This week marks 20 years since John Howard flipped Australia’s taxation system on its head and introduced a broad-based consumption tax.
The goods and services tax (GST) was planned to cover all household consumption with a flat 10 per cent levy, which would then be distributed to state governments.
But political opposition – and perhaps some confusion inspired by ill-fated comments about a birthday cake – meant concessions were made.
Two decades on, the debate over whether Australia should reconfigure the GST is back, with various public figures arguing to apply the tax more broadly, or raise the rate entirely.
So, who wins if GST is overhauled – and who would be worse off?
Who’s arguing for changes to GST?
The GST debate reignited earlier this week after a NSW government-commissioned Thodey review into the state’s tax system recommended the state work with the Morrison government on legislation to hike the GST rate.
The state’s treasurer Dominic Perrottet welcomed the proposal.
He told ABC’s The Business policymakers now have an “obligation” to champion tax reform to fortify Australia’s pandemic recovery.
“These are tough conversations but ones that will drive better efficiencies and better outcomes,” Mr Perrottet said.
Bipartisan think tank Grattan Institute also pushed in a new report released this week for “broadening and raising” the GST to help stimulate the economy.
The Tax Institute’s senior tax counsel, Bob Deutsch, told The New Daily that broadening the GST’s scope should be the priority over an outright rate increase.
“I think 10 per cent is a satisfactory rate, but the basic model we should be looking at is New Zealand’s, where they don’t exempt things like basic food, health and education,” Mr Deutsch said.
“Broadening GST has potential to take the pressure off earned income and puts it on consumption, which is a better thing to do rather than effectively penalising people for working,” Mr Deutsch said.
Who would be the winners and losers?
State governments would undoubtedly be the biggest beneficiaries.
Prior to the pandemic, GST revenue accounted for roughly 40 per cent of Tasmania’s income and 22 per cent of NSW’s.
However, Treasurer Frydenberg wrote down the states’ GST revenue by $1.8 billion in 2019-20 in his December mid-budget update, with $9.9 billion in total written off to the 2022-23 financial year.
With consumption experiencing its largest fall in 34 years due to the pandemic, states would be eager to see it broadened.
Federal Treasury modelling shows the consumption tax could raise an additional $7.4 billion a year if it were applied to fresh food, and a projected $35 billion if the rate were raised to 15 per cent.
But any GST increase would disproportionately affect low-income households, as groceries, education and healthcare comprise a larger percentage of their spending, compared to other groups.
However, the Grattan Institute recommended in 2015 that nearly a third of the additional revenue generated by raising the GST rate should be devoted to permanently increasing welfare payments.
ANU Tax and Transfer Policy Institute director Professor Robert Breunig told The New Daily there are another two groups who would be “unambiguously” harmed: pensioners and young people.
There are ways new tax pressures can be offset, he said.
“You could look at increasing the aged pension or increasing the housing allowance for older people that don’t own their home, and younger people can also benefit if other changes are made,” Professor Breunig said.
Would any taxes make way if GST were to be raised?
Given a GST raise would be a political hard sell on its own, proposals to scrap other taxes including stamp duty, capital gains taxes on homes, payroll tax and vehicle registration fees are on the table.
As previously reported by The New Daily, NSW was already considering replacing stamp duty (paid when settling a property purchase) with a broad-based land tax that’s paid over the life of home ownership.
Professor Breunig argued that making sweeping changes alongside GST reform could benefit younger people in the long haul.
“With a land-based tax, you would tax a lot of the accumulated wealth in Australia and that can bring down house prices, and if you used increased GST to have lower income taxes, younger people would shoulder a smaller burden for the next 40-50 years,” Professor Breunig said.
Will this debate actually lead to GST reform?
At this stage, it’s incredibly unlikely.
Prime Minister Scott Morrison said tensions between NSW and South Australia on GST reform could scupper any national-level agreement.
“I think there needs to be a greater consensus amongst the states that clearly doesn’t exist at present,” he told reporters on Thursday.
And Federal Treasurer Josh Frydenberg went one step further, quashing the debate this week.
“We’ve got no plans to increase the GST,” Mr Frydenberg told Sky News.
“It’s not the first and it’s not the last report into our tax system.”
Although he welcomed the renewed focus on tax reform by the states, Mr Deutsch said there’s only a “20-80 chance” of the NSW proposals translating into real-world change.
He cited the federal senate as any proposed reform’s greatest roadblock, unless more political parties come to the table.
“When it comes to tax reform, there will be vested interest groups pressuring all politicians and they will succumb to that sort of pressure because they are in politics, and they want to get re-elected,” he said.
“It’s a tricky road to pursue, and there’s a degree of confidence in the current political climate that’s probably misplaced.”