Opinion & Commentary
Increasing Australia's GST would add little value
Since France became the first country to adopt the value added tax (VAT, or to Australians the GST) in the 1950s, this form of tax has spread to almost every corner of the globe. As further confirmation of its popularity with governments, the VAT has been increased from its initial level in almost every country usually more than once resulting in rates as high as 25per cent in Europe.
Australia (so far) is one of the very few exceptions to that rule. Our GST recently passed its 10th anniversary with the same 10 per cent rate and the same base as when it started. In the context of hopes for tax reform, there are now calls for Australia to do what so many other countries have done and raise the rate and/or broaden the base of GST. Some of these calls are from unlikely advocates of higher taxation. Even though they want other taxes cut or abolished at the same time, in the ''new paradigm'' of Australian politics they are playing with fire.
The Business Council of Australia, for example, wants a GST increase so that the extra revenue can be used to abolish various state taxes and cut taxes on capital and income. The Henry tax review points in the same direction, advocating a change in the tax mix away from inefficient state taxes and taxes on mobile capital and income towards land, resources and consumption. Its terms of reference, however, placed the GST off limits. Whether for that or other reasons, it favours a business cash flow tax in the long term, which would be similar to a GST in its economic incidence. The International Monetary Fund recently added its voice to calls for a higher Australian GST in exchange for reductions in other taxes.
The Key Government in New Zealand has just engineered a neat and tidy trade-off between higher GST and lower income tax, including a lower top rate, but Australia is not New Zealand. Prime Minister John Key does not have an upper house to worry about. Any proposal for such a trade-off on this side of the Tasman would face stiff opposition from the welfare lobby because of the perceived regressive character of the GST, and such protests would fall on the sympathetic ears of Greens senators.
We have been there before. The GST only got through the Senate in 1999 because the offsetting income tax cuts were skewed, and social benefits increased, to satisfy the Australian Democrats' definition of fairness. Although the package included some income tax relief, it was structured primarily to over- compensate low- and middle- income earners for the GST rather than to reduce the disincentive effects of income tax by cutting marginal rates across the board.
The Opposition is hardly likely to support a GST increase under any circumstances. That leaves the Greens senators in the box seat. Their party if its platform can be taken at face value favours among other things an increase in company tax, a higher top rate of personal income tax, abolition of the capital gains tax concession and introduction of an inheritance tax. Put in the same position as the Democrats in 1999, the Greens would make the then Democrats leader Meg Lees look like Margaret Thatcher.
If, despite their aversion to the ''regressive'' GST, the Greens could somehow be persuaded to go along with increasing it, the trade-off could hardly be expected to enhance incentive and productivity. Their emphasis would be on redistribution, not economic efficiency. Anyone who thinks the Greens would agree to a GST increase to pay for efficiency- enhancing cuts in personal and company income tax and state taxes is dreaming.
A more general problem with supposedly revenue-neutral tax trade-offs is that they help to fuel the growth of revenue. A static trade-off is one thing, but a dynamic trade-off is another. Over time a higher GST may generate more revenue growth than the taxes it replaces, or the taxes that are reduced as the trade-off may ratchet up again through income tax bracket creep, for example while the increase in GST is preserved.
There is evidence of this in New Zealand's long-term tax history, its latest consumption/income tax trade-off notwithstanding. Tax cuts accompanied by action to curb expenditure growth are more likely to endure over time than those financed by other tax increases.
In current political circumstances a GST increase is more likely to pave the way for bigger government than to change the tax mix in a durable and revenue-neutral way. Next year's tax summit should be as much about government spending as tax.
Those pushing for a higher rate of GST should be careful what they wish for they may get it, along with a lot of other things they didn't bargain for. In the new political climate, the GST is a sleeping dog that is best not disturbed.
Robert Carling is a senior fellow at the Centre for Independent Studies.
