Over the weekend, World Vision CEO, Reverend Tim Costello, backed broadening the base of the GST to food, education and utilities, arguing that some of the additional $15 billion raised could be used to compensate the poor, overcoming concerns about regressivity. From The Guardian:
Costello said a “mature” discussion was needed about broadening the GST with a compensation package for people on low incomes.
“The preference in terms of simplicity and reducing cost is to have the broadest base possible and deal with it in the compensation”…
“The starting principle should be ‘don’t exempt anything’, because it’s simpler and clearer and more transparent and then build that back into the compensation for those that are poor.
“I think a broadening rather than raising the rate is probably the fairest way … It actually does capture the rich.”
This is an important development as it helps to overcome concerns that reforming GST would necessarily harm the poor, who spend a higher proportion of their incomes on consumption, in particular on basics like fresh food, which are currently exempt. It also represents a reversal in position from Tim Costello, who in 2000 demanded that basics like food, education, healthcare and some utilities be excluded.
The fact is, GST reform does not need to be regressive and punish the disadvantaged. If those that are most affected by broadening and/or raising the rate of GST, such as those on welfare and low income earners, receive direct compensation via cash transfers or other mechanisms, then the Budget can be improved without worsening outcomes for the most vulnerable members of society.
One of the biggest failings of the original GST, implemented in 2000, was that it contained exemptions, which not only reduced the overall revenue raised, but also increased administrative complexity and reduced the tax’s efficiency.
Nevertheless, even with the excluded items, the GST is still far more efficient than taxes on incomes and profits, which the Budget has become overly reliant on. The Henry Tax Review showed that the “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) from the GST is only around 8%, one-third of of personal income tax and one-fifth of that of company taxes (see next chart).
Closing exemptions and broadening its application would increase the GST’s efficiency even further, because it would become even more difficult to avoid and distort behaviour even less.
Reform along the lines advocated by Tim Costello would, therefore, represent a both win for the Budget and the economy as the whole, providing the states with a much needed revenue lift (some of which could then be channeled into programs for the disadvantaged), while boosting productivity.
Moreover, it would help Australia overcome its excessive over-reliance on taxes on incomes and profits, which is becoming increasingly unsustainable in light of the structural headwinds facing the economy, such as population ageing (rising old-aged dependency) and falling commodity prices.
