The Road To Reform Leads To A Simpler Tax Structure
Sydney Morning Herald
Tuesday June 30, 1998
WHILE there is general agreement among taxation economists that a value added-type tax, like the proposed goods and services tax for Australia, is an efficient tax when levied at a single rate with virtually no exemptions, the introduction of a GST is not the be-all and end-all of tax reform, especially in this country.
Indeed, it seems unlikely that a GST could ever be introduced in a form satisfying the purists; and even then there would remain a series of other tax reforms which are as urgent.
Drastic simplification of the tax scale and the Income Tax Assessment Act is perhaps even more important for equity - as well as efficiency - than a GST; the personal and corporate tax regimes have become so complex that even the courts have difficulty interpreting them, and some taxation lawyers argue that while a "black letter" approach to tax law is adopted by the courts, the tax-avoidance industry will always be ahead of the Taxation Commissioner.
Part of the problem of comparing tax regimes is that the study of tax incidence, that is, who actually pays a tax and how it can be shifted on to others, is relatively undeveloped and in any case difficult. The glaring example is corporate income tax, which is passed on to a varying extent to consumers, partly depending on the competitiveness of the market in which a corporation finds itself.
It can be argued that the corporation tax is extremely regressive, hurting consumers and low-income groups most, rather than the rich shareholders it is intended to fall on. And while the incidence of a single-rate GST is considered to be fairly obviously regressive in that it hits hardest the poor, who spend all or most of their income, even this has to be modified once other indirect taxes are taken into account.
It is generally agreed that at the least the GST would be expected to replace the existing wholesale sales tax (WST), which was widely extended by the Keating government after 1993 election.
But of course its range would be wider still, since it would gather up the most important untaxed, or relatively undertaxed, sector of the economy, the services sector, which is also the fastest-growing and the main source of new employment. Although from the economists' efficiency point of view this is `It seems unlikely that a GST could ever be introduced in a form satisfying the purists.' desirable, the appearance of taxes on the huge range of services is bound to arouse opposition and fear, even if the rate of GST were struck so as to merely raise the same total revenue as the WST. At the very least, a legal onslaught on the services element of the GST would be inevitable.
But the replacement of the WST by a GST would not even complete this area of tax reform. The most obvious area is that of tobacco and alcohol excises imposed for social or moralistic purposes, which should logically be replaced by the standard-rate of GST.
Since such taxes are extremely regressive, hitting lower-income groups hardest, this would increase equity. But since the purpose of such taxes is ostensibly to deter consumption, the additional excise is likely to remain. Rather more difficult is the question of food, clothing and housing.
While the welfare lobby argues that such exemptions are necessary for equity reasons, in fact they would be highly beneficial to middle- and high-income earners unless some kind of sumptuary, or luxury, taxes were introduced as well.
Then there is the problem of import tariffs. These, too, are mainly regressive commodity taxes (and very inefficient and counterproductive policy measures); few discussions of the GST go into the question of how these would interact with it. Nor is the distributional impact of the tariff considered alongside the supposedly adverse impact of the GST.
The matter of tariffs also brings in the issue of the incidence of the GST on imports and exports. One of the strongest arguments for a GST advanced by the business sector is that since it falls on imports but is remitted on exports, it advantages our exports.
However, this is really the same as a unilateral devaluation against the rest of the world - an advantage which is insignificant when variations in the exchange rate in markets are much greater. (Much the same applies to tariffs.) Even without a GST, it would be possible to modify the WST to lessen its impact on exporters.
In assessing the pattern of indirect taxes, payroll taxes have also to be taken into account. These are the equivalent of indirect taxes, since they impact on commodity and service prices to the extent that they can be passed on; indeed, some tax specialists argue that payroll taxes should properly be classified as excise taxes under the Constitution and should be Commonwealth and not State taxes.
This brings out another important aspect of tax reform in Australia which the GST proposals do not take into account: the vertical fiscal imbalance between the Commonwealth and the States, with the former controlling and collecting most of the sources of taxation revenue and the latter depending on the Commonwealth for the source of much of their expenditure.
This imbalance in responsibility for collection does considerable political and economic harm. A series of High Court decisions has made it clear that consumption taxes generally are in the province of the Commonwealth rather than the States (though the law remains untidy).
It seems that the intention of the constitution-makers was that indirect taxes and tariffs were to be the main source of Commonwealth revenue, while other taxes (particularly income tax, which was in its infancy) would be left with the States. One corrective for the present vertical imbalance might be for the Commonwealth to facilitate, and perhaps even insist on, the States getting back into the income-tax field.
In most earlier discussions of the GST (in other countries as well), its use as a supplement to - and to a considerable extent a substitute for - the income tax has been an important consideration. Here especially is where political and distributional considerations become most divergent.
The most extreme proposal has involved the virtual replacement of the income tax by the GST, with perhaps a flat-rate income tax cutting in at some threshold income. Such a tax might be supplemented with wealth or inheritance taxes.
FLAT-rate tax proposals are often ridiculed, but properly administered could solve many of the problems inherent in our present progressive scale, including bracket creep and the poverty trap. Short of that, however, a shift in reliance on income tax towards the GST is one of the fundamental original reasons for advocating the introduction of such a tax. European Union countries collect a smaller proportion of their total tax revenues from the income tax as a result. This, together with the fact that the GST does not impinge on savings, is seen as an encouragement to private saving.
One of the selling points of the GST was that it would make possible substantial income-tax cuts as well as the replacement of the WST. However, the welfare lobby has in effect adopted the position that a GST should be introduced only as an addition to the total tax burden designed to increase expenditure on its preferred schemes, rather than as a pure tax reform.
On such a basis the GST would become even less politically attractive than it is now. Equally, any commitment to introduce a GST at a fixed rate would prevent future adjustments to the indirect-direct tax mix.
Whether the Government will stick to the intention of introducing some kind of GST remains to be seen. Even if it were re-elected on such a commitment it would face a hostile Senate; and a new tax is hardly a suitable double dissolution or referendum issue. Where the equivalent kind of tax has been introduced without too much fuss, it has been either by surprise, in the absence of constitutional checks (as in New Zealand) or fulfilling treaty commitments, as in Britain under the Treaty of Rome as a condition of membership of the (then) European Economic Community.
It seems the only available certain path of reform in Australia is through incremental simplification of the existing tax structure, even though a GST would be a useful beginning.
ppmcg@ozemail.com.au
© 1998 Sydney Morning Herald