tag:theconversation.com,2011:/id/topics/consumption-tax-14565/articlesconsumption tax – The Conversation2022-07-10T20:27:18Ztag:theconversation.com,2011:article/1852232022-07-10T20:27:18Z2022-07-10T20:27:18ZDo Australians pay too much income tax? 6 charts on how we rank against the rest of the world<figure><img src="https://images.theconversation.com/files/473155/original/file-20220708-25-p8k8y8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3968%2C1954&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australians pay too much income tax – or so some argue. </p>
<p>The Australian Financial Review’s economics editor, John Kehoe, for example, <a href="https://www.afr.com/policy/tax-and-super/personal-tax-take-second-highest-in-oecd-20211206-p59f3y">has noted</a>:</p>
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<p>Australians are paying more personal income tax as a share of government revenue than any other advanced economy, except for the high-taxing Scandinavian welfare state of Denmark.</p>
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<p>And the day after the federal election, the AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">editorialised</a>:</p>
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<p>Too heavy reliance on taxing productive workers and business earnings blunts incentives to work, save and invest. </p>
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<p>Perhaps even more stinging is that the AFR considers New Zealand to have a better income-tax system. New Zealanders pay <a href="https://www.newzealandnow.govt.nz/live-in-new-zealand/money-tax/taxes">10.5%</a> on their first NZ$14,000 (then 17.5% up to NZ$48,000), while Australians enjoy a tax-free threshold <a href="https://www.ato.gov.au/rates/individual-income-tax-rates/">up to A$18,200</a>. The AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">says</a> this:</p>
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<p>creates tax-penalty work disincentives that partly explain New Zealand’s approximately 5% higher rate of workforce participation than Australia.</p>
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<p>Are these issues really a problem? If there is a case for tax reform, what sort of reform?</p>
<h2>High individual income tax</h2>
<p>In 2019, the most recent year for which the OECD has <a href="https://www.oecd.org/tax/revenue-statistics-australia.pdf">complete statistics</a>, Australia ranked second among OECD members on personal income tax as a share of total taxes.</p>
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<p>In fact, it has ranked second or third in 36 of the past 40 years, and fourth in the other four years, swapping places with New Zealand and the United States.</p>
<h2>But that’s just part of the picture</h2>
<p>Overall, Australia’s level of taxation, measured as a proportion of GDP, is relatively low – 27.7% to the OECD average of 33.4%. </p>
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<p>That makes Australia the 29th lowest-taxing nation of the OECD’s 38 members. </p>
<h2>Other nations have social security taxes</h2>
<p>The main reason Australia ranks so highly on individual income tax levels is because Australians don’t pay separate social security taxes.</p>
<p>Australia, New Zealand and Denmark fund social security from general government revenue. The other 35 OECD nations levy specific taxes on employers and employees to fund social security systems (unemployment support, age and disability pensions etc)</p>
<p>These account for an average 25.9% of total tax revenue, or close to 9% of GDP, across the OECD. </p>
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<p>Employee social security contributions are <a href="https://www.jstor.org/stable/pdf/1910545.pdf">very similar to income taxes</a>. They are generally collected the same way, and counted as direct taxes on households or individuals in income surveys.</p>
<p>Though employers also pay social security taxes, <a href="https://voxeu.org/article/who-really-pays-social-security-contributions-and-labour-taxes">evidence suggests</a> about two-thirds of these are effectively paid by employees through lower wages.</p>
<p>In fact, if we add together personal income taxes and social security contributions, then Australia, rather than having the second-highest share of income taxes in the OECD, has the eighth-lowest.</p>
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<h2>What about superannuation?</h2>
<p>Some say Australia’s compulsory superannuation scheme, in which employers pay 10.5% of an employee’s wage as super, should be counted in these tax measures, because it is similar to social security contributions in other countries.</p>
<p>12 other OECD countries have mandatory employer-paid private pension schemes. </p>
<p>Employers pay this money directly into private accounts, not to the government, so it doesn’t meet the <a href="https://treasury.gov.au/sites/default/files/2019-03/c2015-rethink-dp-TWP_combined-online.pdf">definition of a tax</a>. </p>
<p>But for argument’s sake we can factor in super payments using “<a href="https://data.oecd.org/tax/tax-wedge.htm">tax wedge</a>” data. </p>
<h2>Combining mandatory payments</h2>
<p>A tax wedge is the ratio between the amount of taxes paid by an average worker (assumed to be single without dependents) and the corresponding total labour cost for the employer.</p>
