The goods and services tax is slowly capturing the low, middle and high ground.
The GST is becoming more popular among people for very different reasons. There is an odd alliance between business and social-welfare groups to support a GST. These two extremes of the income table have the most to lose or the most to gain from a GST, depending solely upon how it is implemented. For middle-income groups is not likely to make much difference immediately, but they are in there with support.
The middle ground support is reflected in the latest Bulletin poll which shows that 56 per cent are in favour of it and 37 against. Coalition voters are much more likely to support it. But the swing towards a GST is perhaps more a result of dissatisfaction with the present system, than an open embrace of a GST. The poll showed also that 66 per cent of people thought the present system needed to change.
The middle-ground PAYE taxpayers appear to be saying they are sick of being ripped off with ever higher income taxes being taken out of their pay while the high income earners escape through negative gearing, trusts, income-splitting and other avoidance schemes and people on low incomes get unearned money from the government.
The lower income earners have a different reason for supporting a GST. The Australian Council of Social Service and others are concerned that the tax base is narrowing and that in turn is causing governments to cut spending on the needy in society. They would support a broadening of the tax base to include a GST, provided it did not mean low-income earners were hit harder and provided it meant that overall revenues would rise so that governments had more money for the needy.
At the higher end of income tables, business, as represented by the Australian Chamber of Commerce and Industry, supports the tax for different reasons again.
For business, it is a question of efficiency. The present array of wholesale and excise taxes require high administration costs because different rates of tax apply to different categories of items. Just deciding the category for taxing purposes can be a nightmare. For example, should a Superman outfit be a toy (taxed at 22 per cent at wholesale) or clothing (free of tax)? Is a television stand merely furniture (12 per cent) or electronic goods (32 per cent)? Is a chocolate birthday cake confectionery (12 per cent) or food (zero)?
There are further economic inefficiencies. The wholesale tax applies to exports, whereas a GST would not.
A GST taxes consumption and therefore discourages it. If it is combined with cuts income tax it will encourage savings.
At present it is complete stupidity to save money in a bank deposit account, as we were urged in childhood. You put in $1000. A year later you get $70 in interest. Tax takes $35 of that. And a the other $35 plus a bit more is eroded with inflation. If marginal tax rates came down and were replaced with consumption taxes, there might be some point in putting money in the bank.
Overall, replacing a large amount of income tax with a GST will be better for the nation overall. The potential efficiencies, export encouragement and import discouragement are very large.
The potential for more fairness is also there. The GST captures services, which are used more by the wealthy. Tax avoidance is reduced to the extent that income tax is replaced with a GST because if people want to spend their income (upon which they have avoided tax) they with have to pay some tax in the form of a GST.
But, and this is a very big but, there is grave potential for unfairness. If a GST is not accompanied by major compensation to low-income groups it will be so unfair as to be politically unacceptable.
Lower income earners spend a far greater proportion of income on necessities than high-income earners. At present necessities, like food and clothing, are not taxed. On the other hand, luxuries, which high-income earners use proportionately more of, are taxed at a higher rate than the proposed 15 per cent GST. Luxury cars are at 45 per cent, jewellery at 32 per cent and so on.
So the rich like a GST because the sorts of things they buy will drop in price and they will also get lower income tax rates.
The disparity in taxation between the rich and poor can be seen even with the present mix of direct and indirect taxes. For the bottom 10 per cent of incomes, only 10 per cent of their total tax is paid as income tax and 90 per cent of their tax is wholesale and excise tax (booze, petrol and tobacco). For the top 10 per cent of incomes, 83 per cent of their total tax is income tax and only 17 per cent is wholesale and excise.
So if there is a further shift to indirect taxes from incomes taxes, the top income earners will benefit unless there is compensation.
But it is no good exempting food and clothing. Once you have exemptions the whole efficiency argument fails. You need armies of bureaucrats to work out exactly what food and clothing are. Also tax dodgers start reclassifying things to fit the tax-free categories … ski coats are sold as clothing, not luxuries; luxury camping tents becoming housing and so on.
