Academic journal article The Economic and Labour Relations Review : ELRR

A Better and Larger GST?

Academic journal article The Economic and Labour Relations Review : ELRR

A Better and Larger GST?

Article excerpt

1. Introduction

Reform of the Goods and Services Tax (GST) has been off the political agenda. The GST was explicitly excluded from the terms of reference of the Henry Review (Henry et al. 2010: viii), although a brief chapter D2 noted opportunities for its reform. The current federal government has been explicit on several occasions that changes to the GST are not being considered, and it was not on the agenda for the October 2011 Tax Forum (Australian Government 2011b). Similarly, the current federal opposition has not advocated taxation reform involving changes to the GST.

However, changes to the GST as part of a wider package of tax reform have logic to achieve a more efficient and simpler tax system. These gains are available with a tax mix change package which is constrained to collect approximately the same current aggregate revenue and which results in about the same distribution pattern. The current GST applies only to about 60 per cent of the potential broad consumption tax base, with New Zealand the practical example of a comprehensive base. Removing tax expenditures and broadening the tax base would bring efficiency gains and simplify the GST.

The revenue gains of a broader base and/or a higher rate GST can be used to reduce other more distorting taxes. Taxes to be removed or reduced include state stamp duties and income taxes. For example, the Henry Review (Henry et al. 2010: 13) estimate the marginal welfare cost of the current GST at eight cents per dollar revenue versus 68 cents for stamp duties on insurance, 44 cents for the corporate income tax, 35 cents for conveyance duty, and 25 cents for income tax on labour. Equity can be restored by recycling the GST revenue gains as higher social security payment rates and lower income tax rates. These tax mix changes have many of the characteristics of the 'A New Tax System' (ANTS) reforms of 2000 in Australia, and of increases to the VAT in the United Kingdom and the GST in New Zealand in 2010. A further potential gain of an expanded GST is to reduce the magnitude of the vertical fiscal imbalance of current Commonwealth-state financial relations.

Introduced in 2000, the current GST applies to about 60 per cent of private final consumption expenditure at a flat rate of 10 per cent. It is a destination base tax with exports exempt and imports taxed. As in other countries, the invoicecredit method is used. In 2010-11, the GST is estimated to collect $48.2 billion, or 13 per cent of all Australian tax revenue. The Australian GST tax rate is below the New Zealand 15 per cent rate and it is well below that of most OECD countries, with an average standard rate of over 18 per cent where the VAT collects 20 per cent or more of all taxation revenue (OECD 2011).

The remainder of this article provides more details of, and the rationale for, a tax reform package involving a broader based and higher rate Australian GST. In order to preserve approximate vertical equity of the status quo, some of the GST revenue gain would be recycled to lower the income tax rate schedule and to increase social security payment rates as more direct and explicit redistributive instruments. Other revenue would reduce, and in some cases replace, relatively more distorting and inefficient state taxes. A key part of the efficiency arguments for a tax mix change from a production and origin base income tax to a consumption and destination base GST derives from differences in the elasticities of responses of factor supplies relative to consumption. Arguments to replace payroll tax, especially by many business lobby groups, will be questioned. In addition to the efficiency gains, tax reform involving a more comprehensive GST tax base and removing some state taxes will contribute to simplicity and to lower administration and compliance costs.

2. GST Base Broadening and Rate

Relative to a comprehensive consumption base as illustrated by the New Zealand version, the Australian GST exempts expenditures on basic food, water and sewage, health, education and child care. …

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