Ideas@TheCentre

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Beware of calls for a bigger GST

Robert Carling | 07 December 2012
The history of taxation is that new taxes start small and grow bigger over time. Australia’s Goods and Services Tax (GST) has so far been an exception, surviving 12 years without the original 10% rate being increased or the base broadened. This goes against all international experience, which has seen these value-added type taxes grow from modest beginnings to levels as high as 25% in some countries.

Most Australians would be pleased their GST has not been increased or broadened, but that happy state of affairs may not last much longer. The chorus of expert voices calling for a higher rate of GST and/or the removal of exemptions currently applying to food, health services and education is growing louder. Politicians feign opposition to such ideas, but they may change their tune after the coming federal election.

The validity of the case for a bigger GST depends on the objective. Some want it to pay for higher government spending – a tax increase to finance further enlargement of the public sector. This approach should be rejected. The public sector is already too big. If the community wants government to provide new services and benefits, then existing services and benefits should make way.

Others want tax reform involving a switch from direct (income) tax and some state taxes to the GST, which experts believe to be more economically efficient and less distorting. They have a case, but the devil is in the detail. Which taxes are to be reduced or abolished, and how to ensure the trade-off doesn’t erode over time, leaving the overall tax burden higher than it would have been without a bigger GST?

The kind of trade-off that is most likely to be sustained involves the abolition of whole taxes and their removal from the statute books. Mere reductions in taxes in exchange for a higher GST are too easily reversed over time. The best way to pay for lower personal and corporate income taxes is the hard way – consistent, grinding restraint over government expenditure.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.