But to include food and clothing in a GST requires proper compensation to make it politically acceptable. That will require a very long education period. It took from 1987 (Paul Keating’s Option C) to 1996 to get even modest understanding of the economic advantages of a GST; it will take a long time to convince people that a compensation package is fair.
People on middle incomes can be fairly easily catered for. The cuts in income tax compensate for increases in the GST indirect tax.
People on low incomes, however, cannot be compensated so easily. Many do not pay any income tax, so cuts in income tax will not help them. They will need cash from governments.
A further group of mainly elderly people living off savings accumulated through their working lives will be especially disadvantaged. A GST will reduce the purchase power of their savings in one hit and they would not have had the advantage of lower incomes taxes in the past and their total earnings now would be too low to give them significant savings in the future.
These people will not be conned. The business groups promoting the GST must realise that these people will work through the detail of the compensation and if it is not good enough they form a large enough section of voters to veto a GST and the economic benefits will be lost. Moreover, if they are appeased by exempting food and clothing, once again the efficiency gains will trickle away.
A further problem arises from the compensation packages being paid up front, before the revenue from the GST itself and the economic benefits from it come on stream. If that is funded through cuts in government spending far than a deficit, once again it will probably hurt low-income earners.
There are further anomalies. A GST will result in women’s tax burden being increased because they dominate the lower income groups who pay a higher proportion of their tax through indirect taxes.
From $5000 to $20,000 there are more women than men in every $2000 bracket. Yet overall there are more male taxpayers. At the other end, there are five times as many men as women in all $2000 tax brackets above $50,000. The men would tend to benefit more from the income-tax cut and the women would tend to pay the extra GST when they buy clothes and food. And there is no guarantee of intra-family compensatory payments.
It is easy to see why the GST is a fad of high-earning businessMEN.
But the efficiency of the GST is worth striving for. Business and government must recognise that to achieve it they have to provide imaginative and fair readjustments of other taxes and government payments.
An example of a sweeping efficiency which would also help equity, would be to cut income tax on all incomes below $20,000. It would cut three million people out of income tax (and all the administration that goes with it) but only reduce the total tax cake by about $5 billion of the total $50 billion. The GST would recoup this.
Low-income earners, however, would make some gains from an across-the-board 15 per cent tax replacing all wholesale and excise taxes. Present excises on alcohol, petrol, tobacco are much higher than 15 per cent. They are very regressive taxes. Low-income earners pay a far greater proportion of their income on these taxes than high-income earners, so any reduction in them by replacing them with a lower GST would benefit low-income earners.
However, the social impact of these taxes has to be taken into account. The theory is that “”sin” taxes discourage consumption. But the practice is different. Petrol, tobacco and booze have inelastic demands. Raising the price does not stop consumption (though it might cause some people to swap to cheaper alternatives … wine not spirits, home brew, roll-your-owns or diesel.)
The essential point is that moving to more indirect taxes has a myriad of consequences. An economics professor who happened to lead the Liberal Party might have been able to work them out quickly, but he was foolish to imagine the broad mass of voters could or would have the inclination to. Moreover, he (Dr Hewson) was naïve to ignore the fact that the complexity of the change would provide huge opportunities for unbalanced scare-mongering. Fightback had some very reasonable compensation packages, but also some defects.
If Australia is to reap the economic advantages of tax reform, those driving it have to realise many people have a lot to lose and are rightly suspicious. It will take a lot of time, a lot of repetition of the arguments and more importantly a lot of honesty and fairness.
We will also need good, non-tendentious statistics gathering. And good research generators. Both of which are under threat from short-sighted government spending cuts.
Footnote: I am indebted to two papers by Professor Ann Harding of the National Centre for Social and Economic Modelling at the University of Canberra: Consumption Tax, Compensation and the Distribution of Income; and The Incidence of Wholesale Sales Tax and Excises.