<p>The important point here is that wedge data include both what employers pay as mandatory private payments and as mandatory payments into government social security.</p>
<p>On this measure, Australia’s direct tax burden is the 11th lowest in the OECD.</p>
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<p>So claims we have very high shares of personal income taxes are only part of the picture. Superannuation does not change the story significantly.</p>
<h2>So what about New Zealand?</h2>
<p>New Zealand does collect more revenue through consumption taxes – <a href="https://data.oecd.org/tax/tax-on-goods-and-services.htm#indicator-chart">12.5% of GDP</a> in 2019, compared to 7.3% for Australia.</p>
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<p>But it still collects more in income taxes – <a href="https://data.oecd.org/tax/tax-on-personal-income.htm#indicator-chart">12.4% of GDP compared to 11.6%</a>. Its total level of taxation is <a href="https://data.oecd.org/tax/tax-revenue.htm#indicator-chart">33.4% of GDP</a>, compared to 27.7% for Australia.</p>
<h2>The case for tax reform</h2>
<p>Even so, there are things to learn from New Zealand. </p>
<p>Australia’s system could be structured better. As Louis XIV’s finance minister, <a href="https://www.economist.com/special-report/2014/02/20/plucking-the-geese">Jean-Baptiste Colbert</a> (1619-1683), said, the art of taxation is about “plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.</p>
<p>Income taxes are highly visible. This may make us more ready to believe we are highly taxed. There is a case for considering tax reforms that deliver adequate revenue more fairly.</p>
<p>New Zealand is in the process of this change, with its proposed <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2021/November/NZ-Social-Unemployment-Insurance">Social Unemployment Insurance scheme</a> being funded by a 1.39% levy on employers and workers.</p>
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Read more:
<a href="https://theconversation.com/beyond-gdp-chalmers-historic-moment-to-build-wellbeing-184318">Beyond GDP: Chalmers' historic moment to build wellbeing</a>
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<p>Last month the Australian Treasury’s secretary, Steven Kennedy, said <a href="https://treasury.gov.au/speech/address-australian-business-economists-0">in a speech</a> it was possible for the government to spend more on things “that improve lives”, such as higher-quality aged care and disability services, “while reducing pressures arising from poorly designed policies”:</p>
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<p>We will need a tax system fit for purpose to pay for these services, that appropriately balances fairness and efficiency. This is achievable.“</p>
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<p>Given the inevitable challenges of an ageing population, climate change and international uncertainty, anything that moves the national conversation on from misleading comparisons with other nations can only help.</p><img src="https://counter.theconversation.com/content/185223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Whiteford receives funding from the Australian Research Council. He is a Fellow of the Centre for Policy Development.</span></em></p>Compared with other OECD nations, Australians pay much less tax than some headline statistics suggest.Peter Whiteford, Professor, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1679922021-09-16T20:08:44Z2021-09-16T20:08:44ZVital Signs: we’re doing well despite Delta, but 3 major economic challenges loom<p>This week the Organisation for Economic Co-operation and Development published its first “<a href="https://read.oecd-ilibrary.org/economics/oecd-economic-surveys-australia-2021_ce96b16a-en?_ga=2.78212884.1665175254.1631702118-2085086460.1631702118#page1">Economic Survey of Australia</a>” since 2018. </p>
<p>It gives Australia good marks for a remarkably good economic response to the COVID pandemic, but warns of the importance of not shirking reforms needed for long-term prosperity.</p>
<p>The Reserve Bank of Australia’s governor, Philip Lowe, also addressed Australia’s recovery this week, in a speech to <a href="https://www.rba.gov.au/speeches/2021/sp-gov-2021-09-14.html">the Anika Foundation</a>, which funds research into adolescent depression and suicide. Lowe has made a speech annually since 2017 to help raise funds for the foundation, as his predecessor Glenn Stevens also did.</p>
<p>Lowe was upbeat about Australia’s recovery from the pandemic, and also had important observations about Australia’s economic outlook. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/four-gdp-graphs-that-show-how-well-australia-was-doing-before-delta-166817">Four GDP graphs that show how well Australia was doing, before Delta</a>
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<p>He emphasised the central bank would not be lifting interest rates to curtail the latest spike in house prices. The OECD report warns the Australian government relies too much on income taxes for revenue. It also argues forcefully for the significant economic benefits in Australia doing more to reduce carbon emissions.</p>
<p>Taken together, these two assessments point to the outstanding job done in managing the economic recovery. </p>
