Central Council

GST Reform

October 2015

In the first poll of the ESA's newly formed National Economic Panel, our panellists were asked for their opinions on the following proposition:

“Increasing government revenue collected through the Goods and Services Tax (GST) by removing exemptions (such as food, health and education) is better than achieving the same extra revenue by increasing the GST rate while retaining the existing exemptions.”

They were asked to: 

  1. indicate their individual opinions on the above proposition (i.e. strongly agree/disagree, agree/disagree, uncertain or no opinion) 
  2. indicate their level of confidence - on a scale of 1 (very low confidence) to 10 (very high confidence) - and
  3. provide an optional short comment (to elaborate on their response, link to further reading etc.)

44 of the 49 panellists (90%) responded.  

The two charts below summarise their responses: (1) opinions only; (2) opinions weighted by their confidence level.  The table presents the responses of each panellist and their individual comments (if provided). 

For this poll, we also invited an expert in the subject matter, Professor John Freebairn (University of Melbourne), to provide his take on the results.

Read Professor John Freebairn's Overview

Read Ben Potter's article published in the Financial Review on Monday 5 October which covers the findings of the NEP poll.

NEP Q1 - Chart 1.1 (Responses)

 

NEP Q1 - Chart 2.1 (Responses weighted)

Name

Vote Confidence Comment

Peter Abelson

Uncertain (neither agree nor disagree) 10

The proposal is efficient because it implies lower price distortions, i,e, smaller departures of prices from costs, and hence it most likely has less distortionary impact on consumption (lower deadweight loss).

However in the absence of compensating benefits the tax imposition is likely to be relatively heavier on low income households (i,e, it would be regressive) and would be less fair.

Thus the proposal would likely be better by one criterion and worse by another. However it could be clearly better if combined with appropriate compensation payments. 


Kym Anderson

Strongly agree 10

Any issues such as 'the poor can't afford to pay more for fresh food' can be dealt with more efficiently using generic social security instruments or income tax rates.


Gary Banks

Agree 7

Better in an efficiency sense to have a lower rate and wider base, provided that distortions can be minimised between private and public services (which I am not entirely convinced about!) Extension to food is clear.


Garry Barrett

Disagree 10

It is important to consider distributional and efficiency effects. Exemptions effectively provide a multi-rate GST. Having a lower rate on staples, such as food (a commodity with a low income elasticity) contributes to the distributional objective.


Harry Bloch

Strongly disagree 10

It is appropriate for different categories of consumption to be discriminated for (food, health and education) or against (alcohol and tobacco) based on their considered contribution to social well being.

Jeff Borland

 Did not answer

 

 

David Butler

Disagree 7

A broader base is preferable in theory, but the outcry wouldn't be worth the political capital lost; better to just raise the rate.

Matthew Butlin

Uncertain (neither agree nor disagree) 5

Removing the exemption on food, with appropriate compensation, would be a better, simpler design. Removing the exemption for education and health is complicated by having major private and public service providers in those areas and would distort consumer choices. Understanding the overall impact of these issues needs some careful quantification and modelling. Only changing the rate is a simpler case to explain, and does not reopen the complex arguments that were had prior to establishing the GST about what was in and what was out.

Lisa Cameron

Strongly disagree 8

 

Fabrizio Carmignani

 Disagree

 8

My answer draws on two preliminary considerations.

First, the view that indirect taxes are "better" than direct taxes is a OECD mantra that has received little empirical support. Instead, one thing that the empirical evidence suggests is that the GST is likely to be regressive unless basic items are not taxed or taxed at a significantly lower rate.

Second, the GST rate in Australia is on average lower than in the rest of OECD countries. However, in most other OECD countries, different GST rates apply to different consumption items and this is done exactly to reduce the degree to which the tax is regressive.

In light of the above, I believe that some exemptions should be retained (albeit not necessarily all of the existing ones) or that a lower rate should be applied to some basic items.

The removal of exemptions can be motivated with the need to broaden the tax base and to make tax collection/administration easier and hence less costly. Yet, I believe that these considerations are of second order importance. Ensuring that the tax is progressive (or less regressive) is instead a priority.

Bruce Chapman

Agree 6

 

Deborah Cobb-Clark

Strongly agree 8

 

Max Corden

Disagree 8

I am in favour of increasing the GST provided other ways of raising revenue are also adopted, notably removing concessions concerning superannuation that favour high income people, and restoring the carbon tax.

Lin Crase

Agree 7

Exemptions provide unnecessary 'wiggle room' for political interference and rent seeking. The costs of administering exemptions is also likely to be non-trivial.


Kevin Davis

Agree 8

On efficiency grounds it seems sensible, not sure about the distributional consequences. Broadening the base should also incorporate financial services – even though there are difficulties in implementation, this is a major sector to exclude.

Brian  Dollery

Agree 7

 

Uwe Dulleck

 

Disagree

 

8

GST is not the best form of a consumption tax but the tax incidence may be fairer than the current form on income taxation. Whether the exemptions are the right ones is a difficult question, to err on the side of caution, I would tend to recommed to keep exemptions for some groups of goods and services and increase the base rate.

Mardi Dungey

Agree 8

While a broader base is the most desirable, and would reduce the distortion in relative prices and hence consumption and production, the political realities create problems with this approach. Broadening the state government tax base through other means also has high appeal.

Chris Edmond

Disagree 7

I guess the idea here is that removing exemptions allows the same revenue to be raised but with fewer distortions (lower deadweight loss).

