Home > Tax and public expenditure > Increasing GST: not worth the effort?

Increasing GST: not worth the effort?

December 7th, 2015

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.

Categories: Tax and public expenditure Tags:
  1. David Allen
    December 7th, 2015 at 09:08 | #1

    Hearing all this talk about raising the GST is like hearing criminals plan their next bank heist in public without even the politeness to not be so brazenly open about it.

  2. Ivor
    December 7th, 2015 at 09:21 | #2

    This is pure capitalism.

    By passing taxes on to final consumption through a GST, capital passes tax responsibility from capital to wages and salaries.

    All GST on intermediate stages cascade down to final consumption.

    The only source for final consumption is wages and salaries and credit.

    All wages and salaries are generally taxed through PAYE and provisional taxation and workers get no deduction for the costs necesarily incurred in obtaining their income. If workers act like capitalists – eg investment housing – they then get all the tax deductions they could dream of.

    GST taxing being paid by workers after tax incomes amount to nothing but bloody double taxation – all just to allow capital to boost its own profits.

    And then our economists go bald trying to work out why the rich get richer and the poor get poorer.

    A minute GST on daily share transactions and on foreign exchange would obviously be a much better policy.

  3. Newtownian
    December 7th, 2015 at 09:26 | #3

    About a year ago I had a look at the Grattan web site. They struck me as being very light weight research wise compared to an average University department, heavy on the self promotion, and narrow in their view of the world being essentially management/economics focused.

    The context was something about my area of water. The analysis looked dodgy and I looked in vain for anyone who might have a technical clue about physical chemical or biological sciences and engineering or whether they might have undertaken some further subcontracting to incorporate the real world in their report. I found none.

    Now economists ignorantly commenting/prognosticating on water is nothing new so it was just par for the course. Nevertheless their analysis coloured my perception of their abilities badly and the more I looked they seemed the kind of organisation you would include on a list of places a lobbyist would visit while looking for a report/bag of arguments that put a quasi analytical spin on a starting assertion which was primarily ideological. aka a gun for hire.

    Regretably I’ve seen the gun for hire phenomenon all too often be it left right green or calathumpian. So I wonder really how far we can take such reports seriously. I categorically dont suggest Grattan are another IPA or have a specific ideology beyond perhaps ‘Manager Rule OK’. But it did make me wonder how we can better manage expert opinions better. Unfortunately when you get them from such think tanks or the proverbial ‘University Expert’ one almost never sees the devilish detail. And more generally who has the time or expertise to seriously deconstruct such stuff? ‘Consultation’ is so often such a joke unless it hits a raw nerve.

    In the academic literature it isnt so much of a problem….this dialectic competition, I guess you might call it, tends to be sorted out over time. But in the field of public policy and production of sound bites for media consumption the timeframe is so much shorter and the confusion of ad hoc opinions v. hard truth, much harder to disentangle.

  4. Michael
    December 7th, 2015 at 10:22 | #4

    @David Allen

    Couldn’t have put it better.

    ….or they could do the responsible thing and have a carbon tax.

  5. mandas
    December 7th, 2015 at 10:38 | #5

    But increasing welfare payments and cutting the lowest tax rates will NOT compensate all low income earners.

    I am retired and I live on a modest pension from my military service, which brings in less than $50,000 per year for myself and my wife. Under all the scenarios proposed for compensation I will receive absolutely nothing, and will have to pay a higher rate of GST.

    The burden of any increase will not only fall on those who can afford to pay – and there are quite a few in a similar situation to myself. All self-funded retirees will be worse off.

  6. John Quiggin
    December 7th, 2015 at 10:45 | #6

    @mandas

    Is that correct? As I understand it, you should be eligible for a part-pension, and therefore for some compensation.

    http://www.humanservices.gov.au/customer/enablers/income-test-pensions

  7. EconoMan
    December 7th, 2015 at 12:10 | #7

    Generally agree John. At least Grattan Institute has the compensation pecking order right.

    Increasing the top marginal rate is anathema to ‘teh orthodoxy’ and both major parties (probably for different reasons). Arguably, the theory and evidence supports that GST has less economic drag than income taxes in general, but that would definitely not be true of the concessions and rorts you pointed to. Australia’s GST is also compliance cost heavy, and it’s original virtual of being broad based is no longer true – and getting worse.

    One benefit of the GST – given most plans to change super tax concessions either ‘grandfather’ changes and/or don’t propose to tax the retirement phase, one benefit of the GST is that it is one of the few taxes paid by ‘self funded’ retirees that have their money primarily through (tax-free) superannuation.

