Me against the world… or the revenue lobby, at least

Due to popular demand, I post a transcript of my recent ABC Drum piece about the fiscal constitutionality underpinning the GST design framework.

To my mind, one of the more astounding aspects of the effective prohibition against free-wheeling GST rate and base amendments is that the political propagators of the “thou shalt only change the GST unanimously” rule quite possibly had never read James Buchanan and Geoffrey Brennan, The Power to Tax, which placed great import on explicit tax rate and base constraints not unlike those in force today.

In fact, I am quite certain that not many senior policymakers within federal Treasury at the time had done so, either.

Nonetheless, the design features of the GST have saved Australians from the worst of the fearful discretionary tax hikes seen elsewhere, thus far. To the extent that we remain lumped with this terrible “monster tax” (HT: Paul Keating), long may the fiscal constitution reign!

The transcript is below:

Australia should get its excessive spending under control without resorting to the tempting but unwarranted consumption tax grabs we have recently seen in other countries.

That’s why the current institutional arrangements for managing the GST should be preserved in the face of recent pressure from revenue lobbyists like Martin Parkinson and Ken Henry.

As a mid-ranked bureaucrat in the Commonwealth Treasury during the late 1990s, I witnessed first-hand the first agreement signed by the Commonwealth and state governments concerning the distribution and administration of the GST.

Signed by former prime minister John Howard and treasurer Peter Costello along with the state premiers and some senior bureaucrats, the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations ensured that the states receive all GST revenues (less administrative collection costs).

Importantly, the agreement also contained a set of provisions aimed at protecting Australian taxpayers from policies to increase the GST.

The original agreement stated plainly (Part 3: 32-36) that changing the GST rate or base required unanimous support from the Commonwealth and all states and territories, as well as the successful passage of legislation through Parliament.

These arrangements have been maintained in a revised Intergovernmental Agreement signed in 2008, and remain in force to this day.

The importance of this GST ‘fiscal constitution’ becomes clear when one recognises the frequency of increases in similar taxes in other developed countries.

From 2000, when the Australian GST was introduced, to 2013, central governments across OECD economies increased value-added tax or GST standard tax rates on 35 occasions, including 22 times during the aftermath of the 2008-09 global financial crisis.

Australia hasn’t needed an increase to its own GST rate or base to record a dramatic increase in its GST revenue – it has increased from $23.9 billion in 2000-01 to an expected $50.2 billion this financial year simply as a result of a nominal growth in consumption.

This GST revenue growth was equivalent to an annual growth rate of 6.4 per cent; well in excess of the average annual increase in general prices throughout the Australian economy.

As painful as the GST is, particularly for poorer individuals and families, the prohibition of unilateral GST structural changes has, at least, spared Australians from the extreme discomfort of quicker and easier consumption tax grabs experienced elsewhere.

Even so, politicians, bureaucrats, academics, special interests, and other members of the ‘revenue lobby’ occasionally advocate that all governments band together to loosen the fiscal constitutional constraints, which would allow them to help themselves to more GST revenue.

In his first appearance as prime minister, Kevin Rudd proposed to claw back 30 per cent of GST revenues from the states, in order to boost Commonwealth funding of the states’ public hospitals.

This plan was abandoned after several jurisdictions, particularly Western Australia, raised concerns that the partial federal confiscation of GST would further reduce the states’ fiscal autonomy, and invite future GST revenue grabs for other federal policy purposes.

As well, responding to the growing popularity of online shopping, some state governments and interest groups, such as retailing associations, have suggested lowering the $1,000 threshold below which GST is not payable on imported goods purchased online.

Taxpayers can breathe a sigh of relief – at least for now – knowing that the recent Council for Federal Financial Relations meeting between Commonwealth and state treasurers failed to come to a decision on that base‑broadening proposal.

By and large, the GST fiscal constitution has stuck, but a recent round of tax proposals by current and former senior bureaucrats illustrates that the revenue lobby won’t let go of their GST hike dreams too easily.

In a much-publicised speech last week, outgoing Treasury Secretary Martin Parkinson suggested that those authoring a forthcoming White Paper on taxation should “consider the mix of taxes, including whether there is a role for a greater contribution from indirect taxes”.

Parkinson’s immediate predecessor as the head of Treasury, Ken Henry, claimed a GST increase is inevitable, stating, “Raising the GST rate one day will be seen as necessary to underpin fiscal sustainability.”