I don't agree with the statement because (i) it's not clear what "is better" means, i.e., what the criterion is supposed to be — such a change would be more efficient but less equitable — and (ii) it's not clear whether this exercise allows for part of the revenue raised to be redistributed as compensation for the regressive aspects of such a change. As a general matter, I prefer for the regressive aspects of the GST to be addressed by compensation rather than through selective exemptions and so if the policy could be structured to achieve that, I would be more supportive.

Henry Ergas

Did not answer  

 

Saul Eslake

Uncertain (neither agree nor disagree)

 

7

I would respond differently to different options for GST base-broadening if given the opportunity: I do favour extending the base to include currently-exempt food, private health insurance premiums, and private school fees but not to other items of health or education expenditure.

Allan Fels

 

Disagree

 

4

 

Gigi Foster

Disagree 8

The proposal is regressive: the existing exemptions are there in part to reduce the burden on Australia's poorer people, for whom food and health care are a larger fraction of their overall disposable income. The exemption for education also encourages education "consumption", which is in fact long-term investment into a good with high and mixed (both public and private) benefits. Arguably however, the counter-proposal of increasing the GST while retaining the existing exemptions – while preferable to the proposed regressive change – is not the most-preferred way to increase government revenue.

John Freebairn

Strongly agree 8

Acceptance of a larger GST requires also details about the use of the revenue gain, including other taxes reduced and compensation for those on lower incomes.

Paul Frijters

Disagree 3

The exemptions relatively favour the low-income groups, so from a distributional point of view I'd prefer the GST rate to go up if that is the only alternative to removing the exemptions, but there are better ways of achieving redistribution that don't have the price distortion inherent in the exemptions.

Lata Gangadharan

Disagree 8

 

Ross Garnaut

Agree 8

 

Robert Gregory

Agree 8

Remember that any GST increase will involve compensation hence the package of GST increase and compensation must be counted together. Income tax increases do not involve compensation so the right comparison is GST (with compensation) with income tax (without compensation).

This point is important because compensation may well vary with whether the GST is increased or its coverage spread. Of course economists love cet par analysis and are unhappy with this sort of position where the tax is bracketed with the compensation but if you are publicly recommending a course of action you need to be aware of all implications.
Having said this – as the GST tax rate increases the case for spreading to more goods naturally increases

Stephen King

Strongly agree 9

The existing exemptions appear to have little economic or welfare rationale. Where removal would lead to undesirable redistribution this can be dealt with directly (e.g. cars for the disabled).

Geoff Kingston

Disagree 7

Education, aka human capital, is a productive input that should not be taxed until the output produced by it is consumed. Health too has been shown by economists to resemble a stock of a particular type of capital. Fresh food is a final good that should therefore be considered for GST, although it can be argued that fresh food promotes health. Overall, then, the 15% route is the better of the two.

Michael Knox

 

 

Did not answer

 

 

Rodney Maddock

Strongly agree 4

Some compensation may be needed but the change simplifies the administration of the tax and captures a greater share of spending on services.

Tony Makin

Agree 8

Selective taxation of goods and services is distortionary and not necessarily equitable.

Warwick McKibbin

Strongly agree 9

There is a balance between efficiency and equity in this policy. When interpreting "better", I assume better is in terms of efficiency and there are other cheaper ways to provide equity adjustments.

Doug McTaggart

Strongly agree 8

 

Flavio Menezes

Strongly agree 10

As long as low income individuals are compensated.

James Morley

Strongly disagree 10

Having the flexibility of different tax rates for different goods or services is always better than not having that flexibility.

Margaret Nowak

Agree 8

 

Adrian Pagan

Did not answer  

 

Martin Parkinson

Agree 8

 

John Piggott

Agree 7

This is an academic economic assessment. In policy terms, it is a less likely outcome than one in which there is some increase in the breadth of the base, and some increase in the rate.

John Quiggin

Strongly disagree 9

Taxing food is regressive. The exemption would be better if it applied to all grocery food (not restaurant meals), rather than "fresh food".

Taxing health and education expenditure is self-defeating, since the relevant items are heavily subsidised. If the current subsidy is justified, it would have to be increased to offset taxes. If not, it should be reduce.

Rana Roy

Strongly agree 9

The politically-determined distinction between “discretionary” consumption, subject to GST, and “necessary” consumption, exempt from GST, is a bad guide to policy: it is necessarily insensitive to individual preferences, sometimes comical in its outcomes and invariably distortionary in its final impact. A welfare-maximising outcome is more likely to be achieved by applying a relatively low but standard rate of GST without exemptions – as well as additional “externality taxes” on particular items of consumption insofar as these are clearly justified and at rates which are clearly justified.

Peter Sheehan

Strongly disagree 8

 

Jeffrey Sheen

Agree 7

 

Hugh Sibly

Agree 8

The GST exemption provides, in effect, a poorly targeted subsidy of arbitrary magnitude for exempt goods. If the intention of the exemption is to support the purchasing power of low incomes, a better mechanism would be to make direct payments to low income earners (as this way high income earners do not also benefit from the subsidy). If, instead, the intention of the exemption is to subsidise the consumption of certain goods (e.g. healthy foods), then the consumption of those specific goods (rather than a broad class of goods) could be given a subsidy of a magnitude that represents the social benefit of their consumption.

Nigel Stapledon

Agree 8

Removing exemptions for food and the like will remove inefficiencies and the case for removing exemptions is clear cut. In the case of education, the issue is more nuanced where for most it is provided free in the form of public education. 

John Tisdell

Did not answer  

 

Joaquin Vespignani

Uncertain (neither agree nor disagree) 6

I believe that not all exceptions are alike, for example the health and education sectors have also other sorts of subsides and therefore each case should be treated individually.


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