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GST Reform by AFR's Ben Potter

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Expand GST, Don't Hike It, Say Economists

Top economists favour broadening the base of the GST to raise more revenue rather than raising the rate.

A panel of the nation's most eminent economists narrowly favours broadening the base of the GST to raise more revenue rather than raising the rate.

A majority of the 49-strong National Economics Panel says broadening the GST base would be preferable to hiking the rate because it would be more efficient to cut out exemptions for items such as food, healthcare and education than to raise the 10 per cent rate and continue the exemptions.

The panel is convened by the Economics Society of  Australia – the premier professional body for economists.

It includes former Treasury secretary Martin Parkinson, former Productivity Commission chairman Gary Banks, and Melbourne University professors Ross Garnaut and John Freebairn, who favour changing the GST, and former competition regulator Allan Fels and University of Queensland professor John Quiggin, who oppose it on equity grounds or are unsure. 

A large minority of the panel took a contrary view or were undecided because they were unsure about how the revenue would be allocated and whether low-income households would be adequately compensated. 

That suggests Prime Minister Malcolm Turnbull and Treasurer Scott Morrison – who want to revive a debate about changing the tax system to boost economic growth and encourage investment – will need to address these concerns head on if they are to be able to sell the package to voters. 

Mr Turnbull and Mr Morrison met the leaders of peak business, union and  civil society groups on Thursday to hear the key messages from the National Reform Summit hosted by The Australian Financial Review and The Australian in August. 

Raising more revenue from the GST is a key plank of most tax reform proposals because it would raise a large amount of revenue for deficit repair and cuts to company and income taxes, increasing the rewards for work and investment.

Fifty-five per cent of the 44 panellists who answered the question agreed or strongly agreed that broadening the GST base was a preferable way to raise more revenue than raising the rate, because of efficiency and simplicity.

"The existing exemptions appear to have little economic or welfare rationale," said Monash University professor Stephen King. 

"Where removal would lead to undesirable redistribution this can be dealt with directly, for example cars for the disabled."

 Panel member Professor Freebairn said the GST applied to just 47 per cent of goods and services consumed today, down from 56 per cent a decade ago, and half the 96 per cent coverage of New Zealand's GST. 

"If Australia were to adopt the New Zealand position of (essentially) no exemptions, then at the current rate of 10 per cent the GST would raise roughly twice its current revenue," Professor Freebairn said. 

"This would be broadly equivalent to the revenue raised by doubling the current rate to 20 per cent while retaining the existing exemptions."  

Forty-five per cent of the economists either disagreed with removing the exemptions or were uncertain. 

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

"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 reduced."

The Economics Society convened the National Economic Panel of eminent economists to consider pressing policy questions facing the nation.

The panel follows the example of one set up by the University of Chicago's Booth School of Business. 

 


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