Both Labor and Coalition states are pushing the federal government to extend the GST to more online purchases as they look for additional sources of revenue.
And while the Coalition had promised no changes in its first term, they are now “leaning towards [the tax] but will insist the states lead the public campaign for such a move and bear some or all of the costs”, according to the Australian Financial Review.
One suggested reform, previously raised by retailers, is to lower the current $1000 exemption on imported goods.
But if the threshold is lowered and current administrative arrangements remain in place, the high costs to government and businesses of collecting GST on a very large number of parcels from all over the world mean the net revenue gains are likely to be small, if not negative.
A more ambitious proposal is to broaden the GST tax base along the lines of the New Zealand model, or to raise the GST rate from 10%. A larger GST could be part of a reform package replacing inefficient state stamp duties, increasing social security rates in a targeted manner and reducing lower income tax rates for distributional equity.
However, these changes will require a very significant and sustained investment in design and explanation to gain widespread community and political support.
Lower threshold makes sense, in principle
The GST is Australia’s broad-based consumption tax. It is applied at a rate of 10% on a base representing about 60% of domestic consumption expenditure. The larger exemptions are food, education, health, child care and water. And financial services are input taxed, which means concessions are provided to households.
In 2012-13 the GST is estimated to collect $48 billion. It is collected by the Commonwealth, and all revenue – net of administration costs – distributed to the states according to the principles of horizontal fiscal equalisation.
The general consensus is that while businesses collect the GST and send funds to the government, businesses pass forward the cost to households as higher prices for goods and services.
As a general principle, the GST is levied on imports to provide for neutral tax treatment of domestic-produced and import-sourced products. But because of high operating costs, imported parcels valued at $1000 or less are exempt from the GST, and also customs duty except for tobacco and alcohol.
Over time the share of household purchases via internet purchases from overseas has risen and this upward trend is expected to continue. The Treasury estimated a loss of gross of more than $600 million in GST revenue on imports valued at less than $1000 a parcel for 2011-12.
Some states see the forgone gross GST revenue on low-value imported parcels as an easy source of additional funds for their ever-growing health, education and infrastructure expenses.
And they have been joined by retailers complaining of a loss of international competitiveness, who are also arguing that similar taxation of all imported goods would boost local employment.
In principle, the argument for neutral taxation of all consumption goods – whether produced domestically, imported in packages valued at more than $1000, or imported in less than $1000 packages – is impeccable.
However, the in-principle argument for lowering the threshold assumes zero costs to collect the GST, both for the government authorities and for business suppliers. The reality is extending the current procedures would be expensive.
The Productivity Commission in a 2011 study, “Economic Structure and Performance of the Australian Retail Industry”, estimated additional costs more than double the gross extra GST and customs revenue if all imported parcels were to be taxed.
Lowering the current $1000 threshold to $500 would at best break even. Since the Commonwealth returns only net proceeds of the GST, that is gross tax less its administration costs, the net gains for the states are likely to be minor, at most a few $100 million a year.
Wider base, not a lower threshold
Investing in a more comprehensive base and higher rate GST as part of a larger tax reform package makes more sense.
First, a broad based consumption tax, like in New Zealand, has relatively low distortion costs. Using the Henry Review estimates, replacing state stamp duties and some income taxation can provide productivity gains of 30 cents or more per dollar of tax mix change.
Second, a comprehensive GST tax base, including food, education and health, would simplify the tax and lower business costs. And third, while the GST is regressive in its incidence because low income households spend a higher share of their income on food, higher income people spend many more dollars on food, education and health.
Complementary changes in the social security and progressive personal income tax rate schedule are more direct and effective ways to achieve distributional equity.
A larger GST will require complementary changes as part of a wider tax reform package to state taxes, income taxes and social security payments. And the reform package would have to consider Commonwealth-State financial relations. None of these questions will have easy answers.
At best, some of the opportunities and the options should be explored by the promised Commonwealth review of taxation.