<p>But they also tell us we will have economic problems down the road if three big, structural reform areas — housing affordability, the tax mix, and decarbonisation — are not addressed.</p>
<h2>Recovery signposts</h2>
<p>In his speech on Tuesday, Lowe painted a helpful picture of the path of Australia’s recovery before the Delta outbreak — with the unemployment rate hitting a 20-year low and GDP growth recouping all its 2020 losses.</p>
<p>At the end of the June quarter, domestic final demand was more than 3% above its pre-pandemic level. GDP was up close to 10% for the previous 12 months. </p>
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<p><strong>Australia’s gross domestic product, seasonally adjusted</strong></p>
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<a href="https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Australia's gross domestic product, seasonally adjusted" src="https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=290&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=290&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=290&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=364&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=364&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421466/original/file-20210916-37-1ut7wro.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=364&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2021">ABS, Australian National Accounts: National Income, Expenditure and Product, June 2021</a></span>
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<p>The recovery of the labour market was even more impressive. As Lowe put it:</p>
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<p>In June, the employment-to-population ratio reached a record high of 63% and the unemployment rate fell to 4.9%, the lowest it had been in more than a decade.</p>
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<p>The momentum in the labour market was so strong that in July the unemployment rate dropped to 4.6%, despite Delta-related lockdowns in greater Sydney.</p>
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<p><strong>Australia’s unemployment rate, seasonally adjusted</strong></p>
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<img alt="Australia's unemployment rate, seasonally adjusted" src="https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421467/original/file-20210916-23-90iemw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Australia’s unemployment rate, seasonally adjusted.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">ABS, Labour Force Survey, August 2021</a></span>
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<h2>Delta thoughts</h2>
<p>Lowe went on to discuss the economic hit of Delta. </p>
<p>Of course, how big that hit is depends on vaccination rates and how safely NSW and Victoria reopen. At a time when there’s a fair bit of discussion of best-case scenarios, Lowe warned of grimmer possibilities, warning of the possibility of:</p>
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<p>further significant restrictions on activity […] in response to new outbreaks of Delta, the emergence of a new strain of COVID-19 or a decline in the potency of the current vaccines.</p>
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<p>What Lowe hinted at, but didn’t say, was that, absent the Delta outbreak in Australia, the recovery would have continued to drive GDP up and unemployment down. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-with-vaccine-thresholds-come-the-danger-of-repeating-past-mistakes-166754">Vital Signs: with vaccine thresholds come the danger of repeating past mistakes</a>
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<p>“On the economy,” Lowe said, “our central message is that the Delta outbreak has delayed – but not derailed – the recovery of the Australian economy. If that turns out to be correct then unemployment could fall below 4% by early 2023 — though how far below remains to be seen.</p>
<p>It’s worth remembering that had the federal government not bungled its vaccine buying and roll-out strategy, Australia might have avoided the current economic pain.</p>
<p>Finally, Lowe was emphatic the central bank would not be raising interest rates to "cool the property market”:</p>
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<p>I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.</p>
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<p>That’s Lowe-speak for: “Read my lips — no interest rate hikes until 2024.”</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-to-fix-australias-housing-affordability-crisis-negative-gearing-must-go-158518">Vital signs: to fix Australia's housing affordability crisis, negative gearing must go</a>
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<h2>OECD’s report card</h2>
<p>The hefty OECD report (about 130 pages) concurs with Lowe’s view on strength of Australia’s pandemic recovery. It essentially congratulates the government for its response, noting “fiscal policy has responded with unprecedented force”.</p>
<figure class="align-right ">
