Scare Campaigns Aside, GST On Food Is A No-Brainer

Let us thank Kevin Rudd for reminding voters that “great big new tax” scare campaigns are a bipartisan affair.

The sole hook for Labor’s claim that the Coalition will increase the GST is Joe Hockey’s promise to conduct a review of Australia’s taxation system that would include the GST within its terms of reference. (Kevin Rudd’s Henry Tax Review specifically excluded the GST.)

From that, Rudd has concluded that the price of Vegemite will rise 50 cents under the Coalition.

Pretty deceitful, but such is politics. And let’s not be precious. Recall the often farcical tabling of electricity bills by the Coalition in the last parliament. When a politician wants to make an argument – right or wrong – they’ll stretch the truth to breaking point. Whatever works.

But the carbon tax has nothing on the GST. The GST is the great bogey-tax of our generation.

Thirty-eight years after it was first formally proposed in Australia, the GST still retains its power to spook the political class.

In 1972 William McMahon’s government commissioned the first full-scale review of the Australian taxation system since the Great Depression. The review, chaired by NSW Judge Kenneth Asprey, concluded that the key to a simple and efficient tax system was a broad-based tax applied uniformly to all goods and services.

By the time Asprey’s report was released, it was 1975 and the prime minister’s name was Gough Whitlam. The only tax reform Labor was interested in was that which might suppress Australia’s skyrocketing inflation.

Malcolm Fraser’s cabinet toyed occasionally with a goods and services tax, but ultimately left it alone. Paul Keating proposed a GST which was then scuttled by Bob Hawke. John Hewson put it officially back on the political agenda, but an opportunistic Keating tore it down again when he tore Hewson down. And John Howard had to denounce the GST before he could introduce it. By comparison, introducing the carbon tax was a cakewalk.

No surprise our politicians don’t want to revisit all that pain.

But any self-respecting tax review has to include the GST. And any review would conclude that broadening the GST’s base – that is, applying the GST to food – is a no-brainer. Excluding food increases the GST’s complexity and reduces its efficiency.

The argument that a GST on food would disproportionately hurt the poor is misconstrued. Yes, the smaller your income, the more you’re likely to spend on food as a proportion of your income. But the food exemption doesn’t just make food cheaper for the poor. It makes food cheaper for everyone. There are much more targeted better ways to help people on lower incomes – direct welfare payments, for instance, or varying the income tax schedule.

If you were a benevolent dictator designing a tax system from scratch, the GST would apply to all consumption goods and services. The ideal system might even set the GST higher than 10 per cent. There are a lot of inefficient, complex taxes that target production which could be replaced by a simple GST that targets consumption.

(This is important. Free marketeers tend to favour GST reform not because they love taxes but because the GST should replace more distortionary ways of raising government revenue. Any GST tax change ought to be revenue neutral. Hopefully the Coalition remembers this in government.)

Of course there is no benevolent dictator, and we wouldn’t want one.

Policy thought experiments like this are an economists’ fallacy. They assume the best policy can be modelled on a computer or detailed in a white paper and then imported holus-bolus into a nation’s legislative framework. The world doesn’t work like that. The elegant, uniform, and broad-based consumption tax envisaged by the Asprey review was shredded when it came into contact with the Australian Democrats.

One of the current furphies is the idea that Tony Abbott couldn’t change the GST even if he wanted to – it would need to be renegotiated with the states. This is wrong, at least on the face of it. The GST is a Commonwealth law, and a Commonwealth law can be changed by the Commonwealth parliament whenever it likes.

But there appears to be an evolving political norm that would compel the Commonwealth to negotiate to change the GST, even though it technically does not have to do so.

Such a constraint is a good thing. The GST is, after all, supposed to be the states’ tax.

And we know from experience that a tax unconstrained by norms or rules can become a monster.

One of the major taxes that the GST replaced – the wholesale sales tax – was introduced by James Scullin’s Labor government in 1930.

The wholesale sales tax was originally levied on a selected range of goods at a uniform rate of 2.5 per cent. But by 1940 the government had hiked the tax to more than 8 per cent, varied the selection of goods, and introduced multiple rates. The rate and the schedule changed repeatedly over subsequent decades. Scullin’s simple wholesale sales tax became a complex behemoth that the federal government couldn’t stop tinkering with.

The GST has so far avoided this fate in large part due to the trauma involved in implementing it.

Maybe we should also thank Kevin Rudd for ensuring the GST remains a toxic tax.