    PS @mandas if a GST hike leads to a one-off spike in inflation (which it will), and if your pension is linked to CPI (which I suspect it is), then you will get some ‘compensation’ that way.

  8. Chris O’Neill
    December 7th, 2015 at 12:10 | #8

    @John Quiggin

    therefore for some compensation

    Nearly everyone will get a few crumbs of course but generally the idea that virtually every low income earner will be fully compensated is one of the big lies of this “debate”.

  9. Chris O’Neill
    December 7th, 2015 at 12:24 | #9

    @EconoMan

    one benefit of the GST (and an increase) is that it is one of the few taxes paid by ‘self funded’ retirees that have their money primarily through (tax-free) superannuation

    Indeed, which appeals to those who resent the excessive generosity of unlimited tax-free allocated pensions.

    The other side of that coin is the resentment that will be generated in receivers of those tax-free pensions if the GST is increased. I expect the vast majority of those beneficiaries are Liberal Party voters so it would be interesting to see how they react to a Liberal government springing it on them.

  10. Ivor
    December 7th, 2015 at 12:28 | #10

    @EconoMan

    I do not think that relying on CPI to “get some compensation” is particularly useful.

  11. EconoMan
    December 7th, 2015 at 12:33 | #11

    @Ivor why not?

    If the CPI adjustment is designed to maintain real purchasing power of the pension, and a CPI-indexed pension goes up to reflect that prices have gone up from the GST increase – then in theory real purchasing power is the same. How is that not useful?

  12. Chris O’Neill
    December 7th, 2015 at 12:58 | #12

    @EconoMan

    if your pension is linked to CPI (which I suspect it is), then you will get some ‘compensation’

    Problem is that newer public service pensions are no longer linked to the CPI. These days they are account-based pensions (like private super pensions).

  13. Ivor
    December 7th, 2015 at 14:31 | #13

    @EconoMan

    The GST hits different social groups disproportionately. CPI adjustments apply across the board.

    Relying on CPI based mechanism damages society.

    If a CPI effect was sufficient – why does the government propose non-CPI compensation?

    CPI adjustments only maintain real purchasing power if they apply at the same rate and time as price increases. This means they must take place every day.

    Otherwise those on annual or 6 monthly CPI index increases loose equity.

  14. GrueBleen
    December 7th, 2015 at 15:53 | #14

    @Newtownian
    I can’t say I’ve spent any of my increasingly limited time actually scanning the Grattan Institute’s website, Newtonian, but what you say tickles my Bayesian priors greatly.

    I suppose I should have a look at Grattan some day – it isn’t the IPA or similar – but fundamentally, I just don’t understand what such an ideologically bound organization is supposed to actually contribute to society, or to me come to that.

    ProfQ seems to think that Grattan is at least competent at a basic level, but who needs it ? I know that I don’t so if any of my tax money gets to Grattan, I’d want it rapidly defunded.

  15. BilB
    December 7th, 2015 at 16:43 | #15

    Apart from the brazen ideological tax flattening nature of jumping the GST up 50% there is the total in your face housing unaffordability consequence of this totally dumb proposal. Both rental and attempted ownership. It is classic policy for the well healed retired voters who have already acquired their assets and simply have to manage the draw down rate on their nest egg.

    It both pushes up the home ownership bar $25,000 it pulls down the ability to achieve the income level to be eligible to buy. As for compensation promises to buy acceptance for bad policy, we have all seen how that works: make the promise get the policy through; rapidly erode the compensation, or as in the case of the likes of Abbott’s just never deliver ficticious benefits.

    You would have to be a chronic gambler to think that raising the GST is somehow going to be good for the community. It is just plain LAZY government and political expediency feeding ideological obsessions. The ALP (remember it was the ALP who created the GST and the ALP who now want to raise it) only have to raise GST two more times after that and they have met their Libertarian goal at which point they can completely remove progressive income taxation, and we can all look forward to the mirage of Friedmanian trickle down incomes.

  16. Chris O’Neill
    December 7th, 2015 at 17:01 | #16

    @BilB

    there is the total in your face housing unaffordability consequence

    Indeed the GST goes on to building costs. Great if you already own your building. Not so great if your building equity is zero.

    the ALP who now want to raise it

    Where did Shorten say this? Or was it one of the state premiers who you wouldn’t want to get in the way of to a bucket of money?

