The Guardian’s Greg Jericho (aka “Grog’s Garmut”) has published a well argued case for why the $1,000 threshold for levying GST on online imports should not be lowered:
The retail trade sector employs about 11% of the labour force and accounts for 4.5% of gross domestic product, so it is a sizeable part of our economy, and it has vocal and high-profile members such as Gerry Harvey who has been calling on the government to levy GST on all online purchases for a number of years now.
The government hasn’t been ignoring the issue either. In December 2011 the Productivity Commission looked into it. In July 2012 the Treasury Department examined it. And in September this year Choice magazine also gave the online GST argument the once-over.
The Productivity Commission estimated GST revenue forgone in 2013-14 could be about $610m (although they admitted this was more a good guess than a solid estimate). The problem however is the cost of collecting that GST would likely outweigh the revenue collected.
The Productivity Commission estimated that goods under $100 account for 68% of air freight cargo under the $1,000 threshold. But the Treasury department estimates that were the threshold lowered to include items under $100, at best it would cost the government $1.71 to collect $1 of GST. At worst (depending on the average cost of collection) it might cost up to $3.43 for every $1 of GST collected.
When applying the cost to all types of freight and including the cost for Customs, Australia Post, business and consumers (through a longer wait for imported packages), the commission suggested: “It may cost the community over $1.2bn to facilitate the collection of $496m in revenue.”
Not exactly efficient…
In principle, the case for lowering the GST-free threshold (or eliminating it altogether) is flawless on competitive neutrality grounds. After all, why should foreign sellers receive an unfair advantage over local retailers?
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However, the case for reform falls apart when the costs of enforcement are taken into account which, as argued by Jericho, would far outweigh any extra GST revenue raised.
Of course, the retail industry does not care about the net costs imposed by lowering the GST threshold. They would effectively receive a defacto 10% tariff, whereas taxpayers would wear the cost. In this regard, the reform would represent a direct transfer of rents from consumers to retailers.
The first criteria that should be met when deciding whether to implement any new policy is: do the benefits arising from the proposal outweigh the costs? Lowering the online GST-free threshold clearly fails this test.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