<img alt="OECD Economic Surveys: Australia, 2021 report cover" src="https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=796&fit=crop&dpr=1 600w, https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=796&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=796&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1000&fit=crop&dpr=1 754w, https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1000&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/421469/original/file-20210916-21-1g9fnz0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1000&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">OECD Economic Surveys: Australia, 2021.</span>
<span class="attribution"><span class="source">OECD</span></span>
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<p>But it also notes the low rate of Australia’s goods and services tax (GST) compared to consumption taxes in other countries, leaving the federal government (and thereby state and territory governments) reliant on personal income taxes. </p>
<p>The report observes that GST revenue as a share of total taxation has been falling — from 15.4% in 2003-04 to 14.1% in 2020-21. It suggests increasing the rate of GST would lead to a more efficient tax mix.</p>
<p>This puts both side of politics squarely on notice that serious tax reform needs to be on the agenda soon.</p>
<p>The OECD report also emphasises the importance of the Australian economy decarbonising more rapidly. This is another big policy reform on which the government has show little inclination to take stronger steps.</p>
<h2>Common threads</h2>
<p>So the RBA and OECD both point to Australia’s strong pandemic recovery, driven in large part by the fiscal force of programs such as JobKeeper and JobSeeker.</p>
<p>The Delta outbreaks have put a serious dent in this recovery. But there is reason to believe the recovery will be back on track by early 2022. In the longer term, though, there will have to be a reckoning about major structural reforms. </p>
<p>By 2050 we will need to have a largely decarbonised economy. We are also going to need to have an improved tax mix to drive innovation. And sooner rather than later the housing affordability crisis must be addressed.</p><img src="https://counter.theconversation.com/content/167992/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President-elect of the Academy of the Social Sciences in Australia.</span></em></p>Australia faces economic problems down the road if three big, structural reform areas — housing affordability, the tax mix, and decarbonisation — are not addressed.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1000242018-07-19T06:29:52Z2018-07-19T06:29:52ZRising reliance on personal income tax signals need for bolder reforms<p>The Parliamentary Budget Office (PBO) has just <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Publications/Research_reports/Trends_affecting_the_sustainability_of_Commonwealth_taxes">released a report</a> on trends in Commonwealth taxation receipts. While supporting the expectations of a budget in balance by 2019-20, it exposes worrying trends in the balance of the burden of taxes in Australia. In particular, its analysis of trends in the composition of tax revenue identifies an increasing reliance on personal income tax.</p>
<p>The PBO shows that tax revenue from labour (mostly income tax) was 8.6% of GDP in 1971-72. By 2015/16, this had risen to 12.6% of GDP. Over the same period, tax collections from capital (mostly company tax) as a percentage of GDP was virtually unchanged, from 3.3% to 3.2% – although this increased noticeably during the “economic boom”, which ended when the Global Financial Crisis (GFC) hit in 2007. </p>
<p>Taxes on consumption (such a GST and excise duties) were 5.3% of GDP in 1971-72 and 5.7% of GDP in 2015-16. While the introduction of the GST in July 2001 raised consumption taxes temporarily, revenue from both GST and particularly excise taxes has been in decline as a percent of GDP since. </p>
<p>Figure 2 from the report shows these trends over the decades.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=327&fit=crop&dpr=1 600w, https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=327&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=327&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=411&fit=crop&dpr=1 754w, https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=411&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/228358/original/file-20180719-142435-1roakki.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=411&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Trends in revenue from categories of Commonwealth taxes.</span>
<span class="attribution"><a class="source" href="https://www.aph.gov.au/~/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/Reports/Research%20reports/02_2018%20Sustainability%20of%20Australian%20taxes/Trends%20affecting%20the%20sustainability%20of%20Commonwealth%20taxes%20-%20Data.XLSX?la=en">Source: ATO data and PBO analysis</a></span>
</figcaption>
</figure>
<p>The main emphasis of the PBO report is on the period since 2001-02. The chart below shows the increased reliance on income tax and declining importance of taxes on consumption and capital.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/228378/original/file-20180719-142408-1js855h.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>What is driving these shifts?</h2>
<p>The main reason for the rise in income tax revenue is “bracket creep” as incomes increase and taxpayers move into higher marginal tax brackets. This is due to successive governments not fully indexing tax brackets to increases in CPI or average earnings.</p>
