The much ado about little in the past week over the GST is just a foretaste.
With Prime Minister John Howard and Treasurer Peter Costello away on holidays, Financial Services Minister Joe Hockey made a complete hash over the rounding-up issue, aided and abetted by Acting Prime Minister John Anderson.
Neither Hockey or Anderson appear to understand their own new tax system. That is perhaps understandable given its complexity — several volumes of taxation Acts. But you would think that the Government would have left someone on deck who did.
This is just the beginning. Several things will conspire to make the introduction of the new tax fairly hellish for Howard. This is a shame because Australia’s tax regime needs reform of this kind.
The rounding-up furore was unnecessary.
Last Friday week, Hockey said prices could be rounded up beyond 10 per cent for the GST but, overall, companies would not be allowed to profit from higher prices.
Properly expressed that was a reasonably stand, if somewhat business-oriented. When you add a 10 per cent GST to an odd price like $1.95 you get $2.14 and a half cents (subs check this in the page that the half comes out as 1/2). That must be rounded up to $2.15. The coinage demands it, for a start.
But no, such is the fear and loathing about the GST, the Government must be seen to be on the consumers’ side. Howard and Costello get on the phone and Hockey comes out the next day saying: No rounding up; no price increases.
Rounding up and down under the GST should result in the same sort of trivial swings and roundabouts as rounding odd cents, and it should have been dismissed as such.
The real trouble was that business did not want it that simple. Some businesses wanted to use rounding up as an excuse to raise prices, like the inexcusable rounding up to the nearest dollar on flying-point memberships. Other businesses wanted to round up to take advantage of the psychological just-under-the-dollar price point. If you take off the wholesale sales tax and add a GST on an item you might get a price like $2.81. That is a bad price for retailers. They would prefer it to be $2.95, because the higher price carries with it no extra psychological resistance. The lower price is a wasted opportunity to pick up extra money for little customer pain. On the other hand, if the final price of an item ended up $3.06, business would be prepared to drop it to $2.95 because it looks a lot cheaper.
The psychology of pricing is not stupid stuff. It works. That’s why retailers do it. That’s why you so often see prices like $13.95 and $15,990.
In fact, the argument was not about rounding at all. It was about jagging. Retailers wanted to jag prices to the 0.95 point. They knew there would be swings and roundabouts and the total GST take would even out to 10 per cent, but they wanted the flexibility to raise some prices and lower others.
But no-one was saying so. Why? Retailers did not want to be seen treating their customers as gullible. And the politicians saw that it was far to hard to explain it all to suspicious voters.
Business groups muddied the waters by saying that rounding to even dollars was important because it lowered accounting costs. What rubbish. No-one adds up by hand these days. And if it were true, prices would be rounded now pre-GST. And they are not. They are always prices like $1.95 and never $2.00.
Hockey then went on to make a further hash of the lay-by issue and the example of a bottle of Coca-Cola. They could have been explained better.
The general point is that the GST is not simply explained. That does not mean it is a Bad Thing in principle. But it does mean it will be a Bad Thing for the Government politically. Because examples will be hard to explain and difficult to understand, suspicious voters will think the worse.
Two more elements will make it worse still. Retailers and Rupert Murdoch.
First to retailers. Under the present tax regime the wholesale sales tax is imposed on the pre-profit wholesale price and is expressed as a percentage of that. The GST, on the other hand, is imposed on the after-profit price.
So a TV set wholesaling at $1000 cops a 22 per cent sales tax and becomes $1220. It gets a profit margin of, say, $779 dollars to retail at an advertised price of $1999.
Under the GST, however, the wholesale and profit margin gives $1779 plus a 10 per cent GST of $178 equals $1955.
Under the existing system retailers never tell you how much wholesale sales tax has been charged. Because if they do, you can immediately work back through the figures and work out the profit margin. Consumers would say, “”Forget the tax mate, what about your hefty margin!”
But under the GST, the retailer can tell you how much tax is in the total bill without fear of exposing his margin because it cannot be back-calculated.
The TV set is advertised at $1954. You get a receipt saying: “”One TV set. $1954 total price. Includes $177 GST.” You cannot tell how much of that is profit margin.
The law demands that retailers ADVERTISE the single price of $1954, unlike in the United States where things are advertised as $1777 (plus tax). But the Australian law does not prevent retailers from INFORMING customers on the receipt AFTER THE PURCHASE how much of the price was tax. It is common practice in Europe. It is likely to happen here because retailers like to blame governments. It is likely to cause the Government grief.
(Notice, incidentally how the tax changes on the TV set result in the awkward price of $1955 — a retailer would like to jag that up to $1999.)
And then there is Mr Murdoch. A month ago this column predicted that Murdoch would apply the media blow-torch to Howard after Howard gave Kerry Packer every Packer wanted on digital television, leaving Murdoch in the cold.
The Telegraph has added GST stories to its anti-Howard campaign.
The example pictured here was an appalling piece of non-journalism beaten into a Page 1 lead. Howard’s son happened to be at a large party in Sydney last October at which a woman was sexually assaulted and later died. The son had nothing to do with it and knew nothing of it. So the Telegraph leads with “”PM’s son in death house”.
The next day it was more legitimately “”Ministers entangled in GST confusion”. Usually the Telegraph is more sympathetic to the conservatives than that. But Howard can expect no mercy after the Packer deal and the GST hands it to Murdoch on a plate. Howard may have to relent on the digital television decision if he doesn’t want a Telegraph-led GST bashing to cost him seats in western Sydney.
There was no cute Page One picture of Sports Minister Jackie Kelly and new baby. Kelly holds (only just) a western Sydney seat. The Telegraph must be horror reading from her hospital bed.
The Telegraph and to a lesser extent The Australia led a tough anti-Howard campaign last time it looked like Howard would give something to rival Packer. That was when Howard looked like he would buy the Packer argument that Australia needed a giant media conglomerate so the cross-media ownership rules should go to enable Packer to buy the Fairfax newspaper chain. Howard relented.
It was a good result for the wrong reason. So, too, if Howard relents on the pro-Packer digital television decision.
The GST might be a double whammy for Packer. For a start he will have to pay some tax and indirectly it could, via the Telegraph, become a catalyst to thwart a digital television monopoly.