The Leader of the Opposition, John Howard, was this week forced to rule out a goods and services tax forever. Mr Howard made the innocuous observation that while a GST would not be policy at the next election, no-one could predict future circumstances and economic needs. This was beaten up out of all proportion.
The Labor Party’s scare tactics were dusted off again and Mr Howard was forced to rule out a GST forever. This is an appalling result for Australia. It means the nation is locked into it present inefficient tax system for many years to come, perhaps forever. At most, a government can tinker at the edges. Most business people and economists understand the need for major tax reform along the lines of a GST. Many ordinary voters, however, fear that a GST will be imposed in addition to present taxes. That fear has some justification judging on past taxation experience: the tax take seems to get bigger and bigger. It is unfortunate, though, that Labor has managed to play on that fear so that a tax-neutral or even tax-reducing reform is now impossible if it involves a GST component in whatever form. The trouble is that without tax reform, Australia will be a less efficient society and the whole nation suffers. Australia will be less internationally competitive without reform. Some pain and adjustment is needed, but it appears to be worth it in the long run.
New Zealand is a case in point. The advantages of a GST are: it taxes imports and excludes exports; it taxes services (used in greater proportion by the rich); it can partly replace income tax which acts as a disincentive to production and saving because interest earnings are taxed; it acts as a disincentive to consume; it taxes uniformly so it has no distorting effect on the economy. However, it is difficult to sell those advantages to ordinary voters, as John Hewson found out in 1993. Indeed, it now appears that his ironic legacy to Australian politics is that an honest, mandated reform of the Australian tax system _ which he rightly gave high importance _ is now impossible. Either voters do not understand the economic effects of the tax system, or they are too easily persuaded by a scare campaign, or they are too suspicious that new tax means extra tax. The only way to achieve tax reform will be by stealth, starting without mandate or warning immediately after an election. It is not a very politically savoury way of going about things, but the end may justify the means. A GST may become more widely accepted as Australians see New Zealand’s economy move ahead. It is not that a GST is a panacea to all of Australia’s economic woes, but it, and other tax reforms, can help to encourage savings, investment and exports and discourage imports and consumption.
Some of those other reforms include removing the very high marginal rates of tax imposed on welfare recipients as they hit cut-off thresholds. And though the GST has been painted as an unfair, flat tax it need not be. With compensatory measures for lower-income people it has the advantage of ensuring the wealthy pay tax on their wealth if they want to enjoy it and pay tax on the consumption of services which the wealthy use more. At present the GST is a bogey. But like the bogey in the child’s bedroom it will no longer be a bogey if enough light is shone upon it