Is Abbott the Crocodile Dundee of tax reform?

July 28, 2015

by David Hetherington

29 July 2015

“That’s not a great big new tax,” Tony Abbott said to Bill Shorten. “THIS is a great big new tax!”

So might Mr Abbott channel Crocodile Dundee as he continues to rubbish Labor’s carbon price while conducting the phony war in advance of a GST rise.

Make no mistake, the wheels are in motion: the Abbott Government and the policy elite are coalescing around a GST rise after the next election.

It’s instructive to compare Labor’s 2012-14 carbon price with what a GST hike might look like post-2016. The two taxes are more similar than you might think. For the punter, the practical effect of each is a tax on consumption.

The carbon price taxed production of a single output, CO2 emissions, but this impost was passed through to the consumer in terms of higher prices on energy-intensive goods and services. Its intent was to reduce the environmental harm caused by greenhouse gas emissions (which it achieved), but its visible effect in the community was retail price rises.

The GST also presents the consumer with higher prices, but on a different, wider basket of goods and services – almost everything bar fresh food, health and education, and some financial services. If the carbon price was a great big new tax, a GST hike is a greater, bigger one.

What do the numbers tell us? In the last full year of the carbon price, 2013-14, the policy generated $4.4 billion for the federal government. In the same year, the GST raised $51.4 billion. Given this, a rough calculation tells us that a rise in the GST rate to 15 per cent with no widening of the base would raise taxes by at least $25 billion. So like Mick Dundee’s knife, Mr Abbott’s big new tax dwarfs Labor’s one.

This alone doesn’t mean it’s bad policy – Australian governments desperately need new revenue – it’s just that the logic of the Coalition’s carbon tax arguments might come back to haunt them.

Whether it’s good policy depends on other factors. The biggest criticism of a GST rise is that it’s regressive – it hits poor people harder than rich ones, because they’re forced to spend a higher share of their incomes on consumption. Research undertaken by ACOSS shows that households in the bottom income quintile spend 7 per cent of income on GST while those in the top quintile spend 3 per cent. So an increase in the GST rate to 15 per cent raises tax on lowest-income households by roughly 3.5 per cent and on highest income households by only 1.5 per cent.

The standard riposte to this is that the regressive effect can be negated through compensation to low-income households.

But compensation packages have their own challenges, principally that they can be eroded over time while their accompanying tax isn’t. Again, let’s consider the compensation package Labor designed to reduce the regressive effect of the carbon tax. One element was a set of income tax cuts achieved through an increase in the tax-free threshold. These, however, are subject to bracket creep where inflation pushes taxpayers into higher tax brackets. Another element was a one-off lift in social security payments. The challenge here is that these can be wound back through subsequent benefit cuts or eroded by indexing them to lower growth benchmarks, as the Coalition tried to do by tying the age pension to inflation rather than earnings.

And if you end up paying lots of your new tax back in compensation, you give up the much-needed new revenue you were chasing in the first place.

For Labor, this mattered less because the policy goal was emissions reduction rather than higher revenue. But the point of a GST hike is to raise more revenue and every dollar of compensation, while legitimate, undermines that aim.

Given this, why the coalescence around the GST as the best available tax reform?

Sure, the GST should be part of the debate, but it’s by no means the whole debate. After all, there are other viable options that raise similar levels of revenues and are fairer, including restriction of superannuation and housing tax concessions, reduction of corporate tax avoidance, and land taxes. At its conference last weekend, Labor even floated a Buffett tax, a minimum overall tax rate on the wealthy – although given our inability to get big companies to pay their legislated 30 per cent tax rate, it’s questionable whether we could force the expertly-advised super-rich to.

No, we revert to the GST because the main game for most of the proponents of the GST is to reduce income and company tax, shifting the share of our tax mix away from higher-income earners and big companies to lower-income households.

In this view, fairness simply doesn’t matter. And what passes as “reform” is simply another transfer of a liability from the better-off to the worse-off dressed up in grand policy jargon.