August 6, 2015

4 August 2015

By Stephen Koukoulas

If, as seems likely, the Federal government needs to raise more revenue if it to achieve a budget surplus and at the same time fund the extra costs associated with an aging population, maintaining a decent health care service and a high quality education the population, a hike in tax scales is needed.

The big policy and political question is which taxes need to rise to meet these objectives? And which tax change is fairer and consistent with the greater income equality?

The recent debate has thrown up two main possibilities for tax increases – increasing the goods and services tax or increasing the Medicare levy.

It is easy to illustrate how a lift in the GST is more unfair and regressive than increasing the Medicare levy as well as being more complex, administratively costly and potentially disruptive to the economy.

The GST is paid by everyone who buys goods and services. The GST is paid by the aged pensioner, the university student struggling with an education debt and a part-time job, the investment banker on $1m a year and the property tycoon who is in the top 10 of the rich list. The unfairness and regressive nature of the GST is such that each person pays the same dollar amount for a particular good or service regardless of their ability to pay the tax. A $10 GST hit on $100 of purchases is obviously a higher proportion of the income of a pensioner than someone on a very high income.

A flat increase in the Medicare levy would be fairer simply because those with an annual taxable income less than $20,896 a year or $33,044 for seniors and pensioners do not pay it. Not a cent. Unlike the GST, this relatively high threshold excludes around one-fifth of the adult population from having to pay the Medicare levy even though they pay the GST whenever they go shopping or turn on their heaters and lights and add to the GST on their electricity bills.

An increase of, say, 2% in the Medicare levy would mean than someone earning $50,000 a year above the threshold would be paying an additional levy of $1,000 a year, whilst someone with an income $200,000 above the threshold would be paying $4,000. While there is no progressivity in the tax scales above the threshold with an increase in the Medicare levy, unlike the income tax scales, very low income earners do not pay any more, low to medium income earners pay a little while high income earners pay a relatively large amount.

In terms of equity and fairness, a GST increase is clearly regressive while there is some progressivity with an increase in the Medicare levy.

The beauty of an increase in the Medicare levy is its simplicity. It is merely a change in the tax scales and that is it. No more or less.

The problems that would accompany a hike in the GST are many. An important issue is that some of the revenue raised would need to be recycled into aged pension payments, unemployment benefits and other benefits. This is to ensure low income earners are “no worse off” under the new tax arrangements. The bureaucracy and red tape issues would escalate as these changes are debated, analysed and then implemented. There is also the issue of the GST revenue being allocated to the States, further compounding the practical problem of those who spend the money (the State and Territory governments) not being responsible for the collecting the revenue, which is undertaken by the Commonwealth. As the recent debate on tax highlights, this disjuncture in accountability leads to a policy impasse.

There are other means to cover the cost of the extra government spending and meet the objective of a budget surplus. Dealing with the gross unfairness of the taxation of superannuation incomes, issues relating to negative gearing for property, subsidies to mining companies, a mining profits tax or a higher fuel excise are a small selection of possible tax changes.

There is also scope to trim government spending as a means to meet the budget objectives and constraints, but the political will and electoral concerns make these harder to implement than a tax hike, or so it appears.

The bottom line is that the next decade and beyond will see the call on government services and money increase and the funds to cover these costs must be raised in an equitable and fair manner. While a hike in the GST has the potential to raise vast sums of money, it is patently regressive.

Which means that from a fairness perspective, other options need to be on the table for consideration. This is where an increase in the Medicare levy is a better, if not perfect, option.