For me, that’s what the current debate around increasing the GST boils down to. My belief is simple: it’s far more effective, on a number of levels, to tax spending rather than taxing earning.
The benefit of consumption taxes like the GST is the amount of tax you pay depends on how much you spend. This alone would be unfair on lower income households, as the percentage of tax they would pay compared to income would be higher. So any talk of a GST increase needs to include income tax cuts for all and compensation for lower income households.
The key issue is this – we as a country spend more than we earn. We can’t go on indefinitely racking up budget deficits. Plus our ageing population combined with people living longer, and the strain on our already-overburdened healthcare system, means we will incur significant healthcare cost increases over the coming decades.
Bottom line: like any business or household facing a debt crisis, we can do two things: reduce our expenditure, or find additional revenue sources. Healthcare costs alone make it hard to do the former, leaving us with the only option of generating more income. Should Australia go out and get a second job? The age of entitlement is over, after all… but who would look after the kids? Far better that we instead maximise our main income source – taxation receipts.
The more we earn, the more we spend
One reason consumption taxes are so effective, and so widely adopted across the developed world, is the timeless phenomenon of the more we earn, the more we spend. Broadly speaking, those on higher incomes spend more, meaning they pay more consumption tax. The higher the GST, the more tax they pay. Give people more income via tax cuts, and they’ll spend even more – contributing more to government coffers. Given most people would prefer to get the budget into surplus sooner rather than later, this is an important consideration.
Also, dropping income tax means high income households can focus less on reducing their tax bill. It’s a lot harder to minimise your normal living expenditure in order to pay less tax. This will also reduce many business owners’ misguided fixation with paying minimal tax – as I’ve said <in a previous post>, paying tax in and of itself isn’t a bad thing, because it means you’re earning an income; spending money primarily to get a tax deduction is bad business.
True tax reform is too big a pill for our current calibre of politicians; but we definitely need to alter the current tax system. We already have some of the highest income tax rates in the developed world; increasing these alone won’t get us where we need to be.
Conversely, at 10%, we have one of the lower consumption tax rates in the developed world. (By comparison, NZ lifted their rate from 12.5% to 15% in 2010, which applies to additional areas such as food, education and health care. Several Nordic countries are above 20%, with Denmark, Norway and Sweden at 25%.) So there is definitely scope to bring that in line with comparable countries by raising it to 15% (in conjunction with income tax cuts and compensation for lower income households).
We then need to determine if we want to broaden the base of the GST – apply it to more goods and services – or maintain the limited base we currently have. Broadening the base will reap $256b over four years. It’s hard to argue against this – provided adequate compensation for lower income households – when you consider we’re spending less and less on the goods and services that are subject to the GST (which kinda defeats the point, I reckon).
Plus anything that reduces the complexity of the GST for small business, and eliminates unfair and bizarre exclusions (like taxing tampons but not taxing condoms) is a good thing.
Next question: what to do with all this extra revenue?
The majority of talk so far has focused on bolstering our beleaguered health system, which I support. To support an ageing and growing population, we need to upgrade our health services.
I’d also like to consider opportunities to simplify other taxes that would be presented by an increase and broadening of the GST – particularly when it comes to small business. First in the gun is payroll tax and stamp duty (but that’s a whole other blog post right there).
So – what do we stand for as a country?
I don’t know about you, but I love living in Australia. If you’re lucky enough to get to travel, say to south east Asia, you’ll see how different life can be outside our blessed shores. We have great (largely world-class) hospital and education facilities, and we support our less fortunate. Sure, we could do a lot better in all of these areas. How much better we do is a measure of the health of our society.
Any talk of tax reform basically boils down to deciding what kind of society we want to have. For mine, the way we treat people who have stopped or are unable to work is a disgrace. Pensioners – who have worked hard their whole life, paid taxes, and in many cases gone to war for this country – receive a paltry $22,365 per single per year, and $33,717 per couple. That’s simply an outrage.
Equally, we need to look after those who, through no fault of their own, are unable to work. I’d definitely advocate some of the additional taxation revenue being directed to those two groups.
Any change that removes the penalties to someone striving harder to improve their lot, while enabling us to improve our society, gets my vote. And if it incentivises Australia to get a second job to pay for our penchant for big screen TVs and holidays to Bali, that’s just fine by me.