Is The Government Chasing Growth, Or Just Revenue?

How on earth did tax reform come to be seen as the great white whale of economic reform in the 21st century? The debate about whether to raise the GST to 15 per cent is a classic case study in out-of-control policy making.

A White Paper into taxation was part of the Coalition’s 2010 election policy platform, intended to set an incoming Abbott government with an agenda for a second term.

Having cautiously sympathised with the arguments for increasing the GST while in opposition, in 2013 Joe Hockey revealed the GST would be part of the White Paper process. This had a political message. The Rudd government hadn’t even allowed its “root-and-branch” Henry Review to consider changes to the rate or breadth of the GST.

Half a decade after it was announced, the White Paper process is as good as dead, and over the weekend Malcolm Turnbull was backpedalling furiously from a GST increase.

There’s been lots of sound and fury. Remember Rudd’s pantomime about Vegemite in the 2013 election? Now nothing.

There is of course a very sensible economic argument for a GST increase. The GST is a relatively efficient tax. It is also very transparent. We know who pays the GST – consumers. In this sense it is much better than some of the other mainstays of the Australian tax system, like the corporate tax, which is levied on corporations but the economic burden of which is actually shouldered by a combination of workers and investors.

Consumption taxes encourage saving and do not discourage earning, as personal income taxes do. Swap inefficient taxes for efficient ones and all else being equal there will be economic benefits. Stop me if you’ve heard this all before.

But in practice, as Turnbull became more interested in a GST change over the last few months it became clear those benefits were illusory.

First, much of the new revenue would be eaten immediately by compensation to lower income groups. Second, some of it would probably be given to the states to satiate their demands for revenue and pay fidelity to the original GST revenue bargain. Only what was left could be traded off for tax cuts.

In the Australian on Monday, Paul Kelly argued that dropping the GST showed that, for Turnbull, short term politics had trumped sound policy. Kelly asked: “Where does the growth dividend he badly needs come from once ambitious tax reform is rejected?”

Yet by the time all the stakeholders had been bought off, it is not at all clear that an ambitious GST increase would bring a growth dividend – and certainly no growth dividend large enough to justify the cost of political capital.

The lesson here is that politics and policy are not really opposed. We live in a democracy. Everything is compromise. Good policy that is politically impossible cannot be considered truly good policy.

Anyway, even in a perfect world an increased GST would be a hard sell. Probably much harder than the original GST, even though a five percentage point increase is smaller than the original 10 percentage point introduction.

The Howard government was justifiably able to pitch their new 10-per-cent-on-everything tax as “not a new tax, a new tax system”, because the GST was novel, coherent and substantive.

Anything an Abbott or Turnbull government might do – even the grandest trade of a consumption tax increase for income tax cuts – could only appear as marginal changes to the Howard tax settlement. And without the look of revolution it was going to be hard for GST changes to look like anything more than a tax increase, and one widely believed to burden poorer Australians.

Imagine if the Government actually proposed a GST boost in order to fund a tax cut for corporations. This would be at the same time economically sensible (that is, likely to bring a big boost to economic growth) yet it would also be politically suicidal – especially for a government struggling hard with the “unfair” legacy of the 2014 budget.

There is no question that marginal efficiencies could be found if the tax system was rewritten. But not of the sort of economy-boosting significance that the Turnbull Government hopes.

The GST has taken on an aura of bold reform that it does not deserve. And, having taken that aura, it has crowded out discussion and debate about alternative growth enhancing strategies that would leave the tax system as it is.

That aura means there is lots of support for tax reform in the press. But so what? There is no agreement as to whether tax reform is supposed to help the economy, or whether it is simply to raise more revenue. The Government has been stuck haplessly between these two forces ever since Hockey released his tax discussion paper last year.

Right now Turnbull and Scott Morrison are casting around for new approaches to tax in the lead up to the May budget. But they first need to answer a simple question: why are they interested in tax reform at all? For revenue, or for growth?

It has to be said, once again: persistent budget deficits are a terrible time to attempt tax reform.