<p>Meanwhile, consumers have been changing their tastes and responding to prices by altering their consumption patterns. The so-called “sin taxes”, or rates of excise duties on alcohol and tobacco, have increased significantly over time. </p>
<p>This has been particularly true for tobacco where the volume of consumption has fallen as fewer people smoke and those who do smoke less. However, the percentage fall in consumption has been less than the percentage rise in tax, so tobacco tax revenue has risen. </p>
<p>For alcohol, consumers have been switching from more highly taxed beer to wine, which is more lightly taxed. For instance, a full-strength beer from your bottle shop carries a tax of $37.10 per litre of alcohol. A moderately priced bottle of wine bears a tax less than half that ($17.60 per litre). </p>
<p>What might be considered a distortion in the taxing of alcohol means that changes in tastes towards drinking wine reduce tax revenue. The system of taxing alcohol is distorting in that encourages changing consumption habits away from beer drinking to wine.</p>
<p>Fuel excise is levied on a number of fuels but revenue comes mainly from petrol sales. The indexing of fuel excise rates was abolished in 2001 before being reintroduced in 2014. This reduction in the real excise rates was accompanied by significant reduction in the volume of fuel per household, from 11.4 L/km in 2001 to 10.6 L/km in 2016, as vehicles became more fuel-efficient. </p>
<p>The combination of reduced real excise rates and reduced consumption have reduced fuel excise revenue as a percentage of GDP.</p>
<p>The GST, one of the principal aims of which was to provide a broadly based growth tax, is declining in relative importance. This is mainly due to the exemptions from the GST base. For instance, spending on education and health, which are exempt from GST, is growing faster than spending on other goods and services. There is also some loss in revenue due to online purchases from overseas, which the government is trying to address. </p>
<p>As the share of consumers’ spending continues to switch from GST-liable to GST-exempt items the share of GST revenue will continue to fall.</p>
<p>Company taxes have diminished in importance in Australia and elsewhere because of the way multinational companies can arrange their tax liabilities across national borders to minimise tax. However, there is also worldwide recognition of the need to reduce company tax rates because of the detrimental effects these have on investment and growth.</p>
<h2>The need to cut ‘deadweight loss’</h2>
<p>When discussing taxes economist often refer to “deadweight loss”, which is the loss to the economy over and above the amount recouped in tax revenue. When revenue is taken from individuals or companies this results in less of a service or good being produced.</p>
<p>It is argued that governments should put more reliance on taxes that cause less distortion – less deadweight loss. That is, they should have as little effect on individuals’ and firms’ behaviour as possible. </p>
<p>A broad-based GST is efficient because all goods and services bear the same tax rate and therefore will not change relative consumption. It is exemptions that bring about inefficiency by encouraging consumption of untaxed items and discouraging consumption of taxed items. Taxing wine more lightly than beer encourages wine consumption at the expense of beer.</p>
<p>The Australian Treasury has named company tax and income tax as having the <a href="https://treasury.gov.au/publication/understanding-the-economy%E2%80%91wide-efficiency-and-incidence-of-major-australian-taxes/">“biggest deadweight loss” of all the Commonwealth taxes</a>. International research backs this up. The deadweight loss falls on consumers and shareholders but mostly on workers and wages through lower investment. </p>
<p>The Treasury estimates the deadweight loss of company tax could be more than half the revenue raised from taxation. For income taxes, the deadweight loss is estimated to be 21 cents for every dollar of revenue. This comes about from reduced incentives to work, save or invest.</p>
<p>The PBO report suggests that with continuing trends in taxation revenue the budget’s reliance on personal income tax will increase if current levels of Commonwealth taxation are maintained as a percentage of GDP. While proposals to reduce company tax rates will reduce inefficiency of taxes somewhat, a heavy and increasing reliance on personal income tax points to the need for substantial tax reform. But that’s something neither major party seems prepared to do.</p><img src="https://counter.theconversation.com/content/100024/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Lewis does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. He also has no relevant affiliations. During his career he has received funding from many private and public sector organisations including most recently the ARC, NCVER, DEEWR, the AFPC, ABLA and CPA Australia.</span></em></p>Personal income taxpayers are shouldering more of the burden, while less revenue is coming from taxes on companies, capital and consumption. Only major reforms will change these sustained trends.Phil Lewis, Professor of Economics, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757752017-05-01T20:05:45Z2017-05-01T20:05:45ZRather than capping tax revenue, the government should reform the system<p>As the government pulls together the May budget, Finance Minister Mathias Cormann is <a href="http://www.afr.com/news/politics/budget-will-contain-tax-increases-says-mathias-cormann-20170402-gvc47a">aiming to cap tax revenue at 23.9% of GDP</a>. At best, this is an arbitrary cap. More importantly, it distracts from real tax reform, which could increase national productivity and income.</p>
