Despite the apparent
differences in priorities, there is a sensible deal to
be done.
The premiers of NSW and
South Australia are right to see GST as the best
opportunity for tax reform. Raising more money through
increasing the GST, or applying it to more things, is
preferable to most other means of raising revenue,
including higher income taxes. A broad-based consumption
tax drags less on economic growth than most other taxes.
And Australia raises less of its revenue through its GST
than most OECD countries.
Broadening the GST base to
include fresh food, health and education is generally
favoured by economists because taxing some categories
but not others distorts the decisions people make about
what they buy. Removing current exclusions would also
make GST simpler to administer and reduce compliance
costs for business. But increasing the rate of the GST
would be a satisfactory second best if the politics of
taxing health, education and food prove too fraught.
Extending the GST to cover
many of the categories now exempt could raise $17
billion per year. Increasing the rate to 15 per cent
would generate about $27 billion.
But the devil of GST
reform is in the detail, and particularly the question
of how the extra revenue should be used.
Any credible package must
compensate poorer households for the higher cost of
living while maintaining incentives to work for low and
middle-income workers – the people whose work decisions
are most sensitive to tax rates.
And in the era of tight
budgets, there will need to be a fiscal pay-off for both
Commonwealth and state governments to get them to the
negotiating table. The days when governments could
afford to "buy" reform are long gone.
Our recent report for the
Grattan Institute, A GST Reform Package, sets out a
tax-reform proposal that strikes a balance between
economic growth, budget repair and fairness.
Spending about 30 per cent
of the additional revenue from a 15 per cent GST on
increasing welfare payments would lift full-rate
pensions and allowances such as Newstart by about 5 per
cent. This would leave two-thirds of low-income
households better off – a helpful buffer to ease
concerns voiced by the welfare lobby that compensation
might be eroded over time.
Committing a further 30 per cent of additional revenue
to income tax cuts will allow the government to shave 1
to 2.5 percentage points off the bottom two tax rates,
improving work incentives and helping households further
up the income scale.
Together the proposed
welfare increases and tax cuts would fully offset the
increase in GST for most low and middle-income
households – those earning up to $100,000 a year.
Overall the tax and transfer system would become more
progressive. But not everyone can be fully compensated.
Promising "no losers" is a sure-fire way to erode any
revenue benefits from the package.
A potential sticking point
will be how the Commonwealth and states split the
remaining 40 per cent of additional revenue. About $5
billion a year is probably the minimum price for state
co-operation – this would grow over time with revenue
collections and would be enough to make a meaningful
dent in hospital spending growth. That would leave
another $5 billion to reduce the Commonwealth's budget
deficit, or to pay for other tax cuts that will promote
economic growth.
The other sticking point
will be how to rearrange payments from the Commonwealth
to the states. Most states will want to keep all the GST
revenue. If they agree to the Commonwealth keeping a
share, history suggests the Commonwealth will
unilaterally decide to take a bigger share at some point
in the future.
To make the books balance,
the Commonwealth would have to treat the additional GST
money as a substitute for the grants now earmarked for
hospitals or independent schools. Lobby groups are
unlikely to be happy about states having more freedom to
change priorities in these areas.
An extended tax debate
might not be everyone's idea of a fun way to spend a
sunny Friday in December, but it's vital that our
leaders resolve the current impasse and find common
ground.
We think there is a deal
to be done that would support economic growth, make the
tax and transfer system more progressive, help improve
the budgets for Commonwealth and state governments, and
even strengthen our federation.
And that might be the best
Christmas tax-reform cheer we can hope for.
Source::
The AGE, dated 08/12/2015. |