  17. EconoMan
    December 7th, 2015 at 17:04 | #17

    @Chris O’Neill

    These aren’t ‘pensions’ at all. They are superannuation accounts. Depending on their income levels, ‘newer’ public servants would more likely receive compensation in the form of tax cuts or, if retired, general aged pension increases.

    @Ivor This seems either attacking a straw man and/or clutching at straws to me. Who’s proposing to rely on CPI indexation to the exclusion of anything else?

    1) Some pensions consider specific cost of living indexes for the relevant group. Also, as experience with these show, they don’t really vary that much from the ‘representative basket’ that informs general CPI. If there are obvious groups that would be disproportionately affected because their consumption patterns are so unusual, they could be directly compensated – but this would be exception rather than norm.

    2) Not everyone gets a CPI linked pension, so of course non-CPI compensation is required. Also, increasing GST has a ‘wealth effect’ on existing savings that a (sole) CPI adjustment to the pension doesn’t seek to address – so again, other compensation might be appropriate. Plus, as is often the case with ‘reforms’, including the original introduction of the GST, Government’s might ‘over-compensate’ people in the short term to ‘buy’ reform and overcome resistance to change.

    3) In terms of your ‘lag’ argument, there is frankly very little to this at current inflation rates. Most prices just don’t change that frequently, and with bi-annual pension adjustments, the lag is minimal. Furthermore, it is well known that ‘basic’ CPI can over-estimate actual cost of living increase because they assume no change in the basket of goods, whereas people will likely substitute and buy less of what has become more expensive.

    There are far more substantive issues in this debate, as John raises. GST reform is held up as the ‘holy grail’ for tax reform – and slated to fund pretty much every wish list (income tax cuts, company tax cuts, health and education spending growth…) but after compensating low and middle income earners, there’s really very little revenue left.

  18. Ivor
    December 7th, 2015 at 17:12 | #18

    @Chris O’Neill

    Or was it one of the state premiers who you wouldn’t want to get in the way of to a bucket of money?

    This was the ACT right winger Chief Minister who was speaking out of turn with no reference to either Cabinet, his party caucus or ACT Conference resolutions. In effect he is just a caretaker Chief Minister.

    He was only Chief Minister when the Left’s Katy Gallagher went to the Senate.

  19. BilB
    December 7th, 2015 at 18:17 | #19

    Oops mixing up my L’s and P’s ,

    ….the LNP who installed the GST and now the LNP who want raise it….

    ..thanks for the correction.

  20. Ivor
    December 7th, 2015 at 18:25 | #20

    Rats in the Ranks?

    Labor sell-outs

  21. Donald Oats
    December 7th, 2015 at 19:15 | #21

    Talk of a (real) 5% increase in income tax for all categories would cause a change in government at the barrel of a gun; talk against a 50% increase in GST is like sighing into a hurricane.

  22. BilB
    December 7th, 2015 at 20:34 | #22

    The reason for that Donald O is that you can’t be tight fisted with money you don’t get ( higher income tax), but, for the wealthy at least, more money received gives options. Higher valued properties will not increase in price by the amount of the GST increase as there is more discression which the vendor will exercise and absorb to make the sale. Not the case at the entry level of housing pricing. The same applies to high end food (restaurants), where profits are higher thd vendor will absorb the tax hit in order to retain throughput.

    Higher income from less income tax for those who are able to make substantial cash accumulations also gives greater financing leverage. A GST increase tat avoids an income ta increase is sll good news for the rich, and all bad news for those who must spend every cent they earn to make ends meet.

    Don’t be fooled. Do not allow a GST increase.

  23. Ikonoclast
    December 7th, 2015 at 20:38 | #23

    @John Quiggin

    Don’t forget the age requirement for pensions. There are superannuants under 65. Some may be as young as 55.

    “Women born before 1949 have already qualified for the Age Pension. Women born in 1949 and beyond now qualify at age 65, the same as men.

    The pension age for men and women born from 1 July 1952 will be gradually increased from 65 to 67 years as set out in the table below.

    Period within which a person was born Pension age Date pension age changes
    From 1 July 1952 to 31 December 1953 65 years and 6 months 1 July 2017
    From 1 January 1954 to 30 June 1955 66 years 1 July 2019
    From 1 July 1955 to 31 December 1956 66 years and 6 months 1 July 2021
    From 1 January 1957 onwards 67 years 1 July 2023”

    – Dept of Social Services.