These, and similar, proposals to increase the GST tax burden are usually couched as part of a broader shift in the taxation mix from mobile income and capital taxes in favour of immobile consumption taxes.

This tax substitution is generally adjudged by economists to improve economic efficiency, but a key consideration, often overlooked in the contemporary debate, is that any resultant growth in revenues from tax reform is likely to be spent by governments on wasteful programs and activities which, in itself, would hamper the attainment of efficiency gains.

Another dimension of the GST debate which perhaps deserves more attention is that the poor, who generally pay little in income taxes in any case, are likely to financially suffer as a result of increasing the GST because more of their disposable incomes are directed toward everyday consumption items.

It is surprising that many calling for a GST increase probably identify themselves with political-left causes, although there are still some voices from the left arguing the traditional position against raising the burden of the regressive GST.

Politicians generally do not respect fiscal rules for too long, as attested by precedents stretching from the federal government keeping surplus revenues from the states in order to fund age pensions, through to the recent abolition of the federal statutory debt ceiling.

If Australia can overcome its excessive government spending problem, as it should, without fiddling with the structure of the GST, then that would rank as a minor miracle.

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34 Responses to Me against the world… or the revenue lobby, at least

  1. Tel

    If you look at the history of tax hikes the tactic tends to be simultaneous appeal to envy (oh those rich bastards we won’t be taxing regular folks, just the top 1%ers) and appeal to charity/utility (but this ever so important spending project is depending on us to pass this tax, oh oh how could you be so heartless as to cut our speeeendiiiiing).

    Hiking the GST clearly hits everyone so it feels like a direct hit, and it punishes the poor by hitting grocery bills, electricity, fuel, bus tickets, clothing, etc.

    It’s really important in politics to connect the actions to the consequences. Difficult, but there is the challenge. Just keep reminding people that good idea projects get bogged down with pocket stuffers and paper pushers, while tax the rich schemes inevitably end up as tax the juicy middle class schemes.

  2. .

    The budget and taxes ought to be cut. Spending ought to be cut so that there is no debt within two terms of government. The budget should be balanced and ideally the tax:GDP ratio should drop below 20%.

  3. Joe

    Indeed, I would go further and fix into the constitution that the only tax available to the government is the 15% GST of all goods except assets, i.e. land, buildings and company ownership. 10% to be distributed to tge state where the goods were purchased or delivered to, 5% to the commonwealth for defence and foreign affairs.

    Governments, state and federal to be able to ASK for donations for specific projects or tasks only within their prerogatives. State prerogatives to be concerned with law, order and common infrastucture. Federal prerogayives to be concerned with external affairs, defence, customs, etc.

    No place for government at any level to be involved in health, education or any such other frippery.

  4. James B

    Is it actually true the federal government needs the consent of the states to change the tax? Is the agreement somehow constitutionally binding? Because I’m pretty sure if the federal government have levied a tax, all it takes is an act of parliament to change that.

    I find it hard to believe the people claiming it’s impossible to change GST distribution.

  5. Alfonso

    Julie’s a lovely girl but doesn’t get the simple mechanics. LibLab require deficits for non emergency purposes as required so they can send cheques in the mail to people having babies, redheads, one legged Aboriginal nuns etc…all of whom clearly have a right to my work product. Tax doesn’t fill the stockings, then print.
    It’s how you get elected.

  6. JohnA

    [Lew: Occasional Goon Show character of a theatrical manager. Accent Soho/Jewish, I think]

    [Lew:] Ooh, moi loife – they’re at it again!

    “As well, responding to the growing popularity of online shopping, some state governments and interest groups, such as retailing associations, have suggested lowering the $1,000 threshold below which GST is not payable on imported goods purchased online.”

    How many times does one have to say that this is not expressed in the GST legislation? This is in fact a derived figure, working backwards from a debt collection policy operated by ACS.

    Customs consider amounts under $A100 uncollectable from an efficiency angle (ie. it would cost more than $A100 per entry to get the money) and therefore unenforceable as against
    a) final end users/consumers
    b) who purchase direct from overseas
    and
    c) who take delivery direct ie without the entry being handled by a Customs Broker.

