Greeting the tax that must not be named

GST hikes are the Lord Voldemort of tax reform – seen by many as too awful to mention. But they’re the smartest option for any government that wants to get serious about the budget.

If there’s an economist who doesn’t like the idea of expanding the base or raising the rate of the goods and services tax, I’ve yet to meet them.

The case is overwhelming. The politics are diabolical, sure. But it’s important to give due diligence to all good public policy ideas.

So here it is.

Australia’s GST is already low by international standards. At 10 per cent, our GST is at the same level as New Zealand’s when they introduced theirs in 1986. The New Zealand government has since raised the GST rate twice, bringing it to 15 per cent in September 2010. New Zealand has faced its own budget crisis in the wake of the GST, but painful choices, such as on the GST, mean its finance minister, Bill English, is set to map out a return to surplus in 2014-15 in his budget due on May 16, just two days after ours. We should be so lucky.

Many European nations also impose a “value added tax” of 25 per cent, including Denmark, Finland, Sweden and others.

In most of these countries, there are carve outs for essential items like food, which attract a lower rate of tax at about 15 per cent.

In Australia, exemptions abound thanks to the compromise deal struck between the Howard government and the Democrats leader Meg Lees before it was introduced in 2001.

So fresh food like bread, butter and milk are free from GST. But if a food manufacturer takes those ingredients to, say, make cookies, those cookies sold in supermarkets do attract the GST.

Figuring out which is which is a headache for retailers that has never been resolved. Tim Reed, the chief executive of MYOB told a Sky News economy panel I attended last night that small businesses would actually welcome any move to clamp down on the exemptions from the GST. Doing so would make life easier for small business and remove a significant compliance cost.

Of course, the most obvious reason to increase the GST is that the government sorely needs the revenue. According to Chris Richardson at Deloitte Access Economics, there are big gains to be had. Extending the GST to fresh food would raise $6 billion a year, to health $3 billion and to education an extra $3 billion.

By removing the loopholes in the GST the government could make up for its entire $12 billion revenue shortfall.

Of course, one person’s loophole is another person’s exclusion to protect low income earners from the rising cost of the basics in life.

But, as Richardson points out, extending the GST not only raises prices, but the revenue needed to compensate low income earners, whether it’s through boosting the tax free threshold or increasing the pension.

We’ve done it once, back in 2001, we can do it again.

Another common criticism of moves to increase the GST is that it is a state tax with all the revenues raised flowing through to the states. That is not entirely true.

The GST is a Commonwealth levied tax that is paid to Canberra and then a separate decision is made to pay the proceeds to the states. There is no reason why the government could not decide to keep a share of any beefed-up GST. Tony Abbott, if elected, would be in a particularly good position to negotiate an increased tax take for both the Commonwealth and state Liberal governments. A new bucket of money is a new bucket of money, after all, in the eyes of a state Treasurer.

All taxes impose a cost on society as individuals seek to avoid paying them. This “deadweight loss” from transactions that might otherwise have occurred, that don’t, must be kept in mind whenever we look at the tax system.

But unlike capital, which is internationally flighty, or labour, which can sit on the couch instead, consumption –  the target of the GST – is less responsive when it comes to price. 

We’ve all got to eat, after all. This reduced capacity for tax avoidance makes the GST a particularly efficient tax.

As a tax on the consumption of all individuals in society, the GST is also a robust tax base for an ageing population.

This is a point made to me by former Ken Henry tax review panel member, now head of the Centre of Excellence in Population Ageing Research, John Piggott.

As the population ages, there will be a dwindling proportion of workers on which to apply income taxes. But you’ve still got to eat in retirement, meaning a beefed-up GST would be a broader based tax for the future.

Extending the base of the GST to include health services would also help to capture a growing share of consumer spending. Health services are what we call a ‘luxury good’ – ie, we tend to spend more on them when incomes rise. After all, if you don’t have your health, what do you have?

At present, prices have been rising the fastest on GST exempt items like fresh food, health and education. Covering off those goods would help to restore the GST base.

So there you have it; plenty of good policy reasons to increase the GST. But for some reason, this much maligned tax has become the “He who must not be named of tax reform”.

We’ll know a government is serious about tax reform and closing the structural gap in the budget when it is prepared to lead a national conversation about raising the GST.