Broader base, not a higher rate the answer for GST
reform
The tax “conversation”
treasurer Joe Hockey is hoping to kick off has quickly
moved on to a discussion about the goods and services
tax.
Last month’s tax discussion paper reminded
us Australia’s GST rate of 10% is one of the lowest
among developing countries, and only just over half of
the OECD average. It may therefore be tempting for
government to take the “easy” approach of increasing the
GST rate, which would require less legislative change
than making various changes to the GST base.
However, it’s imperative Australia fully debates the GST
base broadening issue before reaching for the relatively
simpler option of increasing the GST rate on the current
base. A rate increase on the current base would put us
in (or at least move us towards) the same category as
countries such as the United Kingdom - that have a
relatively narrow GST base with high rates. It would
also run counter to the widely accepted tax mantra of
“broaden the base and lower the rate”.
Poor tax design:
For many reasons, a “narrow base, high rate GST” is poor
tax design. For example, the distortions to production
and consumption decisions are magnified because of the
greater difference(s) between the taxed and non-taxed
items. In addition, inequities are compounded based on
consumers’ spending patterns. It would also put us on
the path to replicating the discredited wholesale sales
tax, which was replaced by the “superior” GST |
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GST systems are designed to tax private final
consumption expenditure (PFCE). But if only a portion of
PFCE is taxed, the whole point of a consumption tax is
significantly undermined or compromised.
In
2012, Australia’s GST applied to 47% of PFCE. This is
lower than the OECD average of 55%. New Zealand’s GST is
a stand out, with 96% of PFCE taxed; it is seen as a
model to aspire to.
The big untaxed items in
Australia’s GST are basic food, financial services
(financial services have a nominal amount of tax on
them), health, medicines, education, aged care,
childcare and water and sewerage. Each of these has its
own reasons as to why they originally were not fully
included in the GST base. The inclusion of all these
items would move Australia well up into the 90% bracket
of PFCE coverage, a very desirable position.
Solving equity issues:
Basic food was excluded due to equity grounds. While
health and education have a small equity aspect, the
main reason was the challenge of dealing with both
private providers (where there is a price signal) and
public providers (where there is no price signal). Given
the differing rationales for the original exclusion of
each category, it is very unlikely one policy measure
(outside or inside the GST) can address all concerns.
That means that significant broadening of the GST base
is likely to require a number of targeted solutions.
However, the regressive effect of a flat rate tax
applying to more categories of PFCE is a recurring
theme. When items are exempted from the GST base, all
consumers, regardless of income level, receive the
benefit of the exemption. The tax discussion paper
highlights that while lower income households spend a
higher percentage of their income on GST-exempt items,
in dollar terms, it is higher-income households that
receive the most benefit from GST exemptions.
For this reason, subject to the comment below,
compensation through the direct transfer (social
security) system is the best method of delivering
compensation for the regressive effect of broadening the
GST base, rather than dealing with the regressive effect
through concessional treatment within the GST base. The
problem with compensation is that many voters (and many
politicians) do not have faith in future governments
maintaining the level of compensation over the long
term. This distrust was at the heart of the Australian
Democrats insistence that basic food be excluded from
the GST.
Locking in compensation :
Perhaps the solution lies in a “lock in mechanism”.
There is no doubt the GST rate and base lock in
mechanism has been very effective as a political check
on the federal parliament acting contrary to it. This is
in spite of the fact the lock in mechanism is legally
meaningless.
A lock in compensation mechanism
would necessarily be very different to the GST rate and
base mechanism. It is very likely a compensation
mechanism would not be legally effective because our
federal parliament cannot generally bind future
parliaments. But given the political sensitivities
around the GST and the categories of PFCE listed above,
there is every reason to think that a lock in
compensation mechanism could be politically effective.
Source:
The Conversation AU , Australia, dated 08/04/2015
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