Tax forum: GST needs changing, so let’s debate it

Is it time to reform the GST? AAP

While changes to the GST are not an explicit item on the Tax Forum agenda, they should be and the issue will arise anyway.

A broad and comprehensive GST tax base along the lines of the New Zealand model would provide gains in efficiency and simplicity.

Recycling revenue gains from a broader base GST and an increase in the GST rate to replace more distorting state stamp duties and some income tax would provide further efficiency gains.

A larger revenue-earning GST would help reduce vertical fiscal imbalance and some of the inefficiencies of current commonwealth-state financial relations.

An approximate aggregate revenue-neutral package of improved indirect taxes, with a larger GST replacing more distorting stamp duties and income tax, can be designed so that most taxpayers are winners with a more productive economy.

Because of exemptions from the GST tax base, it is only 60% of a comprehensive general consumption tax base, such as that of New Zealand.

Exempt items include basic food, water and sewage, health, education and child care, and a lower effective rate applies to financial services.

The exemptions distort purchase decisions, for example between the necessities of water and electricity, and the organisation of service providers, such as the inclusion in-house of ancillary services of food preparation and business services by education and health suppliers.

Greater complexity and lack of transparency follows the often artificial distinctions between GST taxed and not-taxed items.

A more comprehensive New Zealand tax base would mean less distortions, less complexity, and more revenue.

The current Australian GST rate at 10% is low compared with New Zealand at 15%, and many European countries have a basic VAT rate of 20% or higher.

A larger revenue yielding GST would enable completion of the original idea of the GST at the time of its introduction in 2000 to replace existing selective and distorting indirect taxes.

According to the Henry Tax Review estimates, the marginal social cost of stamp duties on insurance at 68 cents per dollar of revenue and conveyance duty on property transfers of 35 cents far exceed the eight cents for GST.

Stamp duties are part of the reason for the observed high rates of non-insurance and of under-insurance, particularly among those on low incomes, revealed by recent natural disasters.

Conveyance duty acts as a disincentive to change houses when one’s employment changes or when family size expands and contracts.

Since these inefficient taxes are state levied taxes, a higher revenue GST is an especially attractive revenue replacement option.

A tax mix change involving a higher rate of GST to fund a lower rate of income taxation in an approximate revenue neutral and distribution neutral package has several efficiency benefits.

Such a package would represent an extension of the ideas of the reforms of 2000; of the 10% GST, about eight percentage points replaced more distorting wholesale sales tax and some state indirect taxes on financial transactions, and the remainder funded lower income tax rates and higher social security payments.

More recently, New Zealand and the UK in 2010 implemented similar tax mix change reforms. A shift from income taxation to consumption taxation reduces the former’s distortions to saving versus consumption decisions.

More importantly, the lower income tax rates reduce the magnitude of distortions and loss of efficiency to the choice of mix of saving and investment options caused by the hybrid tax system with its very different effective income tax rates on different choice options.

In the context of Australia as a open small country, as part of a wider and larger global economy, a consumption for income tax mix change represents a shift from a production base falling on some internationally mobile capital and labour inputs to a consumption base which is less mobile geographically.

Such a shift is in accord with optimal tax theory for reducing taxation distortions by placing relatively higher tax rates on the less price responsive decisions.

Under current commonwealth-state financial relations, the states depend on the commonwealth for nearly a half of their revenue.

Even then, the GST is collected by the commonwealth, and then redistributed in full to the states as untied transfers. For many, the vertical fiscal imbalance is an important reason for the blame game, wasteful rent seeking behaviour and inefficient government.

A higher revenue yielding GST is one of the better options for increasing the states’ own source of revenue to improve inter-government arrangements and general accountability of the different levels of government.

A new and cooperative arrangement between the commonwealth and the states is a necessary prerequisite for changes to the GST, and in particular as part of packages to reduce current highly inefficient state stamp duties and to reduce vertical fiscal imbalance.