The deal between the Government and the Democrats is not ideal, but it is better than no reform at all.
It is now inevitable a goods and services tax will now pass the Senate. It is a significant day for Australia. It means services will be taxed. It means exports will not be taxed. It means tax will focus more on consumption than income and investment. The tax base has been significantly broadened. It means that future governments will be able to do the things that governments should do. It means the economic distortions that flow from the uneven incidence of taxation are lessened.
The GST will not be a panacea for Australia’s economic problems, but it does mean Australia can go into the new century without the burden of a creaking tax system. That system relied on an ever narrowing base – the wholesale sales tax on a range of goods that were forming an ever decreasing percentage of the economy and PAYE income tax which was becoming ever more avoidable.
The exclusion of some forms of food from a 10 per cent GST is more iconic than rational. It would have been better to have a GST across the board with adequate compensation for low-income earners. As it is, anomalies will inevitably arise from the exemption. What precisely is unprocessed food. Examples will emerge to exemplify the folly of having any exemptions from the GST at all. But the issue should not be exaggerated. Every tax system has anomalies. Moreover, the anomalies typical focus around a small range of goods. Hot pies vs cold pies; raw lettuce vs prepared salad and so on. In the long run, the exclusion of food will not matter a great deal, though it will cause some transitional inconvenience and costs for those businesses selling food.
One welcome element in yesterday’s deal is the change to diesel taxes. It is silly to encourage such a polluting health-damaging energy source. Ultimately, taxpayers would have had to pick up a bill for the health costs that would have outweighed any benefit in lower transport costs.
Superficially, the changes to the income taxes appear fairer than in the Government’s package. The Government originally proposed that income tax cuts and increases in welfare would compensate for the GST. In its original package, the top marginal rate would have cut in at $75,000 a year. Now it cuts in at $60,000. The tax cuts proposed in the original package for those on incomes less than $60,000 have been preserved. Those on more than $60,000 still get a tax cut, but it will be $750 less than first proposed.
In the short-term this might be a reasonable compromise to get the package through. But in the long-term governments cannot continue to slug the middle to upper PAYE income earners of Australia – those earning between $60,000 and $100,000. These people have been hit in the past two years with the superannuation levy, the Medicare surcharge, bracket creep and targeted cuts to family allowances. They typically total a couple of thousand dollars. They are being hit from all directions because they are such easy targets. They also have longer working weeks. The tax regime can become a disincentive or worse, an incentive for PAYE employees at this level to engage in tax-minimisation schemes.
Before long governments must address this. Governments must capture the losses to the revenue from tax-minimisation through company and trust structures. The money captured must be used to lower the top marginal rate.
The GST will do some of the work. It will be harder to avoid than income tax. But the Government must continue with tax reform, closing loopholes and rationalising business taxes. The job is not over.