By dropping Treasury-prepared documents with select media outlets on Thursday evening, the government may have thought it was quietly killing off the GST debate – a debate it had decided early in the week it could not win.
Quite the opposite is happening, as the released briefing paper has only highlighted Treasurer Scott Morrison’s duplicity on the issue.
In the faux-debate of the past few months, Morrison has claimed it was worth discussing an increase to the GST because something had to be done about bracket creep – the process by which rising wages push more and more workers into higher tax brackets.
Never mind that wages are growing at their slowest rate in 50 years, meaning fewer workers are seeing a slice of their income being taxed at higher rates.
Putting that point aside, Morrison was at least pretending that tax reform was about putting more money back in the pockets of everyday Australians.
He then utterly contradicted this idea by instructing Treasury to model a tax change that would penalise the low-paid with a GST hike, but give a large part of the tax proceeds to wealthier Australians.
It gets worse. Both Morrison and Prime Minister Turnbull have convinced the commentariat that the only purpose of tax reform is to boost growth.
So when Treasury modelled the tax plan Morrison gave them, there was a sigh of resignation from the Coalition and many journalists who felt, “oh well, it looks like a GST hike would not boost growth”.
That’s only half the picture. The version of GST reform given to Treasury probably wouldn’t boost growth.
That’s because, besides around $5 billion of CPI-linked increases to pensions and benefits, it reportedly hands back the remaining $30 billion raised as income tax cuts that favour high-income earners.
As the Grattan Institute’s John Daley points out, you’d get a far bigger “kick” to growth if you were to adequately compensate the lower income groups – as both John Howard’s GST and the carbon tax did when they were introduced.
The Treasury has refused to release the income tax thresholds that underpin the modelling. But The Age, which obtained those details, reported: “High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.”
“In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off. It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.”
If Morrison’s brief to Treasury was based in economics rather than politics, it would have compensated low and middle income workers for the higher prices they would pay in the shops if the GST increased to 15 per cent, then only use what’s left over to cut taxes for higher income earners.
That is not just a matter of equity, but of economics. Workers in those low-income groups have a higher propensity to spend the extra income, meaning a stronger boost to aggregate demand.
To understand the full picture, you need to get to grips with two facts.
Firstly, income tax is growing as a proportion of federal tax revenue – this is shown in charts produced for the Abbott government’s ‘Re:think’ tax discussion paper in March 2015 (see below).
Australia has an unusually high reliance on income taxes when compared to OECD nations.
That’s a good thing if you earn a lot and have a good accountant, because income tax is the one you can avoid paying through three main areas of tax minimisation.
They are: negative gearing of investment properties, making full use of superannuation tax concessions, and investing in assets for capital growth rather than more heavily taxed income streams they might produce.
Wealth transfer not wealth creation
Negative gearing tax breaks don’t boost housing supply. They just keep rents lower, push house prices higher and transfer tax dollars from non-landlords to landlords.
The Howard-era changes to the way capital gains tax is calculated pushed capital into uneconomic places it would otherwise not flow.
Every dollar you put in superannuation is taxed at just 15 per cent, giving high income earners incentive to stash money away.
If the GST were raised to 15 per cent, and more of the money used to reduce taxes and increase pensions and benefits for lower income earners, equity and growth would improve. That would be real tax reform.
Instead of allowing Mr Morrison’s GST plan to die a quiet death, lots of noise should be made about the choice he made when briefing Treasury.
Morrison presented a scenario that made our increasingly inequitable tax code worse and, surprise, suprise, was unlikely to produce any additional growth.