Tax reform agenda can’t ignore changing the GST
Adjusting the GST to streamline existing revenue collections while removing the incentive-busting imposts currently levied on business and personal income taxes makes a lot of sense. Above all, any reforms must not merely be a way for governments to increase collections to cover their inability to cut spending. The objective must be to modernise the revenue base, promote personal choice and free the economy to grow.
Given the fact that tax reform was frustratingly absent from what was on offer from both major parties at the federal election, it is reasonable to expect that any substantial plans be crafted this term and put to electors in three years’ time before they are put to federal parliament. The worst possible outcome would be for Labor to join forces with the Greens to ram through changes that have already been decided in private and that would never have passed the test had they been put to voters. This is essentially what happened at the Jobs and Skills Summit in the Albanese government’s first term, when the talkfest was used as cover to ram through a suite of changes to industrial relations laws to satisfy the demands of the trade union movement.
For tax reform, the objective must be lower marginal rates for individuals and business, and to put an end to bracket creep. New thinking is required to remove government imposts that add costs and restrict flexibility in the housing market. Proper account must be taken of the productivity and economic impact of an energy transition that is struggling to deliver. Reform of the GST will also allow a reworking of current arrangements that pit Western Australia against the other states.
All of the arguments about equity that accompanied the introduction of the GST by John Howard 25 years ago still hold true. A higher GST rate will be progressive because it will collect more from people with higher means, but they will have greater discretion about how they choose to contribute. Just as there was a quarter of a century ago, there is a strong case that the lowest-paid should be compensated for the impact of a higher rate of GST on non-discretionary purchases. But rather than carve-outs, there is a strong argument to include as wide a range of goods and services as possible.
Changes to the GST have long been considered too difficult to achieve politically because they would require the unanimous agreement of all states. But as tax adviser Matthew Cridland explained in these pages on Thursday, this “lock mechanism” was a political device to reassure voters the GST rate and base could not be easily changed. But, he says, this lock can be removed simply by repealing the old law.
Treasurer Jim Chalmers has been reluctant to put GST reform on the agenda. He is likely to focus on more politically palatable hits to family trusts, reducing the discount on capital gains tax on investment properties, and imposing a switch from fuel taxes to road user charges to guard against a long-term trend to electric vehicles. He must resist calls for further imposts on our major energy exports, given enough damage has already been done to investment confidence and sovereign risk.
The GST may still represent the best opportunity to free up the economy, address concerns of intergenerational equity, and allow state governments to get real about their own need for budget repair.
If Dr Chalmers wants to seize the mantle of reform, a reworked GST is still a vital part of the revenue puzzle.
State and commonwealth governments have a shared interest in reforming the GST as part of a broader suite of changes to boost productivity and grow the economy. While it would be ambitious to expect any concrete proposals to emerge from the hastily convened Productivity Summit scheduled for next month, the opportunity to think big should not be squandered.