Prime Minister John Howard is right to call for major tax reform, including a goods and services tax. Opposition Leader Kim Beazley does not do himself or his party any good by locking himself in so early to oppose it, as he appeared to do at the weekend.
That said Mr Beazley is right to point out that a GST could be an unfair burden on some groups. But that can be overcome by compensatory measures. More importantly, the present tax system is more unfair to more people than a GST could possibly be. The need for reform is unquestionable and gets more urgent as time goes on.
The question of how much the government sector takes can be left aside in this debate. Some will argue that society needs greater government intervention and more government services; others will argue that smaller government and more reliance on the private sector is better for the nation. Whatever one’s view on that, it should be beyond question that the present method and mix of taxation is unsatisfactory.
Several broad defects need addressing. The first is that the very high marginal rates of incomes tax at quite modest levels of income acts as a disincentive to work, save and invest. They are also an incentive to avoid taxation through the use of the cash economy and other more sophisticated avoidance scheme by the very wealthy. A GST is more difficult to avoid. Moreover it catches services, more frequently used by the better off.
Secondly, the federal-state tax balance is unsatisfactory. The states have been forced into an ever-narrowing band of taxes which have a distorting effect. The states’ heavy reliance on payroll and stamp duty are disincentives to employment and other beneficial economic activity. Their reliance on gambling taxes had made at least some of them active promoters of gambling with all its social detriment.
Thirdly, the present wholesale-tax system and absence of a tax on services is not helpful for Australia’s balance of trade. The present system excludes too many imports from tax and excludes too many exports, especially exports in the form of services to tourists.
Of course, it is fairly easy to point out the drawbacks to the present system. But it will take a great deal of political goodwill and compromise on the part of the major players for any worthwhile reform. The main players are the major political parties federally and in the states; the welfare lobby and business. It is important for them all to realise that with some give and take reform carries benefits for all. The danger is that some will seek short-term advantage. Already, the federal Labor seems set of a course of a scare campaign. However, opinion polls are showing an increasing mature attitude to tax reform and it may well be a Labor scare campaign will backfire.
The approach of the Australian Council of Social Service seems to mirror that maturity. It has sensibly said it will discuss reform and has not opposed a GST and has riveted its attention to detail.
A GST on its own is not a solution. But an administratively simple broad-based GST must be the starting point of reform. The debate into the next election and beyond should be about the detail: compensation for welfare recipients and the aged with assets; comparable reductions in income tax; more sensible state taxes (including, perhaps, a slice of the GST cake); further attacks on avoidance; and tax simplification.