Thursday, February 04, 2016

GST hike is a solution in search of a problem

Of all the daft analogies. Scott Morrison says fixing tax is like turning back boats.

"I have had a bit of experience with this," he told a Canberra press conference this week. "I remember before the 2013 election, turnbacks actually had lower levels of support in the Australian community. It's important that when you believe that something's right for the country, that you remain focused on that."

Here's what's different about tax. When you turn back boats, you know what you are trying to achieve. When you attempt to change the tax system, you are without a clear goal unless you set one first. A 15 per cent GST might well be the answer. But it's impossible to know without knowing the question.

The question was muddled from the start. Here's how Tony Abbott put it during the 2013 election campaign: "Well within three years, a tax white paper will have canvassed how we can have lower, simpler, fairer taxes for higher economic growth and better and more sustained services."

That's five points, a bit like the arrow-covered pointless man in the Harry Nilsson film who concedes that "a point in every direction is the same as no point at all".

No matter. Over time the objectives were to be sharpened in a discussion paper, then a green paper setting out options, and finally a white paper detailing the preferred option. We were to be given something to measure the final proposal against.

Except that the Abbott government fell apart. The treasury had the discussion paper ready to go at the start of December 2014. Abbott sat on it for four full months as he dealt with a string of crises, among them the loss of the Victorian state election, the ill-advised knighthood for Prince Philip and a challenge to his leadership. By the time it was released at the end of March there was precious little time for submissions and the production of the green paper due that year.

And Abbott started ruling things out. Superannuation wouldn't be touched. It's the biggest tax break there is after the family home. But Labor had proposed touching it and Abbott wanted a point of difference. Negative gearing wouldn't be touched. Labor had talked about touching that.

By the time the green paper was ready (about the time Abbott lost his job) there was not much in it. Abbott's vetoes had piled up. So Turnbull and Morrison sat on it, and now they are thinking about not releasing it at all...

To their credit they have put everything back on the table and they are talking to lobby groups. Morrison says he has fostered "quite a real debate out there in the community, among policy makers, in private and public sector alike, the various groups".

"I mean, we have the current arrangement, which says there would be a green paper and a white paper. But what the debate over the last three or four months, I think, has shown is, in many ways, the public [has] moved beyond that," he says. "We've advanced the debate I think a lot more effectively over the last four or five months than a green paper ever would."

That's rubbish. Without a clear objective, a 15 per cent GST can seem like the answer. Morrison has become a fan. The treasury isn't. It has calculated that compensation would end up costing "at least half of the extra GST revenue". And that's if it could be delivered. The much higher tax-free threshold these days makes it difficult.

If the objective is fairness (something Turnbull is very keen on) a GST hike won't cut it. It would hurt low income households much more than high income ones, which is why it would require compensation.

If the objective is economic growth, treasury's own graph presented in the discussion paper shows the GST to be no less damaging than an idealised income tax. Deloitte Access Economics says in the real world a switch would bring some benefits, but they would be small, dwarfed by those of other proposals such as swapping stamp duty for land tax. And even those wouldn't be big. Overseas evidence suggests that even the best tax switches don't do much for economic growth.

If the objective is revenue, a 15 per cent GST most certainly would help. But Morrison insists that's not his objective. He says he doesn't want to lift the overall tax take, even though that's precisely why premiers Mike Baird and Jay Weatherill want an increase in the GST.

Examined dispassionately alongside other proposals such as a uniform payroll tax, a land tax, a tightening of superannuation tax breaks and a cut in the company tax rate, a GST for income tax swap wouldn't achieve much.

But Morrison isn't that interested in dispassionate evidence. On Monday he dissed the economic modelling that supported a cut in the company tax rate saying "the sad thing about economic models for those who run them is that they're not perfect and they can't predict the future".

Like a shark preparing to attack, he is closing his eyes.

Turnbull meanwhile has pointedly refrained from pushing the idea of a 15 per cent GST. He genuinely hasn't made a decision and he is quite prepared to leave his treasurer out on a limb. Expect the treasurer to be reined in and expect the Prime Minister to consider the evidence and work out what actually works.

In The Age and Sydney Morning Herald