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Our politicians can't be trusted with a 15 per cent GST

By Brendan O'Reilly - posted Friday, 6 November 2015


Treasurer, Scott Morrison, has recently been flagging "pretty significant tax changes".  While he won’t specifically back a proposal to hike the GST to 15 per cent, others in the Coalition (like Nationals MP David Gillespie) are spruiking a "New Zealand-style model".  This model would extend the GST to more goods and services or increase its rate to 15 per cent, in order to fund reductions in income taxes and business taxes.  The Press is also speculating that the Turnbull Government broadly wants such a change.

This all sounds somewhat familiar.  In fact it is more or less what was said when the GST was first introduced in 2000.  The then Howard Government also had always wanted a GST with as few exemptions as possible, but, in order to get the support of the Democrats in the Senate, some exemptions, particularly for food, were required.

John Howard, in a speech to the nation just before the introduction of the GST, promised Australians the largest income tax cut ever.  "From the first of July, every taxpayer will get a tax cut.  Under the new lower tax scales you will be able to earn up to $50,000 a year and pay a top rate of only 30 per cent instead of up to 43 per cent at present.  Four in every five taxpayers will be on a top rate of 30 cents in the dollar or less".

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So where did that take us?

Well the tax cuts did not last.  They were dissipated by a combination of the effects inflation on tax thresholds, and subsequent tax increases to fund ever-growing spending.  Instead of 80 per cent of taxpayers facing a marginal rate of just 30 per cent (as promised by Howard), a higher marginal rate of 32.5 per cent now cuts in when personal income reaches just $37,001 (and $37001 is equivalent to only about $27,000 in year 2000 dollars).  On top of the higher marginal rate, the Medicare Levy also went up, first from 1 per cent of taxable income to 1.5 per cent.  This was further raised to 2 per cent in July 2014 to partly fund the NDIS.  (The Medicare levy still funds only a fraction of the Government's skyrocketing health and disability support expenditures.) 

An average full time employed adult male in May 2015 was earning $1684.80 per week ($87089 p.a.) and now pays income tax at a hefty rate of 37 cents in the dollar at the margin, plus a 2 per cent Medicare Levy.  High income earners face marginal rates of 47 cents plus the 2 per cent Medicare Levy plus another 2 cents in the dollar "Temporary Budget Repair Levy".

The GST was also supposed to result in the abolition of some inefficient state taxes, such as stamp duty and land tax, but this never happened.

This time round a hike in the GST is also being pushed for competing reasons.  State Premiers, such as Baird and Wetherill have signalled they would support increasing the GST to 15 per cent, not as a means of funding income tax cuts, but instead in return for more money for the States.  Some federal politicians also see a GST increase as a means of tackling the deficit.  All this makes it even more unlikely that (a lasting) GST increase will give rise to long term cuts to income tax.

One of the few frank comments on this subject have come from Senator Ian MacDonald.  Senator MacDonald said he and other members of the Howard government had vowed not to lift the GST above 10 per cent after it was introduced in 2000.  "From the Prime Minister down, we all committed our promise to blood and said that it would never increase beyond 10 per cent, and that's a commitment I intend to honour," he said.  Another honest effort in the area of income tax was the indexation tax thresholds, which occurred in the 1970s.  That did not last very long either.  These days fines and excises (which raise revenue for governments) are indexed.  Income tax thresholds are not indexed, allowing Governments to increase income taxation by stealth.

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On the Labor side, Kevin Rudd promised that there would be no GST increase under his Government.  No change did occur under the Rudd and the Gillard governments but on the other hand they never sought to abolish the GST either.

I believe that the Government needs to address its spending and deficit problems before it can introduce tax reform with any credibility. 

On 22 September, shortly after becoming Treasurer, Scott Morrison declared that the Federal Government has "a spending problem, not a revenue problem".  According to the Financial Review "the Commonwealth's current inability to properly size spending to revenues (or vice versa) has resulted in an explosion in gross debt from just $59 billion in June 2008 (or 5 per cent of GDP) to about $430 billion by June 2015 (26.3 per cent of GDP).  This excludes another $275 billion of government debt owed by the states, local authorities and public companies.  Australia's gross Commonwealth government debt-to-GDP ratio is now at the highest level since the ABS's quarterly records began 27 years ago and exceeds the 22.9 per cent record set in December 1995 after the 1991 contraction".

The much criticised first Hockey Budget (2014-15) did seek to address these matters with deep cuts to spending and some new revenue measures.  Joe Hockey was pilloried for his trouble, and the Budget (key aspects of which did not get through the Senate) contributed to the Abbott Governments unpopularity.  By the time the 2015-16 Budget came around Hockey (and the then Abbott Government) seemed to have given up and brought down a Budget with an expected $35.1 billion deficit. 

One would have thought that sorting out the Budget Deficit, is the Government's most immediate priority and that slashing the spending side of the Budget comes first.  Talk of income tax cuts simply are not credible when the overall Budget position is so bad.  Essentially big spending proposals such as Labor's Gonski splurge on schools, and on the NDIS, and the Coalition's (failed) Paid Parental Leave Scheme (subsequently diverted into higher Child Care spending) and new Direct Action expenditures to combat greenhouse were all unsustainable because there was no money to pay for them.  The spending went ahead regardless.

Given all this history, the average taxpayer/voter should say "no thanks" to a higher GST that is promised on the basis of income tax cuts.  We were dudded last time, not by Howard, but by subsequent governments.  Any new income tax cuts funded by a higher GST will likely only be temporary, and all we will end up with is higher taxes overall, higher public spending, and less of our own money to spend ourselves.

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About the Author

Brendan O’Reilly is a retired commonwealth public servant with a background in economics and accounting. He is currently pursuing private business interests.

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