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

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