The independent economics research firm Access Economics advised the Government last week to abandon any attempt to change the tax mix in its tax reform package. It recommends that a GST replace the variable rate wholesale sales tax with a few, if any exemptions, as possible. It does not recommend that a GST be high enough to fund income-tax breaks in a way that would shift the burden of tax away from income and on to consumption. Access argues that there is little economic merit in changing the tax mix and the argument over how to compensate people on low incomes who would get no benefit from income-tax cuts would be so difficult as to jeopardise any change. Moreover, it might result in an auction between the two parties as to who could offer the largest tax cuts, which might result in the erosion of fiscal discipline and the surplus.
There is certainly some truth in the latter argument. However, Access misses a key point in dealing with wholesale sales tax replacement. That it itself will affect people on low incomes, irrespective of whether the GST is high enough to fund income-tax cuts. This is because at present wholesale sales tax applies less to items that people on low incomes buy. For example, there is no wholesale sales tax on food and low rates on clothing. If these are taxed with a GST it will cast an unfair burden on low-income earners. The argument about compensation cannot be escaped by restricting a GST to merely replacing wholesale sales tax. And given that the compensation issue has to be addressed, the Government may as well change the tax mix, especially as PAYE people on middle incomes see the present system as unfair because of tax avoidance higher up the scale. To the extent they support a GST it is to ensure those people pay tax as they consume, seeing as they do not pay much tax as they earn.
If the Government abandons that element of the attack on avoidance, it may as well give up the GST altogether.