GST Reform - John Freebairn Overview
We invited an expert in tax policy, Professor John Freebairn (University of Melbourne) to provide his distillation of the results and to unpack some of the views and issues expressed in our first poll of the National Economic Panel. The Society does not take an “official” position on any of the economic issues canvassed.
Tax reform design | John Freebairn, University of Melbourne
The details of the form of a larger GST and the use of the revenue have an important bearing on the efficiency and distributional effects of different tax reform options.
The exemptions from the Australian GST cover a large part of the consumption of all goods and services, and the exempted areas are growing relative to the included areas. Currently, the Australian GST is paid on only 47% of the consumption of all goods and services, down from 56% in 2005-06. This compares with New Zealand's 96% coverage. If Australia were to adopt the NZ position of (essentially) no exemptions then at the current rate of 10% the GST would raise roughly twice its current revenue. This would be broadly equivalent to the revenue raised by doubling the current rate to 20% while retaining the existing exemptions.
The revenue gain from either option could be used for a combination of: improving efficiency by replacing more distorting indirect taxes, particularly stamp duties; developing a higher GST and lower income tax mix change package for efficiency gains; redistribution in favour of those on lower incomes via higher social security rates and a lower and more progressive income tax to offset the regressive effects of a larger GST; and, contribute to the funding of higher levels of government expenditure projected in the Intergenerational Report and elsewhere.
There are different national efficiency implications of a larger GST with the option of a comprehensive base with the current 10% rate versus the option of the current base with exemptions and a 20% rate. A broader base and lower rate reduces distortions to the mix of spending choices, e.g. between the untaxed necessity food and taxed necessity clothing, and between the taxed utility electricity and untaxed utility water. With health, education and child care in part provided by the private sector with a relatively small subsidy and by the public sector with a relatively large subsidy, the broader base option which removes the current GST exemption for these services would increase the relative price of private provided relative to public provided services. This could be considered an additional distortion. Several stated that education and some health provide external benefits. These arguments would justify retention of the exemption of these services, a lower rate, or recycling some of the larger GST revenue as a larger private sector subsidy. Both the broader base and higher rate GST options would of themselves increase distortions to decisions to work versus leisure and of market products versus home production.
The comprehensive GST base option would be a simpler reform and involve some savings of administration and compliance costs.
On the generally agreed assumption, and experience, that most if not all of a GST is passed forward to households as higher prices, both the larger base/same rate and same base/higher rate reform options are regressive. Since as an aggregate, the share of the exempt items in total expenditure is similar across income quintiles (Australian Government, 2015, Chart 8.4 using ABS household expenditure data), the two options appear to have similar distribution effects. Further, where compensation to offset some of the regressive effects of a larger GST is desired, recycling some of the GST revenue gain as higher social security benefits and lower income tax rates is a more direct and effective redistributive instrument when compared against GST exemptions.
Points of difference
Those in favour of the more comprehensive GST base option are more persuaded by the efficiency and simplicity gains, together with effective recycling of some of the revenue gain to maintain equity. Those disagreeing with the broader base option are sceptical about the details of the use of the revenue windfall, the magnitude of the net efficiency gains of the package, and doubts that appropriate compensation for those on lower incomes will be a part of the reform package.
Several said the higher GST rate would be an easier political sale.