Why Paul Keating is Wrong about the Proposed GST Rate Hike

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Tax reform is shaping up as one of the key battlegrounds heading into the election later this year. Reforms to the Goods and Services Tax (GST) are likely to be at the front line of this battle. And they could even tip the balance of the election one way or the other.

So what are we to make of it?

From a political standpoint, increasing the GST follows a certain logic. Compared to income, or super tax hikes, GST affects everyone equally. In part, that’s why many see it as the ‘indiscriminate’ tax, as it spreads the tax burden across society.

In recent months, there have been growing calls to raise the GST rate to 15%. That’d represent a 5% increase on the current 10% tax rate. The issue splits opinion. But you get the sense that most people would prefer a GST hike in lieu of other taxes.

However, there are powerful voices in politics that don’t agree with this. Writing in a Fairfax opinion piece, former Prime Minister Paul Keating said a GST hike of 1–2% would be preferable. He thinks a small GST rise would be acceptable, provided that revenue raised from it was spent on public hospitals. Keating writes:

If say, an extra 1 or even 2 percentage points of GST were levied, purely and simply to fund public hospitals and was hypothecated to that sole purpose, one could at least defend such an increase.

If nothing else, Keating’s heart is in the right place. But you have to wonder how keen any presiding government would be to support this.

After all, the government doesn’t have a specific healthcare funding problem. It has a revenue problem; one that affects every area of public spending. Right now the government is sitting on a $40 billion budget deficit that’s only likely to expand in the future.

Keating goes on to say:

The big falls in commodity prices mean that Australia’s income has been cut. We cannot pretend we can go on spending as though nothing has happened.

The world has trimmed us down — we now have to trim ourselves down. Trim our spending and not accommodate more of it by ever more taxation.’

In fairness, Keating does acknowledge the effect that weak commodity prices have had on government coffers. But his suggestion that policymakers need to respond to it is lacking in the way of any solutions. You won’t win the election promising to fix public hospitals. You need a plan which steers the entire budget and economy back into surplus.

Of course, governments typically go about fixing budgets in one of two ways. They either cut spending, or they raise taxes. Or they do both at the same time when things get particularly grim.

Yet, as Europeans knows all too well, austerity isn’t always the answer. It can certainly help in reducing debt burdens. But it’s efficacy in improving economic conditions isn’t so clear.

Ultimately, you wouldn’t bet on either Labour or the Liberals putting their hands up to carry out this proposed ‘trimming’ either.

Labour’s GST proposal makes the most sense

The Labour government’s current plan to lift GST by 5% is the best way forward for the country. Especially since Turnbull plans to use proceeds from extra GST revenues to lower income taxes. But, according to Keating, we’re going to end up with more problems if the government follows through on this. He explains:

A big increase in the rate of the GST will only lead the political system into continuing bad habits. People should remember that a GST or a value-added tax was the invention of the socialist parties of Europe; a flat tax levied to pay for larger systemic social programs — a policy of ambitious income transfers.’

According to Keating, the idea of ‘socialist’, is tantamount to ‘fiscal folly’ even. But is it?

To be fair, Keating may be correct in where some of this GST tax revenue ends up. It’s hard to believe some of the extra revenue won’t end up paying for fat public sector wages.

But it could lead to more consumption too, which is what’s needed, and what Turnbull wants.

According to some estimates, the move would raise $20 billion extra in annual tax revenues. Granted, this would hinge on broadening of the entire GST tax base. That means food and education would also get taxed at 15%. But, it wouldn’t be either novel, or extreme. It’d put us in line with other countries, where value added tax can get as high as 25%.

Either way, we can assume Turnbull will keep pushing for state approval of GST reforms.

We know both parties will be loath to mess with corporate taxes. Raising corporate taxes when earnings are declining would be pointless. What’s more, the corporate tax rate, at 30%, is already among the highest in the world.

Higher income taxes are another no-go zone. Again, Turnbull won’t touch this for a simple reason. Both parties want to win the election, not lose it. And Turnbull’s already indicated a GST hike would allow for a reduction in income taxes. The last thing the Libs want is to jeopardise their position ahead of an election. The easiest way to spread the burden on everyone is not through income taxes. It’s through broad based taxes like the GST.

Ultimately, a 15% GST tax could be a good thing for the economy. But it would depend on the government compensating for this by lowering other taxes. Otherwise it might only damage consumer confidence and spending.

The only question is whether Turnbull, or Labour, stays true to their word in the end. They can’t promise income tax cuts as a counterweight to GST, if they bail on it down the line. As with any change to the tax code, the government isn’t always good for their word. Taxpayers have been promised these things before. The Howard government lulled the nation into accepting the GST at the turn of the century. It did so by promising cutbacks in other state taxes, like stamp duties. We’re still paying stamp duty to this day.

Nonetheless, GST at 15% ticks all the boxes. It’s a revenue raiser. It spreads the burden across the economy. It can help improve government coffers. And it incentivises employment because it’s not a corporate or income tax.

It might be a risk worth taking.

Mat Spasic,

Junior Analyst, The Daily Reckoning

PS: One tax reform the government could look at is the growing issue of super concessions. Addressing superannuation tax breaks could plug holes in the budget deficit. But any changes to super should come as a result of a broader review of the system.

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