<p>There are many potential reforms to the tax system that are revenue neutral, from broadening the tax base to replacing transaction taxes.</p>
<p>The <a href="http://www.budget.gov.au/2016-17/content/myefo/html/index.htm">2016 federal budget</a> projected that federal tax revenue would be 22.2% of GDP in 2016/17, rising to 23.5% by 2019-20. Meanwhile, the government’s <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/2015_IGR.ashx">Intergenerational Report</a> projects ever-growing government expenditure as a share of GDP thanks to, among other things, an ageing population and further increases in health outlays. </p>
<p>These two trends make it hard to believe that capping tax revenue at 23.9% of GDP could ever bring the budget back to balance. Furthermore, a comparison of Australia’s tax revenue to GDP ratio with other countries with comparable living standards shows Australia as a relatively low taxed country. </p>
<p>Using the <a href="https://data.oecd.org/tax/tax-revenue.htm">latest numbers compiled by the OECD</a>, we find that tax as a share of GDP when you include all levels of government is just 27.8% in Australia. This compares to an average of 34.2% across all OECD countries. Several European countries have a share above 40%, although both the US and Switzerland are relatively rich countries with lower tax as a share of GDP than Australia. </p>
<p>The diversity of tax to GDP ratios across countries indicates the design and operation of taxation and government expenditure programs are more important than the tax share.</p>
<h2>Tax distortion</h2>
<p>Collecting a dollar of tax costs society much more than a dollar. For income and GST taxes, the distortion caused by levying a tax is <a href="http://library.bsl.org.au/jspui/bitstream/1/611/1/Costs_of_taxation.pdf">estimated by the Treasury and others</a> to exceed twenty cents per dollar raised. </p>
<p>This is because levying a tax distorts peoples’ decision making about employment, investment and saving, choice of business type, and so forth. </p>
<p>For example: a higher income or payroll tax can influence decisions about how much to work; the capital gains tax concessions given to home owners incentivises the reallocation of savings from business investments to housing.</p>
<p>As tax and government expenditure as a share of the economy increase, the costs of the additional tax rise while the benefits of the additional expenditure fall. As the tax rate rises, the tax distortion costs rise at a greater rate than the rise in the tax rate.</p>
<p>The cost of tax distortions to private sector decisions on employment, investment and so forth is a reason to constrain tax as a share of GDP. But if we are trying to enhance the well-being of Australians, setting a ceiling on taxation as a share of GDP seems an issue of second order importance. While the principle is clear, its practical application is dubious.</p>
<h2>So at what level should we tax?</h2>
<p>Identifying the right level to tax is subject to conflicting political and personal assessments. This is because, beyond funding the government, tax can serve a number of roles. </p>
<p>A progressive income tax – increasing the marginal tax rate as income rises – is one of the instruments used to redistribute income to those on lower incomes.</p>
<p>Some forms of taxation can be used to account for costs to society that may be ignored in market transactions - such as taxing pollution, or to discourage behaviour - like taxing tobacco or gambling. </p>
<p>Tax can also be one of the levers to smooth economic outcomes over the business cycle. Increasing taxes during economic booms and reducing them during recessions as part of a overarching policy to achieve full employment and low inflation, for example.</p>
<p>An idealistic benchmark to maximise social well-being would increase until they reach the point where the benefit to society of additional government spending no longer exceeds the distortion cost of raising the additional tax. There is no evidence to indicate this point is 23.9%.</p>
<p>In fact, the <a href="https://data.oecd.org/tax/tax-revenue.htm">wide range in tax to GDP ratios</a>, from the US at 25.9% to Denmark at 49.6%, illustrates there is no one answer. </p>
<h2><strong>Tax reform</strong></h2>
<p>Instead of looking at tax to GDP, there are far more important and higher value reforms that could be made to the taxation system.</p>
<p>Over the past several years we have had a number of inquiries and discussions, including the <a href="https://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Review</a> and the more recent <a href="http://bettertax.gov.au/publications/discussion-paper/">Re:think discussion paper</a>. </p>
<p>These have highlighted many options to improve the taxation system in roughly revenue neutral reform packages. </p>
<p>One of the ideas raised was to remove special exemptions and deductions while lowering tax rates. It would collect the same amount of tax revenue while reducing distortions and the associated losses of national income. </p>
