tag:theconversation.com,2011:/us/topics/gst-the-evidence-14366/articlesGST: the evidence – The Conversation2015-01-27T19:22:03Ztag:theconversation.com,2011:article/362982015-01-27T19:22:03Z2015-01-27T19:22:03ZWhy the Commonwealth can change the GST without the states<p>Under Australian law, changes to the GST are said to be not permitted unless the states agree to the changes. In reality, the GST lock-in mechanism is legally meaningless and unenforceable, though it may still hold political weight.</p>
<p>Section 11 of the <a href="http://www.comlaw.gov.au/Details/C2014C00008">A New Tax System (Managing the GST Rate and Base) Act</a> 1999 provides that:</p>
<blockquote>
<p>“the rate of the GST, and the GST base, are not to be changed unless each State agrees to the change.” </p>
</blockquote>
<p>Similarly, section 1-3 of the GST Act states that:</p>
<blockquote>
<p>“the Parliament acknowledges that the Commonwealth will maintain the rate and base of the GST in accordance with the Agreement on Principles for the Reform of Commonwealth-State Financial relations endorsed at the Special Premiers’ Conference in Canberra on 13 November 1998.” </p>
</blockquote>
<p>These legislative provisions and the <a href="http://www.federalfinancialrelations.gov.au/content/intergovernmental_agreements.aspx">Intergovernmental Agreement</a> are referred to as the GST lock-in mechanism.</p>
<p>The legislative GST lock-in mechanism is contained in Commonwealth pieces of legislation. Despite the fact that the GST revenue collected is distributed to the states, these pieces of legislation are not Acts of state parliaments. Accordingly, it is the legislative power of the Commonwealth that is relevant when determining whether the GST rate and base can be modified contrary to the lock-in mechanism – that is, without state agreement.</p>
<h2>Centrality of Commonwealth Constitution</h2>
<p>The Commonwealth Constitution grants the Commonwealth Parliament the right to make laws in respect to taxation. Section 1 of the Constitution states:</p>
<blockquote>
<p>“the legislative power of the Commonwealth shall be vested in a Federal Parliament, which shall consist of the Queen, a Senate, and a House of Representatives.” </p>
</blockquote>
<p>There is no mention of any other body (e.g. state governments) having any power in relation to Commonwealth law-making.</p>
<p>The current GST lock-in mechanism is in conflict with section 1 of the Constitution, (which vests the legislative power of the Commonwealth solely in the Commonwealth Parliament) because it purports to grant a veto power to the states in regard to the GST, and is therefore constitutionally invalid. </p>
<p>In order for a GST lock-in mechanism to be valid, section 1 of the Constitution would need to be amended to include a grant to the states of a veto power over Commonwealth GST legislation. Such constitutional change could only be achieved by way of referendum.</p>
<h2>The role of the Intergovernmental Agreement</h2>
<p>In spite of the above, the Commonwealth government has a signed agreement (the Intergovernmental Agreement) with the states that contains the lock-in mechanism. Since the legislative provisions are invalid, does such an agreement provide an alternate avenue for enforcement of the lock-in mechanism? It depends whether the government has the authority to enter into such an agreement.</p>
<p>The key factor in addressing this is whether the executive under the Constitution (i.e. the government) has the authority to enter into such an agreement.</p>
<p>Section 61 of the Constitution gives the government the power (and effective responsibility) to implement and maintain the Constitution and the laws of the Commonwealth. The GST lock-in part of the Intergovernmental Agreement is attempting to circumvent a central pillar of the Constitution – that is, the sovereignty of the legislative branch of the Commonwealth government – by granting a veto power over certain areas of its legislative competence to the states.</p>
<p>If the High Court enforced the GST lock-in mechanism, it would be sanctioning a change to the Constitution without requiring use of the referendum process (i.e. contravening the Constitution rather than maintaining it). The High Court will not do that.</p>
<p>Overall, neither the legislation nor the Intergovernmental Agreement would legally prevent the Commonwealth government from changing the GST rate or base. However, this does not mean that the Commonwealth government won’t seek the approval of the states before making any such changes.</p>
<p>Professor Cheryl Saunders has stated: </p>
<blockquote>
<p>“Agreements that have no legal effect either as contracts or through legislation, nevertheless may be significant as a form of "soft law”, effectively guiding executive action, often complementing the operation of legislation and sometimes affecting the interests of third parties.“ </p>
</blockquote>
<p>Indeed, consulting the states has been the practice in regard to the numerous amendments to the GST since its introduction. From a political point of view, the Commonwealth government of the day would need to consider the inevitable community backlash it would receive if changes were made to the GST despite state opposition.</p>
