The 'political stupidity' of GST reform

In a cynical manoeuvre, Labor has slammed the door on discussion of the tax reform Australia needs – just as it did with the Henry review.

To believe the headlines today on GST reform, under an Abbott government we’ll see Joe Hockey in a cape and Zorro-style mask dashing around shopping centres and pinching coins from shoppers’ wallets and purses, bellowing ‘give me my extra GST!’

But no. That’s not what Hockey said today, nor what Tony Abbott and Andrew Robb have said in past months. No cape. No mask. No hike in GST.

A bit of clever rhetoric from Prime Minister Rudd, and a message or two from Labor tweeters, has put the dreaded tax back on the agenda – Victorian Labor tweeted (with an alarming lack of commas): “To make sure Hockey doesn't make life harder by increasing the GST volunteer today.”

However, such a suggestion is “crap” according to Professor John Freebairn, tax reform specialist in the economics department at the University of Melbourne. 

What the Coalition has in fact promised is what Labor balked at when it let Ken Henry loose on his tax review in 2008. His report, published in 2010, wasn’t allowed to mention GST reform or taxing superannuation withdrawals. It was a root-and-branch review that ignored much of the trunk of the tree. 

The Coalition now proposes to have a full and frank discussion about all taxes during the 44th parliament, and that means mentioning the unspeakably evil GST. 

That discussion, should it come to pass, can consider broadening the base – only around 60 per cent of value-added goods and services are taxed – or raising the rate. The EU nations average 20 per cent for value-added taxes, and in New Zealand it's 15 per cent, compared with our 10 per cent. 

The Australian quotes Rudd today on the campaign trail in Western Sydney as saying: “If you are going to jack up the goods and services tax, you've got to be upfront with the Australian people ... If you are going to extend the goods and services tax on to food, which is what expanding the base means, you've got to be upfront with people.”

And up-front is what the Coalition has already promised to be. As with John Howard’s bold GST reform, any future change would be taken to an election. And if an Abbott government did decide to take either step, it would take just as much political cunning and salesmanship to get voters on side as with the Howard laws. 

Freebairn says Rudd’s attack on the Coalition for even considering all taxes in a white-paper review process is “political stupidity” – he says he has no confidence that any light will be shone on tax reform in the weeks leading up to the September 7 poll. 

That’s a pity. The arguments in favour of GST are as strong as ever. 

Freebairn notes that though a tradie taking an undeclared cash payment at your front door is still income tax evasion, when that money is spent by the tradie him/herself, at least the GST tax is picked up by the public purse. 

Further, GST is one of the most efficient taxes available. All taxes distort the ‘natural’ patterns of investment, production and consumption, but a 10 per cent GST does this less than most. 

The inefficiencies these distortions cause in an economy are modelled by economists to produce a ‘marginal efficiency cost’ – for every dollar of GST collected, says Freebairn, the distortion is worth about 8-10 cent. By way of comparison, every dollar of stamp duty collected by the states costs the economy 60 cents. That’s a duff tax. 

One problem with raising or broadening GST is that there would have to be careful adjustments to income tax levels, or other taxes and benefits, to make sure it wasn’t vulnerable or disadvantaged Australians who picked up the bill. 

That’s all quite possible, if you’re a good enough politician to bring the public along with you, gain an electoral mandate, and successfully implement the tax change and it offsetting tax/benefit changes. And the economy, the federal budget and the citizenry would benefit.

One might have thought Kevin Rudd would be a good enough salesman to pull off that trick, and make a real and positive structural change to the collapsing federal budget. 

But he’s decided, for political reasons, that that kind of grown-up discussion is too much for voters. Better just to shout it down.