or a higher GST since its introduction in 2000. Neither of the major parties sees the GST as a vote-winner, so there’s no political interest in improving it.
Recent opinion polls only partly support this attitude. An October 2011 Essential Media poll recorded 39 per cent of voters as believing the GST had been “good for the country”, with 30 per cent calling it “bad for the country” and 31 per cent opting for “neutral” or “don’t know”. Those numbers suggest an expanded GST is politically risky and yet potentially doable.
But history has taught all political parties a different lesson.
The conservative side of politics is scarred by the memory of the “unloseable” 1993 election, when it wholeheartedly adopted a GST and was defeated. It is also widely (though perhaps wrongly) believed that advocating a GST almost cost the Howard Government the 1998 election. Says Peter Reith, would-be Liberal Treasurer in 1993, “on the two occasions the GST was put to the people at an election, it cost us votes”.
Labor, on the other hand, has systematically opposed a GST since the Hawke Government considered, adopted and then rejected it in 1985, 28 years ago. The party cemented its opposition at the 1993 election and has remained opposed to the GST or its expansion ever since.
A third party, the Australian Democrats, can trace its virtual demise to a deal done to pass the GST in 1999. That deal removed most food and some medicines from the GST but tore the party apart. The Australian Greens inherited much of the Democrats’ left-wing base and more recently their hold on the Senate balance of power, and have been consistently hostile to the GST.
A further political difficulty is that the current GST system is based on an agreement between the Federal Government and the state and territory governments. The GST rate or base can only change after agreement between all those governments. And that seems unlikely.
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