NSW premier Mike Baird suggested yesterday that Australia's Goods and Services Tax (GST) should be increased to 15% – in a bid to help fund our growing healthcare bill and fix our budget.
Unfortunately he's missing the point as I'll explain below.
Mr Baird is expected to put his proposal to a tax summit attended by state and territory leaders and the federal government on Wednesday. The meeting has been called after Federal Treasurer Joe Hockey slashed $80 billion in funding to the state governments in his first budget in 2014.
GST is a value added tax of 10% charged on most goods and services, introduced by the Howard government in July 2000. Fresh food, health, education and child care are all GST-exempt.
It replaced the previous wholesale sales tax and was designed to phase out a large number of taxes and duties, including stamp duty. The states have removed very few of the large revenue raising means, such as stamp duty on housing transactions, for fear of slashing revenues.
The GST raised $51.7 billion for the federal government in 2013-2014, with excise tax on alcohol, tobacco, fuel and petroleum products raised a further $25.8 billion.
Premier Baird writing an opinion piece in The Australian says, "That all the resources of the commonwealth and the states, pooled together, can no longer fund health services to our current standard. By 2030, the annual budgeted deficits across the commonwealth and states will be about $45 billion, of which about $35 billion will be generated by health."
The reason he suggests that we raise the GST is because "it's a highly efficient tax that is difficult to avoid". Products and services exempt from the GST will continue to be excluded.
The only problem with a tax like the GST is that it affects lower income families more – because it represents a larger slice of their take-home income than those well off. Mr Baird suggests that offering a compensation package for those households earning up to $100,000 would ensure they weren't disadvantaged.
All funds raised under the higher GST would be directed to healthcare, compensation or tax cuts – something the Federal government seems keen to offer Australians at the next election.
I'm not against the GST rising as such whether it's to 12.5% or 15%. The main problem is raising in such a one-off way means we may have to revisit this issue in another 10-20 years with another hike in the GST. Why not get this sorted out once and for all with a sliding scale of increases over time? That means looking at state and federal revenues and expenses as a whole.
Even better, why not revisit the Henry Tax Review from December 2009, which laid out recommendations for policy changes and areas of further investigation, although that review was specifically directed not to increase the GST rate. As the review stated, "It would, therefore, be prudent to design a tax system now that would be capable of delivering higher tax revenues efficiently in future decades, should that prove necessary."
As you might expect, very few of the recommendations in the report were implemented.
Foolish takeaway
Making a one-off change to the GST without a proper review of the tax system is a dumb idea. We already have a recent tax review paper gathering dust on some government shelf. Fix the system as best we can once and for all.