<p>Therefore, whilst the GST lock-in mechanism is unenforceable, the Commonwealth government (regardless of political party) may still feel obliged to comply with it. It must also be remembered that the Senate is a central part of the Commonwealth parliament, and therefore must approve any legislation passed by the House of Representatives before it becomes law.</p>
<hr>
<p><em>Bruce Gordon also contributed to this article. Mr Gordon is a solicitor of the Supreme Court of NSW.</em></p>
<p><em>Dale Boccabella does read all of the feedback, comments, etc, in regard to his articles, and is grateful for them. He will not necessarily respond to all comments though.</em></p><img src="https://counter.theconversation.com/content/36298/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>Under Australian law, changes to the GST are said to be not permitted unless the states agree to the changes. In reality, the GST lock-in mechanism is legally meaningless and unenforceable, though it may…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.tag:theconversation.com,2011:article/362102015-01-20T19:24:03Z2015-01-20T19:24:03ZSelling a GST rise will be easier if we can follow the money<figure><img src="https://images.theconversation.com/files/69321/original/image-20150119-5188-17u4olz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many stubbornly believe a bigger pot of GST revenues, like the magic pudding, will regenerate.</span> <span class="attribution"><span class="source">PeraCultured/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Australia’s latest GST debate may be the political version of <a href="http://www.nybooks.com/books/imprints/childrens/the-magic-pudding/">The Magic Pudding</a>. We stubbornly believe that a bigger pot of GST revenues will regenerate – in whatever flavour is desired – like Alfred the bad-tempered pudding. A minister in the former government used to joke that funds from a higher GST “would be spent four times over before midday”, so numerous were the interest groups lining up to spend the hypothetical revenue, on an ever expanding list of spending priorities. </p>
<p>The Commonwealth government’s tax white paper is rightly examining an increase to the GST as part of a broader tax reform agenda. But the debate cannot be divorced from the question of what we will do with the money. Raising the GST is unpopular, and the public is unlikely to support it unless governments can show a pressing reason to do so. </p>
<h2>Eyes on revenue</h2>
<p>One reason the GST has magic pudding status is the amount of revenue it could generate. Broadening the base to include fresh food, education, health, water and sewerage could raise almost A$20 billion. Alternatively, increasing the rate of the tax from 10 to 14% would raise a little over A$20 billion while leaving existing exemptions in place. Generally, though, it is better to broaden the base of the tax because a broader GST <a href="http://grattan.edu.au/wp-content/uploads/2014/03/801_Balancing_Budgets.pdf">is more simple and efficient</a> than a more limited one.</p>
<p><strong>Foregone tax revenues from GST exemptions</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/94216/original/image-20150909-26372-10dzx1i.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Treasury 2014 Tax Expenditures Statement</span></span>
</figcaption>
</figure>
<p>A GST is regressive. Because people with low incomes tend to save less and spend more, the GST takes a greater proportion of their income, even though those on higher incomes pay much more GST per person. </p>
<p>Current exemptions to the GST for fresh food and health are defended as protecting low-income households. But these households do not spend a much greater proportion of their consumption expenditure on the goods proposed for inclusion in the broader GST base than do other households. As the chart below shows, the poorest households spend around 18% of their income on currently exempt items while others spend at least 14%. Therefore a broader GST would not be substantially more regressive than the current one. </p>
<p><strong>Proportion of household consumption spent on goods proposed for inclusion in the GST base</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=519&fit=crop&dpr=1 754w, https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=519&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/69333/original/image-20150119-2742-11ytqfk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=519&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Australian Bureau of Statistics (2013) Household Expenditure Survey, Catalogue number 6530.0; Grattan analysis</span></span>
</figcaption>
</figure>
<h2>Compensation</h2>
<p>Nonetheless, some compensation would be required to ensure that low-income people were not significantly out of pocket. Pensions and other social security payments would need to rise to make sure the most vulnerable are no worse off after paying higher grocery bills and health costs. Income taxes would also need to be adjusted, probably by increasing the tax-free threshold to compensate low-income earners. </p>
<p>But giving back too much compensation would reduce the revenue available. A rough calculation shows spending 20% of the revenue on compensation (about A$4 billion) would more than compensate welfare recipients and most wage earners. But more work should be done on this question. </p>