<p>Another idea is to replace transaction taxes with broad based asset taxes, such as the ACT model of <a href="http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1543&context=buspapers">replacing stamp duty with a land tax</a>. We could also better design special purpose indirect taxes, such as with alcohol.</p>
<p>Currently there are <a href="https://www.ato.gov.au/business/excise-and-excise-equivalent-goods/alcohol-excise/excise-rates-for-alcohol/">different rates</a> for keg beer, other beer, brandy, spirits, along with the wine equalisation tax. These could be replaced with a common flat rate of tax per unit of alcohol by volume across all alcoholic beverages. </p>
<p>More challenging reforms include changes to the tax mix, such as a larger GST, which has <a href="https://grattan.edu.au/wp-content/uploads/2014/04/Game_Changers_Web.pdf">relatively small distortion costs</a>, combined with a smaller income tax.</p>
<p>There are many options to reform taxation and derive greater value from the money diverted from private use. Placing an artificial and contrived ceiling on taxation as a share of GDP has to be both a long way down the list of sensible reforms and one that is controversial in practical implementation.</p><img src="https://counter.theconversation.com/content/75775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are many potential reforms to the tax system that are revenue neutral, from broadening the tax base to replacing transaction taxes.John Freebairn, Professor, Department of Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397872015-04-07T20:17:00Z2015-04-07T20:17:00ZBroader base, not a higher rate the answer for GST reform<p>The <a href="http://jbh.ministers.treasury.gov.au/media-release/021-2015/">tax “conversation”</a> treasurer Joe Hockey is hoping to kick off has quickly moved on to a <a href="http://www.theaustralian.com.au/national-affairs/government-eyes-retirement-incomes-gst-as-central-to-reform-of-tax-system/story-fn59niix-1227291868919">discussion</a> about the goods and services tax.</p>
<p>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.</p>
<p>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”.</p>
<h2>Poor tax design</h2>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<h2>Solving equity issues</h2>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<h2>Locking in compensation</h2>
<p>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 <a href="https://theconversation.com/why-the-commonwealth-can-change-the-gst-without-the-states-36298">legally meaningless</a>.</p>
<p>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.</p><img src="https://counter.theconversation.com/content/39787/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Simply increasing the GST rate would make for poor tax design. Instead, the government should broaden the base and lock in compensation measures.Dale Boccabella, Associate Professor of Taxation Law, UNSW SydneyKathrin Bain, Lecturer, School of Taxation & Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/365452015-01-26T19:28:43Z2015-01-26T19:28:43ZWhat can other countries teach us about GST reform?<p>Value added tax (VAT), virtually non-existent before 1960, has been the <a href="http://www.oecd.org/tax/consumption/consumption-tax-trends-19990979.htm">predominant form of consumption tax</a> since the mid-1980s.</p>
<p>Given that more than 160 countries now have a VAT, it is hardly surprising that proponents of GST reform for Australia regularly point to other countries in support of proposed changes. Most commonly, references are made to New Zealand (for its broad base and now 15% rate) and to member states of the EU (for their much higher rates). But what can we really learn from other countries’ experiences?</p>
<p>Many older VAT regimes (in Europe, Central and South America, and North Africa) are highly complex, characterised by multiple rate structures, high standard rates, and multiple exemptions for social and cultural goods. While they might have standard rates as high as 27% (Hungary), many products are not taxed at the standard rate. Newer regimes, (New Zealand, Singapore, South Africa, Canada, and others) are simpler, and have a single medium/low rate with fewer exemptions.</p>
<p>Australia was a late adopter and already has a comparatively broad-based, single rate GST. We also avoided the complexities of the older regimes by treating social goods, such as basic food and medical and health care services as <a href="http://tinyurl.com/l8ssud6">GST-free</a> rather than <a href="http://tinyurl.com/qa4n2do">input taxed</a>, but while this limited the impact on registered businesses it increased the revenue loss resulting from such concessions. Should we go further? Proponents of base broadening suggest including food, education, and health care in the tax base, but only New Zealand and Singapore do this and both did so from the outset.</p>
<p>No-one is proposing that Australia follow Singapore’s example. Its GST is charged at only 7% and has a registration threshold of SGD 1 million (around A$950,000), more than twelve times higher than Australia’s threshold. While businesses with lower turnovers can register if they want to, most SMEs can choose to be exempt by not registering.</p>
