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Too many things on the 'verboten' list for this year's 'Tax Forum'

By Saul Eslake - posted Friday, 15 April 2011

Last month, Treasurer Wayne Swan foreshadowed that the Tax Forum which was one of Independent Rob Oakeshott's conditions for supporting the re-installation of the Gillard Government after last year's election will be held on 4th and 5th October. In making this announcement, the Treasurer re-affirmed that the Government won't be budging on the 19 things which he explicitly ruled out when releasing the Henry Review of the Australian Taxation System in May last year, and that there would be no contemplation of an increase in the rate or broadening of the base of the GST.

The Treasurer isn't saying that the approximately '150 representatives of community groups, businesses, unions, and governments, as well as academics and tax practitioners' who will be invited to the Tax Forum won't be allowed to mention the GST (or any of the items on his list of 'no-go areas'): but it's clear that they'll be wasting their breath if they do.

Which is a pity. Because if the Treasurer and his colleagues were serious about, in the fine words of his press release, 'implementing a substantial tax reform agenda to strengthen and broaden the economy', so as to 'ensure our tax system shares prosperity fairly and maximises the opportunities that will flow from the growth of our neighbouring economies in this, the Asian Century', then he wouldn't be refusing to listen to any discussion of these verboten topics.


The Labor Party's unyielding hostility even to thinking about the possibility of broadening the base of the GST, or increasing its rate, is especially surprising when one remembers that the first significant use of such a tax was by Labor's fraternal colleagues in Western Europe (where it is known as a value-added tax or VAT) in order to pay for a Western European-style welfare state. Today, there isn't an EU member country where the standard rate of GST is less than 15%; in most, it is at least 20%; and in some (Sweden, Denmark and Hungary) it is as high as 25%.

According to Treasury's most recent Tax Expenditures Statement, published in January this year, exemptions from the GST base will result in revenue foregone of over $15bn in the current financial year. Of this amount, $5.9bn results from the exemption of uncooked food for consumption other than on the premises where it is bought (for example fresh fruit and vegetables, meat and fish, dairy products, bread, coffee, tea and fruit juices). By contrast, the exemption of imports of goods valued at less than $1,000 (including those purchased through offshore websites, which has attracted the ire of retailers in recent months), results in a revenue leakage of 'only' $460mn. The concessional treatment of financial services results in an additional revenue loss of $3.2bn.

All up, therefore, exemptions and concessions in the GST base will entail a revenue loss of some $18.3bn in the current financial year, equivalent to 35% of the $52.2bn which the GST is expected to raise. Removing some or all of these exemptions and concessions, or increasing the rate of GST from its present 10%, would help to relieve some of the revenue pressures State and Territory Governments are now under as a result of the shortfall in GST collections (compared with previous forecasts) flowing from the 'new frugalism' of Australian consumers; would offer a way of addressing some of the concerns of the larger States about their share of the GST pool without imposing outright losses on the smaller States and Territories; and would permit the States and Territories to get rid of some or all of the 'nuisance' taxes which the Henry Review said should be abolished.

To be sure, broadening the base of the GST to include uncooked food, or child care services, could be regressive (in the sense that spending on these items is likely to represent a higher share of the budgets of low-income households than of high-income households), viewed in isolation from any other changes that might take place at the same time.

But the same is surely true of the Government's proposed carbon tax; and it would be possible (and desirable) to compensate lower-income households for the adverse impact on them of any broadening of the base or increase in the rate of GST in the same way that the Government proposes to compensate them for the effects of a carbon tax (or that the Howard Government did for the impact of the GST when it was first introduced in 2000), by a combination of income tax reductions and increases in social security payments.

The Labor Party's implacable opposition to any consideration of options around the GST is thus hard to fathom. If it is ultimately attributable to their opposition to its introduction more than a decade ago, then it is surely time they got over it, just as John Howard was able to get over his original opposition to Medicare – or, for that matter, to an emissions trading system.


Equally curious is the Government's vehement opposition to any consideration of taxing trusts as companies, as suggested by Opposition Shadow Treasurer Joe Hockey last week. According to the latest edition of the ATO's Taxation Statistics, which was released last Wednesday, there are now more than 4 million trusts in existence in Australia, and more than $37bn of income was distributed through them in 2008-09 (of which less than $500mn, or 1.3%, was income from primary production). The whole purpose of a trust is to allow income to be distributed to spouses or children where it can be taxed at a lower rate than would have been applicable to the individual who (more often than not) actually earned it. As I've discovered myself since leaving my former employer, this is something that ordinary wage and salary earners can't do.

In 1999, the Howard Government proposed to tax trusts as companies (in line with a recommendation by the Ralph Review of business taxation arrangements) as part of a 'deal' with the then Labor Opposition under which Labor also agreed to support the halving of the tax rate on capital gains. The latter was enacted, but the Howard Government then withdrew the proposal to tax trusts as companies under pressure from the National Party and sections of the Liberal backbench.

Why the Labor Party should have reversed the position it took back then is far from clear (especially when it's not prepared to reverse its position on the GST) – unless, of course, one takes the cynical view that it's all about the votes that would be at risk to any party that took a principled stance on an issue of taxation reform.

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This article was first published in the business pages of the Melbourne Age newspaper, and in the online edition of the Sydney Morning Herald, on Wednesday April 13, 2011

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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