Reduce company tax, raise GST?

We can leave aside the flat earth Hayekians and their prescriptions to abolish most taxes and almost all government spending. At the moment, the GST is at the rate of 10 per cent and applies to about 60 per cent of all transactions. Fresh food, health, education and childcare are among the exemptions, costing about $15 billion in 'lost' revenue.

The current consumption wariness among Australia's workers means that the GST collections have slowed over the last few years.

For example, the Australian Taxation Office's statistics say: "For the 2010-11 financial year, net GST liabilities totalled $46 billion, an increase of 2.4 per cent from 2009-10.”

It was only a few years ago that collections were growing at 8 per cent. That $46 billion is distributed to the states and territories. The integration of the Australian economy into the global economy, its dependence on capital imports to grow, its aging population, the expectation of workers for decent public health, public education and public transport systems all mean that the ruling class and their economists are looking for ways to increase tax on workers in the coming years, or to cut government spending enough to fund tax cuts for business and the rich. Or do both.

The Henry Tax Review took the approach that if it moved finance capital (for example), tax it lightly; if it didn't move workers' consumption (land, resources and labour), tax it more highly. Big business and other members of the one percent have been very loud in their support of an increase in the GST rate and a broadening of the base to tax fresh food, health, education and child care.

At a recent forum I attended at the ANU, John Hewson mentioned a possible 20 per cent rate. John Howard is the latest to join the screeching banshees.

In his now-famous "Bring back WorkChoices" speech to the Westpac Deeper Insights Forum, the former prime minister also argued that the decision to exempt fresh food from the GST, imposed on him by the Democrats in 1999, meant there was now "a painful effect on state revenue”.

This is not some genteel walk down memory lane. It is Howard arguing for an incoming Coalition government to impose the GST on fresh food.

If the base is broadened and/or the rate increased the state and federal governments could then use the extra GST revenue and the gains from a broad-based land tax to abolish inefficient state taxes like stamp duties and the exemption ridden payroll taxes (which are consumption taxes under another name) and, here's the main game: deliver tax cuts to companies and the rich.

The GST was deeply unpopular. Although John Howard won the majority of seats in the 1998 election, he lost the popular vote. The Liberals and Nationals formed government with 48.1 per cent of the vote on a 2 party preferred basis; the Labor Party won 51.9 per cent but not government.

Any attempt to increase the rate or expand the base of the GST would produce an electoral backlash. Tony Abbott recently ruled out any increase in the GST.

He has previously ruled out expanding its base to include fresh food, education, health and childcare.

But the plot thickens, because a few weeks ago Shadow Treasurer Joe Hockey said: "If you are going to have a discussion about changing the GST, the states have to lead the argument because they are the ones that need the revenue. They have to take the community with them and they are not doing that.”

Hockey is not ruling out increasing the rate or expanding the base. This is because business wants both and the Abbott government will, like Labor, be a government of business. The difference is that at this juncture they will be even more brutal in their attacks on workers.

The attacks on jobs and government spending on the poor and less well off and workers in Queensland, Victoria and New South Wales will be magnified and deepened across the country by Abbott in power.

Abbott is not a fool. He knows a Labor scare campaign about the GST might cost him some votes. So his strategy is to promise not to touch it before winning government.

Perhaps Abbott should come clean and say "there will be never ever by any GST changes under any government I lead”. You know, just to provide that level of Howardian certainty we all crave. But because the bosses and their capital accumulation process demand tax cuts for business, the Liberals need to let their rich mates know the issue is still on their agenda.

That is why Joe Hockey put the pressure on the four conservative-run states to lead the push. Abbott might be tempted to do a John Howard and, once elected and in the run-up to the next election, announce his intention to increase the GST rate and/or expand its base if his government is re-elected at the 2016 election.

By then, if the states have joined all the economists, tax experts, senior public servants and the like in publicly pushing for major changes to the GST, there will be real momentum for increasing the consumption tax burden on workers by upping the rate and expanding the base.

This would especially be the case if some of the business tax cuts could be diverted to income tax cuts for workers; tax cuts that are eroded over time through bracket creep.

Of course, as China slows and Europe and North America prove incapable of escaping the Great Recession, the Australian economy could take a dive before that far-off 2016 election.

The response of the parties of austerity from left and right in Europe to economic crisis has been, apart from sacking people and slashing government services, to increase their consumption taxes. Given the electoral unpopularity of the GST in the 1990s, the Coalition will be careful about the way it deals with the tax.

But make no mistake: its goal is to increase the GST and expand it, probably in the longer term but possibly short term, especially if the economy tanks when they are in power.

It is time for Abbott to tell us his long-term plans for the GST and tax reform.

John Passant is a tutor at Australian National University's School of Political Science and International Relations, and a former Assistant Commissioner at the ATO.

This story first appeared on The Conversation. Reproduced with permission.