  24. TS
    December 7th, 2015 at 22:10 | #24

    Isn’t the whole idea of GST reform a distraction from going after tax havens?

    Under the topic ‘Offshore Tax Havens” the US Institute for Policy Studies makes various claims, including that nearly $8 trillion of individual wealth is offshore.

    http://www.ips-dc.org/billionaire-bonanza/

    This is in the same region of $21-$32 trillion, said to be offshore by a former McKinsey consultant for the Tax Justice Network in 2012:

    http://www.taxjustice.net/2014/01/17/price-offshore-revisited/

  25. December 8th, 2015 at 09:07 | #25

    You say “Getting rid of the non-profit concession would probably require some compensating expenditure”….
    I can’t see how this would work. Every not-for-profit in Australia comes over and says “Pay us enough to compensate for upping every employee’s income $30,000”? This would result in a massive involvement of government in the NFP sector, among other things.

  26. John Quiggin
    December 8th, 2015 at 10:42 | #26

    @ChrisB

    I don’t mean that non-profits should be compensated individually according to their past exploitation of the FBT rort. Just that some of the money saved by removing the exemption would probably need to be given back to the sector in increased general funding.

    As I said, the same kind of issue will arise of health and education expenditure is included in the GST base.

  27. Chris O’Neill
    December 8th, 2015 at 18:59 | #27

    @EconoMan

    Depending on their income levels, ‘newer’ public servants would more likely receive compensation in the form of tax cuts

    You were right about military pensions still being indexed to the cpi and thus automatically compensated for a GST-caused jump in the cpi. However, not all of public service super benefits is protected from arbitrary jumps in the cpi. The PSS member contributions and earnings don’t have the same protection. (I haven’t checked if the same applies to military members contributions.) Also, if a public servant chooses to take some of their benefit as a lump sum then there is no cpi protection for that.

    So even public servants don’t get complete compensation for their benefit. Even for unfunded PSS pensions (which have no contributions tax), there is no income tax for pensions below $35,480 (because of the 10% rebate) so compensation simply through income tax reductions is not possible.

    Of course, public servants are in the luxurious position of receiving cpi-indexed pensions for a large part of their benefit. No such luxury accrues to the vast majority of people with a superannuation benefit who are basically screwed by an increase in GST.

  28. Ivor
    December 8th, 2015 at 21:07 | #28

    @EconoMan

    Where on earth did:

    to the exclusion of anything else?

    come from ???????

    As I mentioned already;

    If a CPI effect was sufficient then the government would not propose non-CPI compensation.

    People pushing the furphy that CPI can compensate for GST effect never seem to take into account that:

    CPI adjustments only maintain real purchasing power if they apply at the same rate and time as price increases. This means they must take place every day.

    Otherwise those on annual or 6 monthly CPI index increases loose equity.

    Handwaving over some lag is not sufficient. If CPI goes up 2% pa, and CPI adjustment is 12 months then the loss in equity is a full 1% year after year.

    Handwaving over some substitution is also not sufficient. The ABS takes this into account when it deems necessary.

    Maybe we should be seeking a decrease in the GST. I would want it abolished and tax applied to incomes.

  29. ZM
    December 9th, 2015 at 11:31 | #29

    There was an article in the paper yesterday about GST scenarios raised in a report for the Turnbull government, with one proposing a rise to 15% and inclusion of more things like education and healthcare.

    I think if a rise in the consumption tax was based on the rationale that consumption in Australia is generally too high, then that would be a more positive reason for the tax increase.

    If that was the case, then perhaps there could be different classes of consumption taxes, so, for instance, services could be taxed at a lower rate than manufactured goods.

  30. Chris O’Neill
    December 9th, 2015 at 14:08 | #30

    the elephants: land tax

    Wealthy property owners just love GST and its increase. GST increase increases the value of buildings on their land. A GST increase also means the government yet again puts off applying an economic rent tax to the capital gain on their land, a profit that they receive through other people’s effort.

    higher income taxes for (say) the top 5 per cent of income earners

    That’s OK on the face of it but it’s not much good if those top 5 per cent of income earners can still make use of the inefficient tax lurks of negative gearing and superannuation. I’d say there’s much better value for political effort in attacking those tax lurks before attempting to get a higher marginal tax rate out of them. It’s also worth bearing in mind that negative gearing enables the well-off to acquire economic rents through buying property. As if one wrong wasn’t enough.

    (reflecting elite opinion, the Grattan report suggests cutting these rates)

    Shame on them.

Comments are closed.