12/02/2015
A wholesale debate on how to restructure the tax system is needed to redress the mismatch between community expectations on government services and their willingness to pay. Punting this conversation to the indefinite future will only make the challenge that much more difficult to resolve.
For years Australia has had an imbalance in its finances. Due to cyclical and also structural reasons annual tax revenue has been about two per cent of GDP below where it was between the introduction of the GST in 2001 and the GFC in 2008. In contrast, Government expenditures have not been static, with the Commission of Audit finding that total Commonwealth payments were set to increase by 5.3 per cent between now and 2023-24. This is because the largest problems lie in the future, when significant expenditure commitments, such as those on welfare like the NDIS and security, take effect.
Australia is living beyond its means and borrowing from the future to fund current consumption.
Pushing the problem onto the States, as the Commonwealth did in the 2014 budget by reneging on $80 billion in proposed funding, does not fix the problem. It merely transfers it to another level of government.
This is unfortunate as, if approached correctly, these challenges can form the basis of reform that restructures Australia’s finances and puts the nation on a more competitive footing. Not only is Australia’s tax system riddled with incongruous inefficiencies, it is increasingly out of step with the most competitive international approaches.
But change on the magnitude needed cannot be forced on the population.
Australia is increasingly falling behind best practice with its tax system, making it more uncompetitive and unattractive to the free flowing international capital needed for economic growth. The best practice approach to taxation is for the current generation to pay for the government services it uses while investment decisions, such as building a national broadband network, are spread across beneficiaries. The consequence is that many governments concentrate their taxation on the personal incomes and consumption of current generations. This means relatively high consumption taxes, and also a strong reliance on personal income taxes as these also transfer consumption spending power and do so relatively progressively. In contrast, business taxes are low. This approach has been used by the relatively large welfare states of western and northern Europe, as well as the UK and New Zealand.
A comprehensive Goods and Services Tax (GST) may well offer a more efficient and equitable outcome than the current approach. The GST introduced in Australia excludes items considered ‘essential for life’ as opposed to the comprehensive version introduced in New Zealand in 2010. As a consequence, the Australian GST is less efficient, raises less money and imposes a higher administrative burden. It is also an inefficient way of achieving equity outcomes.
It is well known that a GST is a regressive form of taxation as people with low incomes tend to spend more money than wealthier people whose higher level of savings means that their GST tax burden is lower. However, the best way to address these equity concerns is not through the blunt instrument of GST exemptions, but through the highly targeted welfare system.
Food is a clear example. While the bottom quartile of the population spend more of their income on it, the relative difference from the most wealthy in society is slight while the absolute amount is large. This means the bottom 20 per cent of the income distribution spend 19.4 per cent of their income on food compared to the top 20 per cent spending 14.5 per cent. However, in terms of the gross amount, the wealthiest quintile spend many more times the amount on food in absolute terms as the poorest segment of society according to the Australian Bureau of Statistics. So a GST on food would raise more money from the wealthiest than the poorest in society, which could be channelled back to the least fortunate in a progressive fashion.
Broadening the base of the GST would also eliminate anomalies that currently exist. For instance, there is no compelling equity or efficiency argument for exempting food but not essential clothing, or exempting water but not electricity. It is as unacceptable for an Australian to be without basic clothing, or even electricity, as it is for them to be without food or water.
It could be argued that a comprehensive GST would also raise revenue more efficiently than many other forms of taxation currently relied on by the government. All taxes impose economic costs in the form of either administration or changed behaviour. But not all taxes impose the same level of costs. The Henry Tax Review estimated that the marginal cost of raising a dollar of revenue from the GST was $0.12. In contrast, personal income tax imposes a cost of $0.24 and corporate tax $0.37. Meanwhile, some state taxes, such as conveyance duty on property distort the market so much that the last dollar they raise generates up to $0.85 in social costs. That is highly inefficient.
Using a comprehensive GST to replace less efficient taxes, with appropriate recycling of funds to ensure equity concerns, would mean a more efficient tax system.
A further argument applies to the legal manoeuvrings that allow large corporations to shift profits offshore. For instance, Apple is estimated to have only paid just over $80 million dollars in corporate tax on over $6 billion in Australian revenue generated. A higher GST would ensure that the government received more taxation from the economic activity generated by Apple.
Investment capital floats freely around the world. With the end of the terms of trade boom, Australia is not going to continue to attract the same high levels of business investment that it has been accustomed to. It will need to work at becoming an attractive destination for the footloose international capital. This is particularly true since other nations have adjusted their tax regimes to focus on consumption rather than the activities that underpin future economic growth.
While these changes need to be conscious of the equity issues, the most inequitable solution is to do nothing. Not addressing Australia’s budgetary problems will push the issue onto future generations, result in a creeping decline in available services, and will mean the nation is increasingly out of step with international best practice.
Australia was only formed as a continent spanning nation when the debate left the halls of the elites and engaged the common man, as CEDA’s recent Federalism report discussed. The best option is to develop a comprehensive reform program that addresses equity concerns while improving the efficiency of the nation’s tax system and is addressed now rather than in the undefined future when the challenges will be that much harder to surmount.
Surely this must be the outcome of the Taxation White Paper process. Merely punting Australia’s fiscal challenges to the future will not make them go away.