<h2>The priority: repairing state budgets</h2>
<p>Higher GST revenues could be used to repair budgets, fund higher spending, improve the efficiency of the tax mix (by funding reductions in other taxes), or reduce state reliance on Commonwealth tied grants. But it cannot do them all. The best use of higher GST revenues – obtained ideally by broadening the base – would be to ensure the sustainability of state budgets. </p>
<p>State governments provide many of the services, such as hospitals, schools and transport, that most affect people’s lives. These are also the areas of government spending that are increasing most rapidly. </p>
<p>Health spending has grown much faster than economic growth over the past decade, as health services are used more often, and more and better treatments are provided. This trend is likely to continue and costs will increase even more as the population ages. </p>
<p>State government spending on schools may also rise strongly in years to come because of reforms to funding arrangements following the Gonski review. Most state governments have committed to increase funding for schools with disadvantaged students. </p>
<p>Finally, states will need to meet the cost of past capital spending. Substantial <a href="https://theconversation.com/infrastructure-spending-to-blame-for-budget-shortfalls-26278">state borrowing to fund growing infrastructure spending</a> over the last decade has both significantly increased net debt and eroded how much state governments have to spend due to higher interest and depreciation costs. These have increased from 6 to more than 9% of all state revenue over this period. </p>
<p><strong>Combined state and territory net debt, 2014 $billion</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=418&fit=crop&dpr=1 600w, https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=418&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=418&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=525&fit=crop&dpr=1 754w, https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=525&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/69335/original/image-20150119-2730-1iseh7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=525&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">State government budget papers and mid-year forecasts; Grattan analysis</span></span>
</figcaption>
</figure>
<p>Yet at the same time states will need to meet these spending commitments, their revenue base is being eroded. </p>
<p>Taxes such as payroll tax and stamp duties raise just over half of state revenues. The rest comes from the federal government through transfers of GST revenues and tied grants. </p>
<p>GST revenues have failed to keep pace with economic growth. In the decade to 2013-14 they fell from almost 4 to 3.2% of GDP. This is both because households have saved more since 2003 and because consumers now spend more of their incomes on GST-exempt items, particularly housing.</p>
<p>Tied grants are also forecast to decline as a proportion of spending as the Commonwealth pushes spending back onto the states. In its last Budget the Commonwealth announced that from 2017-18 it would reduce payments committed to the states for schools and hospitals, saving it an estimated A$80 billion by 2024-25. The new arrangements shift the entire burden of growth in real spending per-capita on hospitals and schools back to the states. Assuming states seek to maintain the forecast level of funding for these services, they will need to find the money in their budgets.</p>
<p>This issue, including the distribution of funding to the states, is likely to be debated in this year’s <a href="https://theconversation.com/federation-white-paper-will-look-at-a-slimmer-role-for-canberra-28572">Federation white paper.</a></p>
<h2>Something has got to give</h2>
<p>But for now, all this points to a widening funding gap for the states. </p>
<p>States will need to both control spending growth and increase revenue to ensure their budgets are sustainable. They should make greater use of the efficient taxes at their disposal, such as broad-based property taxes. They should also be more disciplined in their spending, especially on infrastructure. But to close the revenue gap they will need to do more. </p>
<p>The GST is not a magic pudding. But increasing it will go a long way to ensuring the sustainability of state budgets so these governments can continue to provide <a href="http://politicsir.cass.anu.edu.au/polls-and-surveys/anupoll/polls/public-priorities-government-expenditure">the improvements in health and education services the public demands</a>.</p><img src="https://counter.theconversation.com/content/36210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p>Australia’s latest GST debate may be the political version of The Magic Pudding. We stubbornly believe that a bigger pot of GST revenues will regenerate – in whatever flavour is desired – like Alfred the…Danielle Wood, Fellow, Australian Perspectives, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/361332015-01-19T19:25:50Z2015-01-19T19:25:50ZExpanding the GST would hit the ‘middle’ and women the hardest<p>Many developed economies have experienced a significant increase in inequality in recent decades. Survey <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2291299">data for Australia</a> show that the share of the top 10% of the income distribution, and more markedly that of the top 1%, has grown dramatically. At the same time, tax reforms over the period have reduced tax rates on top incomes.</p>