    My memory is a bit rusty, but I think these transactions were identified as “Informal Entry”, and most would be delivered by couriers (DHL, FedEx and the like) or Australia Post. It also applied before online shopping to all forms of mail order import. The ease and popularity of online shopping has simply made it a target.

    The amount could include duty, tariffs, various Customs charges and GST.

    There is NO GST GOLD MINE in these transactions, so for heaven’s sake, leave off!

    /rant

  7. Peter

    I have sometimes wondered how a variable-rate GST might work.

    Zero-rate essentials like bread, milk, vegetables and second-hand cars…. then increase the tax in steps of 10% as the expenditure becomes less necessary and more of a luxury.
    Abandon all other taxes, so that savings are encouraged and building businesses (which employ people who pay taxes also) is also encouraged through the availability of investment funds and the lower-cost environment.

    Is it a totally naive idea?

  8. JohnA

    Dot #1264784, posted on April 14, 2014 at 6:05 pm

    The budget and taxes ought to be cut. Spending ought to be cut so that there is no debt within two terms of government. The budget should be balanced and ideally the tax:GDP ratio should drop below 20%.

    The Biblical standard was 10%. That would mean removing Health, Education and Welfare both personal and corporate from the Expenditure side.

    Hmm, not a bad thought…

  9. Peter

    Variable-rating something like a GST would require some arbitrary decisions that some would not like, but so does all taxing.

  10. stackja

    Uniform Tax Case 1942
    Before World War II both federal and state governments collected income tax. In 1942, in order to run the war effort, the federal government became the sole collector of income tax. It did this by passing laws which raised the federal tax rate and gave some of the proceeds back to the states on the condition they drop their income tax. States receive this money in the form of funding grants. Technically a state could still collect its own income tax but this would mean its people would be taxed twice and the state would forfeit its funding grants.
    Four states—Western Australia, Victoria, South Australia and Queensland—challenged the legislation. The High Court ruled it was valid on the grounds that section 51 (ii) of the Constitution gives the federal Parliament power to make laws relating to taxation, even though in practice the legislation removed a state power. It also ruled that under section 96 of the Constitution, the federal government could attach conditions to funding grants, and therefore it was legal to only give compensation to states that stopped collecting income tax.
    Intended as a wartime measure, the arrangement has remained in place ever since. As a result the states are now more dependent on the federal government for revenue.

    Return more income tax collection powers to the states? Does Canberra have the sole ‘wisdom’?

  11. Joe

    GST collection on foreign goods is simple.
    All foreign traders require electronic payment.
    So deem deposits to paypal as a purchase and take 10%.
    Deem card transactions as purchases and take 10%.
    This can all be done at local banks and financial institutions, no need to involve merchants of customers at all.

  12. johanna

    Julie’s a lovely girl but doesn’t get the simple mechanics.

    Please regale us with your academic and journalistic achievements, Alfonso the Genius.

  13. stackja

    Peter
    #1264882, posted on April 14, 2014 at 7:29 pm
    I have sometimes wondered how a variable-rate GST might work.
    Zero-rate essentials like bread, milk, vegetables and second-hand cars…. then increase the tax in steps of 10% as the expenditure becomes less necessary and more of a luxury.
    Abandon all other taxes, so that savings are encouraged and building businesses (which employ people who pay taxes also) is also encouraged through the availability of investment funds and the lower-cost environment.

    Meg Lees
    From Wikipedia, the free encyclopedia
    http://en.wikipedia.org/wiki/Meg_Lees
    In 1999, Prime Minister John Howard proposed the idea of a Goods and Services Tax. It was opposed by the Labor Party, the Australian Greens and independent Senator Brian Harradine, which meant that it required Democrat support to pass. In an election fought on tax, the Democrats publicly stated that they liked neither the Liberal (GST) tax package or the Labor package, but pledged to work with whichever party was elected to make their tax package better. They campaigned with the slogan “No GST on food”. A majority of the senators in the party room agreed to pass the bill if some amendments were made, mostly to exclude fresh food and essential items such as basic medicines. Stott Despoja stated that she was unhappy with the outcome, particularly the GST on books. Both Stott Despoja and Queensland Senator Andrew Bartlett would ultimately cross the floor to vote against the GST package.