<p>Moreover, to combat the regressive effect of increasing its rate from 5% to 7%, Singapore introduced a <a href="https://www.gstvoucher.gov.sg/Pages/Overview.aspx">GST compensation scheme</a>, which provides cash payouts and other support to the poor and retirees. It also absorbs the GST cost on some health care. Canada too operates a <a href="http://www.cra-arc.gc.ca/bnfts/gsthst/fq_qlfyng-eng.html">GST credit scheme</a> to alleviate the regressivity of its GST.</p>
<p>Closer to home, New Zealand applies a 15% GST to all private consumption expenditure, except financial services, residential rent, and some charitable activities. Food, education, and health care are all taxed. </p>
<p><a href="https://theconversation.com/easy-as-bro-raising-the-gst-new-zealand-style-25313">Tim Hazeldine</a> questions whether New Zealand is really such a good example for Australia. In my view, it is not. For one thing, New Zealand is not a federation. (Nor, for that matter, is Singapore.) The Commonwealth has committed itself to having the unanimous agreement of the states before any changes are made, and GST reform is inextricably linked to the broader discussion about Australian federalism and the GST distribution formula. The complexities of the Constitution also require consideration when it comes to taxing the activities of state governments.</p>
<h2>Taxing education is not so straightforward</h2>
<p>As for education, <a href="http://www.minedu.govt.nz/NZEducation/EducationPolicies/InternationalEducation/ForInternationalStudentsAndParents/NZEdOverview/School_Education.aspx">96% of New Zealand children attend state or integrated schools</a> funded by the central government, while only 4% attend private schools, which are themselves subsidised. Many “fees” paid by the parents of children attending New Zealand’s state-funded schools are not subject to GST because they are considered donations, rather than payments for education services. Applying GST to education really only affects the upper echelons. </p>
<p>The situation is quite different in <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/4221.0main+features42013">Australia</a>: 65% of Australian children attend public schools (run by the states) while 35% attend private schools (with heavy subsidies from the Commonwealth). Taxing education in Australia would have a much more significant impact, the incidence and effects of which would need careful consideration. The situation is not dissimilar with health care. Let us also not forget that New Zealand has a high level of income inequality.</p>
<h2>Taxing food might be sensible but is it feasible?</h2>
<p>Food is another issue altogether, yet is likely to be just as controversial with the electorate. There are good arguments for taxing food (or at least for taxing more foods than we currently do), despite suggestions that this will make us less healthy. There’s no obvious reason why a dozen large Pacific oysters ($20.99), half a kilo of organic grass-fed eye fillet of beef ($30), 4 fresh black figs ($9.16), a 225g block of cultured butter ($8.99), and 500g of smoked salmon ($18.99) should be GST-free. Anyone who can afford to eat these regularly can afford to be healthy.</p>
<p>On this matter, unfortunately, we can learn something from the recent <a href="http://www.dailymail.co.uk/news/article-2151287/Pasty-tax-U-turn-ends-threat-50p-VAT-increase-long-eat-Greggs-dont-mind-lukewarm-one.html">“pasty tax”</a> controversy in the United Kingdom: once a particular foodstuff is exempt, it is very hard to get it back into the tax net. It takes a resolute government to explain the need for change and to resist the pressure from producers, consumers, and other interest groups to retain the status quo.</p>
<h2>Reform is always hard</h2>
<p>The most obvious lesson we can learn from other countries is that the best way to achieve a very broad-based GST is to introduce one from the outset. Raising the rate has proved much less difficult than expanding the base, with the OECD reporting significant rate increases in most countries since the global financial crisis.</p>
<p>We can learn from New Zealand that it is possible to operate a very broad-based GST; what we cannot learn from them is that we should. The debate about GST reform cannot be divorced from the <a href="http://theconversation.com/government-cant-just-push-gst-issue-on-to-the-states-26997">adult discussion</a> we need to have about what kind of society we want, <a href="http://theconversation.com/australia-needs-higher-taxes-not-spending-cuts-34657">what we are willing to pay</a> for that society, and <a href="http://theconversation.com/expanding-the-gst-would-hit-the-middle-and-women-the-hardest-36133">who will bear the burden</a> of any changes we make.</p><img src="https://counter.theconversation.com/content/36545/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rebecca Millar has received funding from the ARC for her tax research.
She is a pro bono academic advisor to the OECD's Working Party 9 on consumption taxes and was previously a member of the ATO's GST Advisory Group. She was formerly a member of the NTEU.
The views expressed here are entirely her own.</span></em></p>Value added tax (VAT), virtually non-existent before 1960, has been the predominant form of consumption tax since the mid-1980s. Given that more than 160 countries now have a VAT, it is hardly surprising…Rebecca Millar, Professor of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.