Tuesday, September 18, 2012

Why the GST is failing, and why it's hard to fix

Me on ABC Adelaide 891 September 19, 2012

11 minutes, play or CLICK THEN CLICK AGAIN to download mp3

The GST takes in $50 billion per year


Lift the rate to 12.5%: An extra $12.5 billion

Lift the rate to 15%: An extra $25 billion

Tax fresh food: An extra $6 billion

Tax financial services: An extra $4 billion

Tax health spending: An extra $3 billion

Tax education: An extra $3 billion

Tax child care: An extra $600 million

Tax on-line imports: An extra $600 million

Commonwealth Treasury: 2012 Budget, 2011 Tax Expenditures Statement.

(Rounded figures)

Lifting the goods and services tax to 15 per cent would boost Australian state budgets by an extraordinary $25 billion per year - $8 billion of which would be kept by the O’Farrell government in NSW, but experts warn it would soon evaporate.

Fifteen per cent was the rate originally slated for the GST to be introduced by a John Hewson-led Coalition government should it have taken office in 1993. It is also the rate to which New Zealand has now lifted its GST after two decades at 12.5 per cent. It is dwarfed by GST rates of 20 per cent or more in most of Europe.

At 10 per cent, Australia’s GST earns the states $50 billion per year, double the $24 billion it earned when introduced in July 2000. But as a proportion of gross domestic product it has been slipping for years, something Treasury budget papers blame on increased household saving, and also a “steady decline in expenditure on items attracting GST as a share of total consumption”.

“We knew this was going to happen,” says Greg Smith, a former head of Treasury’s revenue group and a member of the Henry Tax Review. “It was clear people were moving their spending from goods to services - it was one of the arguments for a GST - but it was also clear they were moving spending to services outside the scope of the GST such as health and education."

Treasury calculations show the prices of health, education and rent - all excluded from the GST - have been increasing far faster than the prices of items covered by the GST, meaning a growing proportion of spending is GST exempt.
It is why NSW Premier Barry O'Farrell and Treasurer Mike Baird have called for a debate about lifting the GST, receiving backing from South Australia’s Treasurer Jack Snelling.

But experts warn lifting the rate to 12.5 or 15 per cent would only buy time, perhaps even accelerating the shift in spending away from items covered by the GST...

“The greater the GST rate the greater the incentive for fraud and for moving spending elsewhere,” says Neil Warren, professor of taxation at the University of UNSW. “To stop it you would need to tighten up on GST-free imports and consider extending the GST to food, education and health.”

Treasury calculations show extending the GST to presently exempt fresh food would raise an extra $6 billion per year (some of which would need to be spent compensating low income earners), extending it to education would raise a further $3 billion, and health another $3 billion.

But Professor Smith says the health and education savings are illusory.

“The states themselves are the biggest providers of health and education. Taxing their services in order to help fund their services would mean money in one door and out the other. It isn’t a net revenue gain.”

And much of the extra income would be earmarked as soon as it came in.

“The Commonwealth would want the states to cut insurance taxes and stamp duties. Those two alone would eat up the extra income. The Commonwealth would want to pin the states down to timetables for cutting the taxes, it wouldn’t just let them have the extra GST,” said Professor Warren.

In today's Sydney Morning Herald and Age

Related Posts

. Our GST. Expensive, clunky, too low

. How Australia compares on tax, graphically

. Tax expenditures. Notice how the big ones go to the best off


Austin said...

Getting rid of states would help.

Peter Martin said...

The states aren't the problem. They're the bods that actually do the work, like providing shcools and hospitals and roads.

I reckon the problem is Commonwealth encroachment.

Austin said...

It's the artificial division of services which makes things "tricky" and has states crying poor as you pointed out. So they have to be a factor.

I do not see any reason why the commonwealth couldn't run schools, hospitals, transport, registries etc. (i.e. large scale services) and possibly more efficiently and have more flexibility in funding possibilities.

The point about people moving towards non-GST good and services is fair enough, but the 19th century divisions hinder not help the solution.

Marek said...

Why isn't there GST on financial services?

Peter Martin said...

The argument was that they were hard to define.

wilful said...

Financial services were hard to define? Sounds dodgy to me. Someone issues a bill, put GST on it, how hard is that?

I'd prefer to see all of the exemptions removed before a rate increase. And what would we do with the $$ (apart from NDIS, Denticare, Gonski education - all federal initiatives)?

derrida derider said...

Since roughly two thirds of health and education expenditure in Australia comes from government, two thirds of that extra GST revenue would have to be extra government spending to pay fir it. A lot of churning for not much net revenue.

Its another case of no-one should use the Tax Expenditure Statement without reading the stuff at the front of the publication about the appropriate counterfactual.

Pretty well every jurisdiction in the world would love to extend their VAT to financial services, but it's impossible to define the "value added" in a way which is not either easy to evade or seriously stuffing up real capital allocation or both. If we want to tax financial services (and we should) there are better ways to do it than a VAT/GST.

Peter Martin said...

Thanks DD

Post a Comment