  14. oldozzie

    Why give governments more money – Labor will just piss it up against the wall and feather their own and Union pockets

    As an approaching 70 oldie, it is bleeding obvious the pension age needs to be raised to 70, and no, I will not be getting the pension and I don’t qualify for the seniors health card, am self-funded reriree, my female GPs (fighteningly efficent and forced on me by the female members of my family, thank god) Charge $80 for a standard B consultation $36.20 rebate, so net $43. 00, but worfh every penny for the professionalism and amazingly run practice including on- site nurses who carry out intensive wound dressings and comprehensive innoculation services.

    Proposed $6 co-payment for bulk billing is reasonable, as is proposed charge for emergency department – ED should be for emergencies

  15. I am the Walrus, koo koo k'choo

    You were at Treasury in late ’90s?

    Am sad that I didn’t make your acquaintance.

    Thank heavens they can’t raise this tax easily. Listening to Parko rabbit on about the need to raise taxes the other day, I finally pulled the pin. ‘Enough is enough’. Where would it end, if we let them have their way.

    No more. They should be cutting taxes, not raising them. ‘Deadweight loss’ is unknown in Treasury, apparently.

    Good on you Julie.

  16. stackja

    I am the Walrus, koo koo k’choo
    #1264969, posted on April 14, 2014 at 8:17 pm

    Liberty Quotes
    There will be no carbon tax under the Government I lead
    — Julia Gillard

  17. Yohan

    The left talks about raising the GST and income taxes as inevitable, like there is no possible way to reduce government expenditure. Its beyond their comprehension that anything other than raising taxes is possible.

    I just wish Costello had also legislated the need for a referendum when it came to raising the GST. Then it would never happen.

  18. I am the Walrus, koo koo k'choo

    Stack, I never for a millisecond believed anything that woman or her predecessor said.

  19. JohnA

    Peter #1264882, posted on April 14, 2014 at 7:29 pm

    I have sometimes wondered how a variable-rate GST might work.
    Zero-rate essentials like bread, milk, vegetables and second-hand cars…. then increase the tax in steps of 10% as the expenditure becomes less necessary and more of a luxury.

    Peter, we have that now – some items are exempt from the GST, and it creates “boundary problems” – what is included and what is excluded from GST, distorting and complicating the system.

    Do you recall the death of “Fightback” over the question of how much GST was in the sponge cake? Poor John Hewson got so tangled up in the detail that the take away message became “we don’t want anything to do with it!”

    And before that we had the old Wholesale Sales Tax with three levels and then some additional complications. Plenty of complexity and room for minimisation schemes.

    Nope – KISS: if we had a flat GST on everything, the rate might even have been set down at 5% and therefore the tax might have become ‘hardly worth arguing about.’

  20. Notafan

    Europe has VATs of up to 25%, the Scandinavians might be good at combating the cash economy but I am pretty sure Spain and Greece suck at it.
    I’d be pretty cranky if the LNP didn’t do some serious pruning before heading down the increased tax path,
    Higher co payments for medical prescriptions , co payment for GPs and non urgent ED visits would be a good start.
    No-ones offering anything to pensioners, she whined from the door of her Winnebago on the annual 5 month trip to Noosa….
    Education vouchers might make the education sector leaner and keener too.

  21. rickw

    The budget and taxes ought to be cut. Spending ought to be cut so that there is no debt within two terms of government. The budget should be balanced and ideally the tax:GDP ratio should drop below 20%.

    Hockey is in a target rich environment, he just needs to have the stomach to pull the trigger and put up with the wailing of The Left over the supposed destruction of Australian culture and the moral fabric of our nation (namely programs that line their pocket or allow them to feel good about themselves).

  22. Peter

    JohnA..

    Yes, of course there would be “boundary issues”, just as there are with tax brackets nd the issue of deductible expenditure for business and the self-employed right now.

    The advantage is that – unlike a flat-rate GST – you can set a variable-rate tax to gain enough revenue to permit getting rid of income tax and a raft of other taxes and still avoid the screaming about “taxing the poor”.

  23. Alfonso

    Shucks johanna, knowledge of how the market works has me a half a dozen million net ahead of academics who write about it. Funny that.

  24. Tel

    There is NO GST GOLD MINE in these transactions, so for heaven’s sake, leave off!

    They aren’t looking for a gold mine, they are looking for ways to repress competition and prop up the Harvey Norman’s of this world. Interestingly, one of Harvey Norman’s greatest competitors is Kogan who does pay GST on every single transaction (and still sells plenty).

