Why we shouldn’t hate the GST

Australia faces a tough choice between eroded public services or an increase in the tax base. To achieve the latter, a GST increase is the clear winner.

Households may despise the GST, but they shouldn’t. Australia has only two genuine alternatives, either they increase taxes or the cut government services. It’s time for households and state governments to stop being naïve and face facts: increasing the GST is the best option available.

Everyone hates paying taxes but we all recognise that they play an important role in maintaining Australia’s standard of living. Taxes deliver a range of government services that the private sector is often unwilling or unable to provide.

Would you be willing to pay higher taxes if it meant that you got to keep those services? Universal health care and quality education, a safety net that reduces inequality, a strong police force and the ABC.

I suspect the answer to that question is a tentative yes. Even faced with no alternative, we are reluctant to pay higher taxes, particularly after a generation in which budget time was synonymous with tax cuts.

But recently our tax base has come under increasing pressure. Tax revenue declined sharply following the global financial crisis and simply hasn’t recovered since -- at least not to the extent that many analysts expected.

The federal budget is set to be downgraded heavily when the Coalition releases their Mid-year Economic and Fiscal Outlook in December. Most of the revisions will be on the revenue side, with nominal GDP rising at a far slower pace than the government expected.

Ongoing weakness in the resource sector and a lower terms-of-trade ensures that tax revenue will be downgraded for the outer years as well. At the same time, the demand for government services continues to rise.

Spending on aged care services and healthcare are forecast to increase significantly over the next few decades. We have also introduced legislation such as the National Disability Insurance Scheme that is costly but necessary to improve the living standards of many Australians.

Based on current policies, we will run a federal budget deficit indefinitely.

That creates a conundrum that isn’t easily fixed. Either we cut government services or we raise taxes. Neither is particularly palatable, but the former is more burdensome on the lower and middle-class. Just look at the response to the 2014-15 federal budget.

So the question immediately becomes what taxes should be raised? Income taxes? Company taxes? The GST? What about the fuel excise? Or levies on foreign goods?

Income and company taxes are politically unpopular but much easier to pass through parliament. Unfortunately, they also discourage employment and investment.

Higher income taxes encourage people to either not enter the workforce -- as is often the case with a household’s second income earner -- or to reduce the hours they do work. Higher company taxes encourage businesses to reduce the number of people they hire. It also reduces the level of foreign investment and the desire for businesses to operate within Australia.

The GST on the other hand is almost impossible to pass through parliament without bipartisan support at the state and federal level. Nevertheless, it’s a difficult tax to avoid and has a minimal effect on employment. The tax burden of the GST is significantly lower than for either income or company taxes.

A report by KPMG, based on the Henry tax review in 2010, made this point clear. Increasing tax revenue by a dollar via the GST incurs an additional marginal cost of just 8 cents; this compares favourably with 24 cents for income taxes and 40 cents for company taxes.

A higher GST would also be beneficial for state governments who remain overly reliant on volatile state-based taxes such as stamp duty and resource royalties. Both are unpredictable -- in contrast to the GST -- and make it difficult for state governments to plan ahead.

Just look at Western Australian premier Colin Barnett whose 2014-15 budget has already been destroyed by the sharp fall in iron ore prices. Sure his assumption that prices would remain at over US$120 a tonne was equal parts naïve and stupid, but it highlights how susceptible state budgets are to changes in the resource or property sectors.

I disagree with most of the policies announced by the federal government in the 2014-15 federal budget, but their desire to reform federalism and reduce duplication at the state and federal level is worth pursuing. Naturally, the GST is a key part of that, but it also has the added benefit of widening the tax base and reducing the volatility of state budgets.

Households and state governments must recognise one inalienable fact: tax revenue must rise (either via legislation or via bracket creep) or essential services must be cut. Given no other alternative, I suspect that most Australians would prefer their kids to receive a quality education and for Australia to maintain its universal health care system. The answer is simple: increase the GST.

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