<p>Over the short period from 2004-05 to 2008-09 alone the top bracket limit rose from A$70,000 to A$180,000 and the top marginal rate fell another two percentage points, concentrating billions of dollars of tax cuts in the upper percentiles. Those in the middle of the distribution gained little to nothing, an outcome achieved by combining tax cuts at the top with the Low Income Tax Offset. The LITO raised the zero rated threshold for those on very low incomes while simultaneously denying gains for the middle through its withdrawal rate of 4 cents in the dollar. </p>
<p>Against this background an expansion of the GST, which is well recognised to be highly regressive, is a reform that will further undermine the “middle”. A weakened “middle” will have negative effects on aggregate demand, jobs growth and productivity.</p>
<p>Proponents of an expanded GST typically claim that a consumption tax is more efficient than an income tax. For example, Liberal MP Dan Tehan <a href="http://www.dantehan.com.au/news/692/59/BROADEN-GST-BEFORE-ANYTHING-ELSE.html">argues</a> a shift from direct to indirect taxes like the GST will deliver higher standards of living. This view, which is supported in the Henry Review, reflects the belief that a tax on consumption is more efficient because it allows capital income to be tax exempt. The argument, however, contains a fundamental error in logic.</p>
<p>Modern public finance now recognises that the optimal tax rate on a given source of income, whether labour or capital, can only be determined on the basis of empirical evidence on distributional outcomes and behavioural effects. Even if capital were highly mobile, which is very much open to question in a number of important contexts, this does not imply an optimal rate of zero. This principle, derived from the <a href="http://www.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=6615">theory of “second-best”</a>, has been well established for over half a century.</p>
<h2>Outdated thinking</h2>
<p>The argument for a shift towards consumption taxation also reflects an outdated view of the household. </p>
<p>As explained in detail in the Henry Review, capital income is tax exempt under a cash flow expenditure tax (a consumption tax) and under a labour earnings tax (e.g. a payroll tax). The two are said to be equivalent. This is a fallacy that can be traced to the failure to observe that with the dramatic increase in female workforce participation over the last half century the majority of working-age adults live in couple households with two earners. </p>
<p>With information on earnings we can have an individual based tax that is not only progressive but applies a lower rate to the earnings of the partner with a lower income, typically the female on a lower wage. In contrast, we cannot observe individual consumptions (or saving) in two-person households. A consumption tax is inevitably limited to a flat rate tax on joint consumption and therefore cannot be superior to a well-designed labour income tax.</p>
<h2>Compensation problems</h2>
<p>The labour supply of partnered women as second earners is far more sensitive to taxes than male labour supply, as evidenced by the significantly higher estimates of their <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2007/Treasury-Working-Paper-2007-04">labour supply elasticities</a>. The higher they are taxed the more likely they are to drop out of the workforce. Efficiency therefore requires they face lower marginal tax rates. Due to the Howard family tax reforms many face effective MTRs that are much higher than the top rate on personal income. Expanding the GST will not only add to these already excessively high rates, but the provision of compensation targeted towards low income earners, as suggested by Tehan, will exacerbate the problem. Higher effective rates can only be avoided by introducing a more progressive rate scale on personal income, and this is clearly not the intention.</p>
<p>These issues are missed by KPMG in its analysis of the costs of alternative taxes in terms of consumer welfare loss per dollar of additional revenue. Liberal MP Angus Taylor <a href="http://www.afr.com/p/opinion/liberal_mp_how_to_sell_tax_reform_dUhXRPVK8avPuONAE45T2H">cites KPMG’s finding</a> that taxes on labour cost 24 cents for every dollar levied, in contrast to less than 10 cents for the GST. The result is based on a single-earner household with a single labour supply elasticity set at 0.2. While findings from KPMG’s modelling approach might have been relevant in the 1950s when most households were single-earner, they are entirely fictional for a 21st century economy.</p>
<p>The evidence on wage elasticities suggests female labour is the most mobile factor of production. Yet under current policy settings partnered mothers not only face the highest tax rates on earnings, many also face excessively high child care costs due to the failure of successive governments to invest in a learning focused public sector child care system. </p>
