The pressure to increase the GST has been building for the better part of this year. Yet if an increase does result from the intensifying discussions around tax reform, it will need to be offset by much-needed changes to State and Territory taxes, while still compensating the less well-off.
Australia’s GST rate of ten per cent is one of the lowest among developed countries and only just over half the OECD average.
Indeed the Federal Government relies on bracket creep to keep the budget on track. Treasury’s 2015 Intergenerational Report noted the impact of “bracket creep”, where wage inflation places taxpayers in higher marginal tax brackets, leaves taxpayers with less take-home pay and gives them less incentive to work.
As a result of changes driven by globalisation and the rise of the digital economy, Australia’s heavy reliance on income taxes may be unsustainable. In Australia about 70 per cent of Federal Government tax revenue is collected from personal and company income taxes. That imbalance in tax collection has fuelled demands to increase the GST.
The level of discussion about the future of the GST gained further momentum with the Prime Minister’s first Council of Australian Governments (COAG) meeting in Sydney in early December. Although no agreement was reached on changing the tax system, the PM acknowledged that making changes to the GST, income tax and Medicare levy remained on the table, ahead of the next COAG meeting in March.
So how did we get into this mess?
As many would recall, the GST had a difficult birth when it was introduced on 1 July 2000. However, its birth was made easier by the fact that it occurred in an environment of complex sales taxes and innumerable inefficient and poorly directed State taxes.
Through the introduction of the GST, the Government was able to undertake a process of unprecedented tax reform – by both reducing tax complexity and increasing tax revenue in a way that was seen as fair and reasonable. Moreover, those most at risk by the introduction of the GST were given compensation through income tax reductions to ensure that they were not adversely affected. It all seemed to work reasonably well – more or less.
We all remember the infamous decision by the Howard Government, designed to obtain Senate support of the Democrats, which exempted a broad section of supplies from the application of GST. These exempted supplies included fresh food and health care.
As a result of this decision, and the dramatic growth in these industry sectors, the current GST base covers less than 50 per cent of all supplies carried out in the Australian marketplace.
In addition, the decision to exempt fresh food and healthcare from GST left the States and Territories unable to afford the repeal of their most inefficient and counterproductive taxes – payroll tax and stamp duty. Many consider payroll tax to be the most economically counter-productive of all State and Territory taxes – as it is a tax on employers for employing staff. Also, it is extremely complex and costly for employers to comply with.
In today’s global economy with increasingly sophisticated and complex business models, the reliance on income taxes is unsustainable. In this environment we need to consider if the GST rate should be increased and/or the tax base broadened.
Opponents of GST argue that consumption taxes unfairly affect the poorest in society while any increase in GST will result in higher unemployment and less social equality.
I disagree with these views. In my opinion, the best way forward is to proceed with a higher GST rate and/or broadened GST tax base. But this process should be coupled with the removal of payroll tax, ideally with stamp duty, only if those most at risk are adequately compensated. We can afford it.
Research commissioned by the Chartered Accountants of Australia and New Zealand found that increasing Australia’s GST to 15 per cent could generate revenue of $265 billion over four years. After the introduction of cuts in personal income taxes and compensations to pensioners and others less financially advantaged, this could leave the Government with $94 billion over four years, out of which the abolishment of inefficient state taxes could see $38 billion returned to the States.
It is only through increased efficiency and tax competitiveness that we will attract and increase overseas trade, and this can only be achieved through a repeal of payroll tax and stamp duty, funded through a truly broad-based consumption tax like the GST.