Lifting GST avoids more painful alternatives

Date

April 6, 2014

Peter Martin

Economics correspondentSo you’re frightened by the prospect of a higher GST. You shouldn’t be. The alternatives are worse.

One of them, outlined by the Treasury secretary Martin Parkinson on Wednesday, is deceptively painful.

It’s doing nothing – just leaving the tax system on hold for 10 years and letting climbing revenues eat away at the projected deficits as inflation pushes more of our incomes into higher tax brackets.

It’s called ”bracket creep”, although it can happen even if inflation doesn’t push your wage into a higher tax bracket. Every time your wage goes up, a greater proportion of it becomes taxed (above the tax-free threshold) rather than untaxed (below the threshold).

By doing nothing other than accepting ordinary annual wage rises, each of us is made to pay an ever-increasing proportion of our income in tax.

The latest projections assume 10 straight years of bracket-creep. That’s 10 consecutive budgets without tax cuts. It’s something we haven’t had in generations. Nine out of the past 10 budgets delivered tax cuts, one of them as compensation for the introduction of the carbon tax.

If the ritual was suspended for the next 10 years – and that’s what’s planned to bring the budget under control – ordinary Australians would find themselves paying extraordinary amounts of tax.

Someone on $50,000 at present pays $7797 in tax excluding the Medicare levy. That’s an average rate of 15.6 per cent. After 10 years without tax cuts that person would be earning $70,500 and paying $14,459 in tax – an average rate of 20.5 per cent.

However, someone earning $100,000 today will earn $141,000 in 10 years (assuming wage growth of 3.5 per cent). Their tax bill would edge up from 24.9 to 28.5 per cent.

But Australians on lower wages would get mugged. Someone earning $30,000 today pays 7.47 per cent of their wage in tax. In 10 years, they would pay 13 per cent.

That’s the easy, apparently painless alternative to lifting the GST. That’s what will happen unless someone finds another way to bring down the deficit.

With such outrageous increases in tax would come tax avoidance, as it always does. People won’t respect laws they think are unfair. And low-income Australians considering whether to return to work or work extra hours would quite reasonably decide that it’s not worth their while, or at least nowhere near as worthwhile as it was.

Lifting or extending the GST would also hurt low-income Australians, but it mightn’t hurt them as much as would allowing inflation and unchanged tax scales to steal their wages.

As it happens, extending the GST to the presently untaxed categories of private education and private health would hurt very low earners little. It’s not where many of them spend their money but it is where most of the growth in spending is. The alternative to capturing it is to allow bracket creep to steal more and more of their wages.

The GST system works well, a lot better than the income tax system. Overseas experience suggests that it could withstand an increase in its rate much better than could income tax.

Of course, there are other alternatives. The government could slash spending. But the really big government spending is on things we want, such as health, education and pensions. Or it could lift company tax. But if it did companies would relocate or be less keen to come here.

Or it could attempt to get at the billions we are missing out on from Apple, Microsoft, Google and the like who make money here but pay little tax. It’s trying, but it would be unwise to bank on success.

Or it could tax carbon emissions, resource rents and attack the obscenely generous superannuation tax concessions going to very high income earners. Oh wait, the last lot tried that and got voted out. So we better prepare for a higher GST.

Peter Martin is economics editor of The Age.