Home' acuity : Acuity May 15 Contents acuity | MAY 2015
But could plans be afoot to take a
‘grand bargain’ to next year’s federal
election, in which a higher GST could
fund a package of corporate and
personal income tax cuts?
Revenue starved, the Tony Abbott
government’s first budget, packed
with deep spending cuts, proved
Abbott’s second budget, due this
month, is expected to be much softer.
So the time has come to consider the
other side of the ledger: tax.
Hockey’s first budget provocatively
stripped Australian state governments
of A$80b in health and education
funding, a move seen at the time as
designed to force a new discussion on
overhauling GST revenues.
As Australia prepares for the tax
debate ahead, it is worth revisiting
the economic arguments for
increasing reliance on consumption
taxes like the GST. What lessons can
the New Zealand experience teach?
Will Australian politicians and voters
ever summon up the guts to sensibly
debate an increase to the GST as part
of a package of reforms? And, given
the regressive nature of the tax, would
that even be desirable?
These are issues worth examining
An efficient tax
The overwhelming majority of
orthodox economists support
increasing the proportion of the
tax take from taxing consumption,
particularly as part of a shift in the
“tax mix” away from taxes on labour
From an economic perspective,
GST – charged to consumers as a
fixed percentage of their purchases
of goods and services – has long been
regarded as a relatively efficient tax.
Of course economists also tell us
that all taxes are bad taxes in the
sense that they distort behaviour.
They prevent transactions that would
otherwise have taken place between
parties, on mutually agreeable terms,
from occurring, thereby reducing the
economic surplus. Another way to say
much the same thing is that all taxes
create “deadweight losses”.
The key to minimising deadweight
losses is to impose taxes on things
that can’t respond much to the
imposition of the tax.
The Henry Tax Review identified
four key sources of taxation
in Australia: labour, capital,
consumption and land. Of these,
capital and labour are the most
consumption taxes (including
excises) is relatively low, at just 23.3%
of total taxation versus the OECD
average of 30.9%, according to the
OECD’s Consumption Tax Trends 2014.
(In New Zealand, it is relatively high
Worldwide, the shift is on towards
consumption taxes and away from
income taxes. According to the OECD,
21 countries increased their rates
of Value Added Tax (VAT) between
January 2009 and January 2014 lifting
the OECD standard VAT from 17.6 %
to a record 19.1% – double Australia’s
On 1 April this year, Malaysia
introduced a GST of 6%. India’s
parliament is also debating legislation
to introduce one.
Perhaps the most convincing
argument for a shift to consumption
taxes is the increasing mobility of
capital in a globalised world. In
the face of increased “base erosion
and profit shifting” there is a need
for governments around the world
to fortify their tax bases without
Labour, too, is increasingly mobile
with companies competing for
talented young workers to buttress
In such a world, countries are
increasingly looking towards
domestic consumption as a stable tax
base – after all, everyone’s gotta eat.
Lessons from New Zealand
On 15 acres of land, half an hour out
of Auckland, former New Zealand
Reserve Bank governor and National
Party leader Don Brash has an orchard.
Brash chaired the advisory panel
on GST before its introduction in 1986
Today, Brash boasts that it takes just
10 minutes twice a year to complete
his GST paperwork – a prospect that
would make many a small business
person in Australia weep.
When we speak, Brash is freshly
“I don’t want to
sound like I’m
how to suck eggs,
but the New
Zealand GST is
a good one and
regarded as one
of the best in the
mobile, being able to shift to avoid
the tax. Land is the least mobile, with
consumption somewhere in between.
A low tax taken through “indirect”
taxes – consumption and land taxes
means the burden of taxation falls
more heavily on “direct” sources
personal incomes and company
And this is considered bad because
those activities can be more easily
Advocates of increasing GST in
Australia note the proportion of total
tax collected in Australia through
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