With the federal government’s review of taxation about to get underway, many are expecting Australia’s Goods and Services Tax to be up for change. In this GST series we take a closer look at the evidence: the revenue on offer from broadening or increasing, what’s required for the government to change the tax, and the case for compensating those on lower incomes.
It is popular to argue Australia’s goods and services tax is a “regressive” tax, and on that basis, extending the tax to fresh food would be objectionable. Indeed, since people on lower incomes spend more as a proportion of their income on food – it is a tax that hits the poorest hardest. As a consequence, widening the base of the GST would disproportionately impact lower income earners.
But is this a knockout blow for the argument against assessing the GST on fresh food? That it is regressive and unfair and impacts lower income earners disproportionately?
Only if you look at that one aspect of the GST in isolation. Tax academics are fond of saying that there are no such thing as bad taxes, only bad tax systems. Considered as a whole, there are ways of making the tax system fairer while still levying the GST on food.
While it is true that the source of the regressive nature of the GST – the difference between the percent of income spent on food by the lowest and highest income groups – remains, that gap has narrowed significantly since 1984 and is trending downwards, according to my analysis. Where the spending differential on fresh food between top and bottom income quintiles, as a proportion of household expenditure, was more than 5% in the 1980s, it narrowed to a low of 2.5% in 2003-04 and despite a slight rise in the 2009-10 data appears to be maintaining an overall downward trend.
Yet in chasing that difference we ignore significant real spending by high income earners. This is the first quirk in the non-application of the GST to fresh food; it is effectively a tax-break for the wealthy. Why would we decline to tax food purchased by a person on A$180,000 a year simply to save someone on A$30,000 a year some money? Why not treat different people differently, as we do with income tax?
The second quirk comes when you consider the category “fresh food”. Of course, it covers staples like bread and meat and vegetables. But it also covers luxury food items. The purchase of raw foie gras for preparation at a fancy dinner party is GST-exempt, with the rationale that consumption taxes are regressive! A tax on foie gras is progressive, not regressive. It is akin to the luxury car tax; while in theory it is levied at the same amount regardless of a buyer’s income, in practice it tracks with income. And the consumption of luxury food items has been skyrocketing in recent years since the MasterChef craze took root.
We could parse the category of “fresh food” more finely – administering the GST only on those fresh food items considered “luxury”, but that creates another problem; the cost of administering the tax. This includes government research, writing and administering new regulations, the cost of retail outlets changing software, classifying new products on the market, etc. Inevitably disputes about categories would need to be settled, such as when the Federal Court had to determine whether an Italian ciabatta was more like bread (and therefore GST-exempt) or a cracker (which attracts GST).
Another corollary is that since food that doesn’t fall into the category of “non pre-prepared” is taxed, a time-pressured single mother who gives her kids money to buy their lunches at the tuck shop pays GST. As does an infirm pensioner who struggles to prepare meals so buys heat-and-eat alternatives. These stem from an odd, moralistic idea that people who have the time and capacity to prepare food should receive a tax concession for doing so. This is not necessarily equitable.
The other question is who’s preparing all this food? In brief, and on average, the answer is women. The research suggests that while women’s time spent preparing food has decreased since 1980s, this is due to an increase in the consumption of ready-to-eat food of various kinds. Additionally, men are more likely to undertake kitchen-related housework when there is less food preparation to do. The surveys for this research showed the more time a household spent preparing food, the more on average - both in real terms and as a proportion - women undertook that work. In an odd sense the GST-exempt nature of fresh food is a tax break aimed at encouraging women to stay in the kitchen.
The better solution would be to pay low-income earners - say the lowest income quintile, or 20% - a direct compensation for the extra amount that they’ll now pay in GST on fresh food, essentially giving them back a tax credit of the extra GST they pay. This would compensate low income earners, removing the regressive nature of the tax for those most in need.
Interestingly, this was the approach favored by tax academics during the introduction of the GST. But the Australian Democrats – on whose support passage of the legislation depended - didn’t trust the Howard government to fairly administer direct compensation to low income earners, or to not just wind it back at some later date. They reasoned that expanding the GST would be much more difficult than removing direct compensation, so excluding - among other things - fresh food was preferable since it would be politically more difficult to later change the rules.
How much is this exemption costing? Estimates put the lost revenue of not administering the GST on fresh food somewhere north of A$4 billion a year [see 5.25 - 5.27], even after you subtract the direct compensation to low income earners. Perhaps expanding the GST - with the appropriate compensation - might not be the regressive dystopia we worry about. In fact, it might make the take more efficient and fairer, both in vertical equity and gender equity terms.