The Australian Democrats GST plan has some superficial appeal. The Democrats say that fresh, healthy food would be GST-free while restaurant, takeaway and junk food would be taxed.
Basic groceries such as fresh fruit, vegetables, meat, dairy, bread and cooking ingredients would be exempt, but restaurant and takeaway food as well as soft-drink, icecreams, confectionery, bakery products except bread, and prepared meals served hot or warm would be taxed. This is the Irish option. The two other options were the British option where all but restaurants and takeaway food is exempt and the Dutch option where all food including restaurant and takeaway is exempt.
The Irish model exempts the least amount of food, but would reduce the need for compensation because it made up 83 per cent of low-income earners grocery bill.
Nonetheless there are a number of problems with the Democrats model. The first is that the agreement between the Commonwealth and the states would have to be renegotiated, because it had been based on food being in. An exemption for food would result in a tax hole of up to $6 billion, though perhaps as little as half that under the Democrats plan.
Then there is the philosophic question of the extent to which we use the tax system to promote health, the environment and other social aims. Or is it better to flatten tax and make subsidies for health, welfare, research and investment and the like open and transparent. The Democrats plan to exempt groceries only, while superficially appealing, presumes ways of living which may not be the fact in Australian homes. It may be nice to think that people on low income go for freshly prepared food because it is cheaper and healthier. However, many people on welfare, particularly singles or couples without children, may not do as much home preparation as we think. Takeaway, club and café meals have a great appeal to, for example, single pensioners who find it too troublesome to cook for one.
The latest Democrat model looks like a face-saver. At least some food has to be exempted, they argue.
Another, though lesser, difficulty is the hoary old tax problem of once allowing an exemption definitional complexities and administrative costs arise. The administrative costs of separating food has perhaps been overstated by business, particularly in a computer-saturated age. Moreover, few businesses have complained that the Government’s model is administratively inconvenient because exports have to be exempted.
Whatever the arguments about these points, the Government is now faced with a choice. Prime Minister John Howard can swallow his pride and go back on his weekend statement that food must be in. He can do a deal with the Democrats in order to save the fundamentals of his tax reform.
The alternative is to continue to deal with Independent Senator Brian Harradine in the hope that he might agree to a broad GST with all food in provided enough compensation is given to low-income earners. This presumes that the other independent, former Labor Senator Mal Colston does not make the vote because of illness, abstains, or just goes along with whatever Senator Harradine negotiates. With a neutralised Senator Colston, Senator Harradine and the Government have a 38-37 majority.
An option not seriously open to the Government is to go on doggedly saying that only fine tuning is acceptable, as Mr Howard has to date.
There is a danger that Mr Howard’s occasionally admired quality of doggedness will turn into an obstinacy that will destroy the central aims of his tax reforms which are quite worthwhile.
The trouble for Mr Howard is that the Labor Party will oppose every GST amendment. If the Government opposes all amendments, too, they will all go down and the Senate will be left voting on an all-or-nothing proposition on the unamended Government plan. That will see it defeated.
That would be a shame for Australia. The central aims of the reform are good ones. Australia must broaden its tax base, particularly to services; create incentives for saving and investment and disincentives for consumption; create incentives for exports and disincentives for imports; and create simplicity. The present system does not do that.
However, reform must be fair, and the present proposal is not, as the Senate inquiries revealed.
The Senate inquiries have made it quite plain that the compensation packages fall short because they will be eaten away by an earlier promise to increase aged pensions to 25 per cent of weekly earnings anyway, and in any event, what gains are to be had are mainly to be had by people on higher incomes.
If the Government shuns the Democrat proposal, it will have to deal with the enigmatic Senator Harradine. This is a very risky venture. For a start his vote is never tied up until the tellers count on the Senate floor. Then he often has to be appeased and wooed with all sorts of irrelevant, idiosyncratic agenda items like censorship, Apple Isle specials, foreign-aid restrictions, pharmaceutical and Medicare line-item changes and disproportionately extra money for mums at home.
At least the Democrats are sticking to the issue: tax reform.
There is a further risk with dealing with Senator Harradine. If the terminally ill Senator Colston dies before the vote, he will be replaced within hours by the Queensland Labor Government with a Labor senator, as the Constitution requires. And all the Government’s work will be at nought. It will have to deal with the Democrats anyway. Moreover, after July 1, when the new senators elected in October take their seats, the Democrats will hold the balance in their own right and the Government will have to deal with them. It may as well start doing so now.