<p>Not surprisingly, well over 50% of married mothers of prime working age remain out of the work force or work part time not only during the child rearing years but throughout the entire life cycle due to loss of human capital. A conservative estimate of the overall loss would be in the order of 20% of GDP, a loss we cannot afford with an ageing population.</p>
<p>To reduce this loss we need to reverse the direction of tax policy in recent decades – that of shifting the burden from top incomes to wage earners in the middle of the distribution, and particularly towards partnered mothers as second earners. We also need to cut massive tax expenditures that primarily benefit high income earners and invest the revenue in child care. Expanding the GST is no solution.</p><img src="https://counter.theconversation.com/content/36133/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patricia Apps has received funding from the ARC for her tax research.</span></em></p>Many developed economies have experienced a significant increase in inequality in recent decades. Survey data for Australia show that the share of the top 10% of the income distribution, and more markedly…Patricia Apps, Professor of Public Economics, Faculty of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/361302015-01-18T19:20:56Z2015-01-18T19:20:56ZMaking the case for GST on fresh food<figure><img src="https://images.theconversation.com/files/68669/original/image-20150112-23789-1wjoixq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's GST is considered a regressive tax, so the idea of extending it to fresh food is considered unfair. A more detailed analysis reveals it's not that simple.</span> <span class="attribution"><span class="source">Charlotte90T/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p><em>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 <a href="https://theconversation.com/us/topics/gst-the-evidence">GST series</a> 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.</em></p>
<hr>
<p>It is popular to argue Australia’s goods and services tax is a <a href="https://theconversation.com/renewing-federalism-increasing-the-gst-will-increase-inequality-31360">“regressive” tax</a>, 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.</p>
<p>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?</p>
<p>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 <a href="http://www.aph.gov.au/%7E/media/05%20About%20Parliament/54%20Parliamentary%20Depts/544%20Parliamentary%20Library/Seminars/2011-12/TaxReform_Eslake.pdf">ways of making the tax system fairer</a> while still levying the GST on food.</p>
<p>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.</p>
<p>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?</p>
<p>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 <a href="http://www.pir.sa.gov.au/__data/assets/pdf_file/0005/165974/safood_consumers_report.pdf">skyrocketing in recent years</a> since the MasterChef craze took root.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/68670/original/image-20150112-23801-rb82p8.jpg?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">
<figcaption>
<span class="caption">Bread, or a cracker? Ask the taxman.</span>
<span class="attribution"><span class="source">Martin Burns/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Fair’s fair</h2>
<p>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 <a href="http://www.mondaq.com/australia/x/100026/cycling+rail+road/Federal+Court+Goes+Crackers+Over+Product+Classification+and+Warehouse+Licensee+Liabilities">Federal Court had to determine</a> whether an Italian ciabatta was more like bread (and therefore GST-exempt) or a cracker (which attracts GST).</p>
<p>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.</p>
<p>The other question is who’s preparing all this food? In brief, and on average, the answer is women. The <a href="http://www.researchgate.net/publication/249673914_Patterns_of_change_and_stability_in_the_gender_division_of_household_labour_in_Australia_19861997">research</a> 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.</p>
<p>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.</p>
<p>Interestingly, this <a href="http://www.aph.gov.au/senate/committee/gst/report/d03.htm">was the approach favored by tax academics during the introduction of the GST</a>. 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.</p>
<p>How much is this exemption costing? Estimates put the lost revenue of not administering the GST on fresh food <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Former_Committees/gst/main/contents">somewhere north of A$4 billion a year</a> [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.</p><img src="https://counter.theconversation.com/content/36130/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tomas Fitzgerald has received funding from the WA Bar Association. He is a member of the WA Labor Party and the NTEU.</span></em></p>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…Tomas Fitzgerald, Senior Lecturer, Law, University of Notre Dame AustraliaLicensed as Creative Commons – attribution, no derivatives.