Broaden GST before anything else

06 Jan, 2015 05:00 PM
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Progress on tax reform in Australia has been left half-baked due to opportunism and fearmongering

REMOVING exemptions is a bigger taboo than raising the rate, even though the argument for exemptions is intellectually lazy, says DAN TEHAN.


OPINION: I WAS reminded when reading Barry Nichols' You Only Get One Innings over the break how quintessentially Australian is the saying "if you are going to do something, do it well". In this regard at least, tax reform and cricket have something in common.

In 2015, tax reform is no longer an option for Australia, but a condition for future growth and enhanced competitiveness.

This year must begin where the Coalition left off when last in government. We must finish reforming our tax system by broadening the GST.

Progress on tax reform in Australia has been left half-baked due to opportunism and fearmongering. In Howard's era, the breadth of our GST base was diminished to ensure passage through a hostile Senate. More recently, Labor's Henry tax review ruled out changes to the GST out of fear of unpopularity in the polls.

If we can't handle the task of making our tax system work now, we will hand a bound and broken Australia to our children.

The Coalition knows this and has included the GST as part of its tax white paper.

As Hawke, Keating and Howard publicly said last week, now is the time to move on major economic reform.

After the significant bipartisan reforms of the Hawke and Keating governments, the Howard government's implementation of an introductory 10 per cent GST was the biggest shift in Australia's tax mix since the Second World War.

It was significant as it meant the moving away from the traditional direct taxes to an indirect tax, which enhanced growth and international competitiveness.

Australia hit new heights of prosperity due to the confidence found by growth in wages and investment.

At the time Howard argued that it was only through introducing a GST that we could keep the levels of government services and support that Australians expect.

This remains as true today.

GST solution to higher living standards

As Martin Parkinson has stated, when it comes to tax reform, research consistently shows that only indirect taxes like the GST will deliver higher standards of living.

The Howard tax shift also brought Australia closer to other developed nations in regards to a tax mix, with the majority of OECD countries already having some form of GST.

Yet despite its resounding success in increasing wage growth and competition, the GST remains unfinished business.

Broadening the GST is the missing link. It would deliver up to $21.6 billion in extra revenue each year and enable further serious reductions in direct taxes.

While OECD countries have applied their value added taxes more broadly, Australia has an aversion to broadening this taboo tax, either due to flawed arguments of unfairness or political cowardice.

One only has to look across the ditch for inspiration. Since its introduction in 1986, New Zealand has raised its GST twice. It also recognised from the start that the only way to reap a full GST benefit is to have minimal exemptions.

Their GST covers 96 per cent of their consumption. Australia's only covers 47 per cent and is shrinking, down from 53 per cent a decade ago.

As a result, the Kiwis now enjoy a company tax rate of 28 per cent and a top marginal income tax rate of 33 per cent.

Yet many still seem to be buying the intellectually lazy argument run by the Labor Party: if the GST is broadened or applied without exemptions, it will hit the poorest in society.

This completely ignores the fact that applying welfare through an indirect tax means that everyone gets the exemptions.

Even the OECD has pointed out that using GST exemptions to achieve welfare goals is terribly inefficient for precisely this reason.

The other alternative to broadening the GST is to raise it. This has the political advantage of being easier to sell, but the strong economic distortion of placing a further tax burden on one half of the economy.

Tax reform, particularly broadening the GST, is not the easy path. But it is the right one for our future. We must finish the job of tax reform begun last century by doing it well.

Dan Tehan is the MP for Wannon.

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Well why are they paying MLA levies. ?
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Where have I been for a week, don't tell me the PC has been reading all the hints I leave on
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Pete you also missed 15,527 votes for Marty Corboy in Indi because Sophie made it a 3 corner by