Sunday, May 26, 2013

Why we'll learn to love the higher GST

You think it'll stay at 10 per cent?

Hands up if you think the GST is going to stay at 10 per cent.

If you believe that I bet you also believed in the tooth fairy, in the Australian government when it said would only use the Tax File Number for tax, in Julia Gillard when she said she wouldn’t increase the Medicare levy and in John Howard when he said he wouldn’t introduce a GST in the first place.

Things change. The GST hasn't, yet. But it was designed to.

Think about the agony that went into building it. More than a million Australian businesses were forced to become tax collectors. They are made to complete Business Activity Statements, to install special computer codes on their cash registers and to hang on to money due to the Tax Office they would rather spend. A University of NSW study finds it the most expensive of the taxes for businesses to collect, costing each business an average of $12,000 per year.

But now that it is in place, the extra cost of raising it is next to nothing.

All that’s needed is a small change to the line of computer code in each cash register. The real work has already been done.

Imagine a building constructed with super strong supports in the expectation that one day an extra story will be placed on top. The building is ready, and one day the extra story most probably will be placed on top because it’s a very cheap way of getting extra space.

The Treasury has ranked Australia’s twelve most important taxes in terms of the trouble that would be caused by increasing each one a little more.

The most trouble are mining royalties, insurance taxes, payroll taxes and company tax. Just about the easiest, right at the cheap end, is the GST. It is already in place and by international standards it is low.

New Zealand lifted its GST from 10 per cent to 12.5 per cent and then to 15 per cent. Introducing it was difficult. Lifting it was easy. The United Kingdom began with 10 per cent and now has 20 per cent. Germany has 19 per cent, France 19.6 per cent. China has 17 per cent.

Taxes are always their most unpopular before they are introduced...

Remember the fringe benefits tax, the capital gains tax, the carbon tax? Each was talked about in apocalyptic terms before it was introduced. Afterwards each is close to popular, certainly little remarked upon.

Labor’s Kim Beazley looked silly when he continued to promise to roll back the goods and services tax. Tony Abbott looks just as silly continuing to pledge to roll back the carbon tax.

Experts have a saying: “An old tax is a good tax”. That’s why our GST will inevitably be lifted. It is old, it is relatively low, and we will need more.

And it does little damage. Boosting income tax at the present rates would discourage people from working, especially mothers already facing big costs returning to work. Boosting company tax would frighten away some of the foreign investment we will need as the mining boom winds down. But boosting our present rate of goods and services tax would do little to dent spending. That’s what the overseas experience suggests.

It would unfairly disadvantage low income Australians. They spend almost all of their incomes on goods and services. High income Australians escape some of the tax by spending overseas and saving for retirement. But compensating low earners isn’t difficult. We did it most recently with the carbon tax.

The GST takes in $50 billion a year. Boosting it to 12.5 per cent would take in an extra $12.5 billion (less after compensation). Boosting it to 15 per cent would take in an extra $25 billion.

It is money we will need. Health and aged care costs are set to more than double as a proportion of GDP over the next four decades. No-one seriously suggests not paying those costs.

And we are rich enough. The question is how. What is the least-damaging way of raising more tax? At times Tony Abbott and Joe Hockey have put forward another (apparently less painful) solution - cutting government waste. But it is not clear there is enough waste to cut. The budget papers show the government spends no more of Australia’s national income than it did ten years ago.

Treasury boss Martin Parkinson put it starkly this week. He said we would need to either pay more tax to government or expect less from the government. The GST is about the best means of paying more.

In today's Sun Herald

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