The statement by the Prime Minister, John Howard, that a goods and services tax should be more widely debated is a welcome one. From the moment of the defeat of the Coalition under John Hewson at the last election the GST has been a taboo subject. The Coalition was rightly concerned that Labor would again run a huge scare campaign at the slightest hint of it.
Now, however, with a huge majority in the House of Representatives it can afford to be a little more comfortable and relaxed about at least discussing tax reform. Mr Howard said this week that he had openly supported a GST when first put by then Labor Treasurer Paul Keating in the mid-1980s and again when proposed by Dr Hewson. He thought it would be a worthwhile reform, but he rightly recognised that he should live by his promise before the election and not consider it until after the next election. Ruling out a GST was a significant promise, on par with Telstra and industrial relations on the other side of the electoral ledger.
Even so, the next two and a half years should see extensive debate not only on the GST but on tax reform in general. Over the Labor years, middle-income earners have been significantly hit by the tax system. Lower income people have been helped by well-targeted social welfare. People on very high incomes have managed to rearrange their affairs to lessen tax. The pay-as-you-earn taxpayer has copped it badly.
A GST is not a panacea. The whole tax system must be looked at. A GST has some advantages. It reduces avoidance because higher income people must pay their tax if they are to enjoy their income. Consumption is far harder to hide than income. A GST would also tax services which at present go largely untaxed, and services tend to be used more by the wealthy. It would also tax imports more and exports less.
However, with a uniform GST, the indirect tax burden would be lower on luxuries and higher on necessities. So a GST must be accompanied by significant compensation to those groups who would be disadvantaged by elements of it … lower income earners who spend a higher portion of their income on necessities and retirees whose nest eggs’ purchasing power would be eroded.
In a wide-ranging tax debate, the Australian Government should explore the possibility of a small tax on foreign currency and foreign security transactions. This would have to be done in conjunction with other countries. Free marketeers may initially dislike any market interference, but in fact such a tax might have a healthy discouraging effect against some of the more rampantly speculative currency movements with the effect of stabilising markets more.
On the state taxes, the states should look a widening their tax base. A present a narrow range of taxes … on gambling, alcohol, petrol and tobacco … make up too-great a portion of their taxes. There is no reason why they should not reverse the 1970s decision to abolish death duties. It seemed smart at the time, but the narrow state tax base has made the states increasingly dependent on the central government which can and does greenmail and blackmail them into taking policy decisions they might otherwise reject.
Australia needs a widespread debate on tax, looking at funding infrastructure, fairness, equity, balance between local, state and federal taxes, efficiency, effects on industry and clamping down on avoidance.
The dipping of the prime ministerial toe into the water this week was at least a start.