Gillard is right about GST

Bookmark and Share Economics & Deregulation | John Roskam
Australian Financial Review 23rd November, 2012

At last Julia Gillard can be congratulated for something. She's ignored Rob Oakeshott's call to review the GST.

On Tuesday the PM said there'll be no review and there'll be no change to the rate. Yes, promises like that have been heard before about the carbon tax - but this time hopefully the PM will keep her word.

Tony Abbott also promised not to change the GST. He said "I invite Rob Oakeshott to campaign in his seat for changes to the GST, if he thinks they are necessary."

The last thing the country needs at the moment is the Prime Minister with her hands on more money.

In theory the GST rate should be increased, and the GST exemptions removed. A broad-based consumption tax has numerous theoretical advantages over taxes on income or capital.

But reality is different. The Treasury Department assured Kevin Rudd that in theory there'd be no problem implementing the mining tax.

The reality is that if the GST goes up the chances are almost zero that the additional revenue will be used to cut other taxes. All that will happen is that the government will keep the cash.

Even if somehow an increase in the GST rate is used to cut other taxes, it's likely the wrong taxes will get cut.

The taxes that the business associations and the politicians like to talk about cutting are the corporate tax rate and the so-called "inefficient" taxes levied by state governments. It's funny how business and government always put personal income tax low on the list of what should be cut.

There's no lobby group in Canberra for cutting personal income tax. The problem is also that because the federal government collects twice as much in income tax from individuals as it does from companies, reducing personal tax is much more expensive than reducing company tax.

But, the main reason why left-of-centre governments don't want to cut personal income tax is simply because left-of-centre governments generally have an aversion to people keeping and spending their own money. The Gillard government is no exception.

Left-of-centre governments especially dislike people keeping their own money if they are wealthy enough to no longer be regarded as "middle class". In the United States, Barack Obama's tax increases are targeted at anyone with an annual income of more than $250,000.

An increase in the GST shouldn't be used to fund a cut in the corporate tax rate. It's naive to suggest Australia would become a substantially more attractive destination for international investment if the company tax rate was cut by a few percentage points.

The mining tax, the carbon tax, and the broader question of sovereign risk are bigger issues for overseas investors than insignificant cuts in company tax.

The very worst thing that could happen is raising the GST and then having the federal government pay state governments to abolish state taxes like their mining royalty and transaction-based tax regimes. "Inefficient" state taxes are basically the only sources of revenue the states have left that they control. Abolish those taxes and the states as viable political entities virtually disappear (an option that unfortunately is quite palatable to many people).

Instead of the commonwealth using GST payments to alternate between bribing and blackmailing the states to get them to eliminate their inefficient taxes, the GST should become a tax exclusively used to fund federal government activities, and state governments should be able to levy their own taxes on the income of individuals and companies.

If state governments were able to use their tax systems to genuinely compete against each other, their transaction taxes would be the first taxes states would abolish.

One of the prevailing assumptions of Australian politics over the past few years is that as the population ages and demands for government spending grow, taxes must therefore go up and the overall tax burden must increase. And it's automatically assumed that raising the GST is the answer to the problem.

For politicians, one of the least politically painful ways of raising taxes is to increase the rate of the GST, which is why in the wrong hands the GST is so dangerous. It should be as hard as possible for governments to raise taxes. When Julia Gillard ignores what Rob Oakeshott says about the GST, she is doing the taxpayers of Australia a great service.