Oh dear, the new round of GST debate is hardly off the ground and the first of the special-interest pleas have come out of the woodwork, and this time from the Coalition’s own side. Health Minister Michael Wooldridge wants health services exempted. Not, mind you, because he thinks health is an essential service and so on principle should not be taxed. No; rather he is worried that a large part of health is provided by the public sector and would be tax-free under any GST regime. As a result the private-sector health suppliers, which would be subject to a cover-all GST regime, would be unfairly disadvantaged. So the argument, from Mr Wooldridge’s point of view, is about competition between the private and public sector; not about the fairness of taxing essentials.
Under that reasoning, education would be exempt because the state system would be exempt in any event and the poor old private sector would have to compete on an unfair basis.
To take the calls for exemptions to ridiculous extremes, swimming pools should be exempt because it would give an unfair advantage to the government-run pools.
Even business is in on it, calling for exemptions for financial services.
Virtually anyone can make a case for an exemption. The tourist industry would be destroyed with a tax on travel services; the wheat farmers would be hit with a tax on bread; the pharmaceutical industry would be made uncompetitive; and so on.
But the main reasons for tax reform is to get greater efficiency and the broaden the base so tax rates can be lower and less distorting. At present Australia has a range of wholesale taxes struck at different rates for different sorts of items. It costs business and government a great deal of money to administer that system. The system is also uncertain because no definition of a class of items will be sufficiently precise to avoid argument. A lot of needless energy goes into fights over when a product goes in to a category with a no tax or a low-tax class rather than a high-class one. If caviar food or a luxury item?
The theory is that a uniform, universal GST avoids these arguments and the administrative cost of running several different tax rates. Once you start exemptions, the reason for having a GST falls away.
It means, however, that food and clothing, at present untaxed would be taxed. That immediately raises the ire of social welfare groups. Quite rightly. The task for the government is to design changes to the tax system which pick up the administrative efficiency of a universal GST while ensuring those hit disproportionately get compensation through welfare increases and income-tax cuts. The government also has to persuade those likely to be disproportionately hit with taxes on food and clothing because they spend a grater portion of their income on those things that the GST will make them better off because the wealthy, who disproportionately use services (which are at present untaxed), will kick in more to government revenues, enabling the government to spend more on the more deserving.
The government also has to persuade people that the GST will help tax avoidance. People who now artificially reduce their income and therefore their tax, will at least be hit with a tax as they spend their money.
If those are hard tasks for the Government, it will be partly the Government’s fault because it has not built up a level of trust over the past two years.
But we will have to wait for the tax package. The important tests will be whether it contains sufficient anti-avoidance measures for income tax and sufficient compensation for people on welfare and low incomes. If, on the other hand, it contains a range of exemptions, like that suggested by Dr Wooldridge, people may well ask whether it is worth the trouble.