  25. JohnA

    Peter #1265604, posted on April 15, 2014 at 6:42 am

    The advantage is that – unlike a flat-rate GST – you can set a variable-rate tax to gain enough revenue to permit getting rid of income tax and a raft of other taxes and still avoid the screaming about “taxing the poor”.

    The advantage is a mirage. There will always be those screaming about “taxing the poor” – forget about trying to silence them.

    Setting variable rates is another way of saying “soak the rich” (defining rich as “anyone who earns more than me”) and is a disguised form of socialist envy. We already have it with the progressive income tax scales, and anything like it leads, as night follows day, to the tax avoidance “industry”.

  26. JohnA

    Exactly right Tel. In fact, Hardly-Normal’s biggest problem is not the external competition, but the fact that they do not offer value for money vis a vis their competition – they are there own worst enemy. Something like err… “we are us”, maybe?

  27. Tel

    Do you recall the death of “Fightback” over the question of how much GST was in the sponge cake? Poor John Hewson got so tangled up in the detail that the take away message became “we don’t want anything to do with it!”

    And a perfectly reasonable result too. If the advocate for a new tax can’t quickly and easily explain how it works, it’s an obvious sign that the whole thing is a crock. The virtue of current GST law is simplicity. Regulatory compliance with overly complex government schemes is hugely expensive. It is one of the things that cripples this country.

  28. Petros

    As painful as the GST is, particularly for poorer individuals and families,

    What? You think 10 percent is too much tax for these moochers? How about 25 percent and no income tax? Everyone needs to contribute. You sound like someone who supports the progressive income tax regime. I hope I’m wrong.

  29. Dan

    painful as the GST is, particularly for poorer individuals and families,

    Those peoples are not net taxpayers. So while they take a short term hit, if they fill out their tax return properly, they will get a lot more back

  30. Peter

    JohnA….

    There are always screamers, but a tax system that effects those who can least afford it least makes the screamers look less reasonable. That is not a “mirage” when it comes to getting something through parliament.

    Nor is it a “soak the rich” scheme, because it does not tax investment in business and the creation of new jobs and economic activity – UNLIKE a tax on profits. A variable-rate GST would effectively become a luxury tax on a broad scale. If you choose to live modestly and invest your wealth n ways that provide jobs and income for others, you pay less tax. If you choose to spend a large proportion of your income on luxuries – and lollies and cola are as much a luxury as champaign and caviar – then you pay a greater proportion of tax.

    Yes, compliance costs are a bitch. But as the owner of a small business that buys retail, sells wholesale and pays the freight both ways….. Cumulative passed-on tax is more of a penalty than simple GST compliance costs.

  31. .

    Petros

    Efficiency matters more than the perception of people not pulling their weight.

    Having a VAT/GST or a low enough rated LVT on UCV or royalties are the only workable taxes which do not distort economic activity in a significant way – importantly, relative costs of goods and services stay the same.

    If people need to pull their weight, remove exemptions and reform welfare and give people a right to work and don’t hold them back with wage regulation, mandatory on costs and occupational licensing.

  32. .

    If you choose to live modestly and invest your wealth n ways that provide jobs and income for others, you pay less tax. If you choose to spend a large proportion of your income on luxuries – and lollies and cola are as much a luxury as champaign and caviar – then you pay a greater proportion of tax.

    Buying champagne pays for the employment of champagne makers. If we all grew our own food, we could spend more on luxury items and employ everyone at a higher wage rate (thanks to the saving of self sufficient food production) – but all of our consumption would be taxed at a higher rate, lowering the real wage rate rise. Why does this make any economic sense?

  33. Peter

    Dot….

    “If we all grew our own food”,,, we would have less income to spend on those luxuries, because food does not grow itself. There is a reason why economies based on subsistence agriculture are not wealthy.

  34. Peter

    If my comment above seems a trifle cryptic, it was a reference to the fact that to grow, prepare and preserve sufficient food to feed a family for a year on a non-commercial scale, will take approximately one unit of labour for that period.

    That is not including the extra required to generate funds for the purchase of fertilisers, storage facilities, etc.

    You may well be able t distill your own Schnapps (in theory, I believe it to be illegal here) from excess fruit or brew a primitive beer from surplus grain, but Champagne it won’t be.

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