If our health system is to survive, we need our political leaders to bring solutions to the table. I'll go first. https://t.co/JiAO5eeFKF
— Mike Baird (@mikebairdMP) July 19, 2015
On early Monday morning, NSW Premier Mike Baird triggered a national debate about increasing the GST rate to 15 per cent via a video release on his Twitter account.
We think the instigation of a GST debate from a State Premier is another example of the chaotic nature of economic policy in this country.
A week ago the GST wasn’t on the agenda; and now it suddenly is. It’s an embarrassing way to conduct a serious taxation debate. Shouldn’t it be the centrepiece of the taxation white paper?
And the debate is serious: a GST rate hike can’t just be another grab for money, which the community is sick of.
We think the GST should rise to 15 per cent. But any changes to the GST need to part of a broader debate that considers other taxes such as superannuation and negative gearing; and that looks closely at how Australia spends its money.
We think the tax debate also needs to focus on the plight of Australia’s savers who are seeing their returns decimated by taxation and inflation; a situation a GST rise will exacerbate by ramping up inflation.
Yes, the GST should be lifted
Should the GST rate go up?
Yes, we think the GST should probably rise to 15 per cent – but it needs to be part of a comprehensive taxation adjustment process.
Today Australia’s GST rate is well below international comparisons and it is so low that it cannot be efficiently collected on internet-ordered consumer-import items under $1000.
Arguably, the substantial lift in inbound international tourism flowing from a weakening $A and the growing Asian middle-class suggests that a GST is a sensible way to benefit from this influx.
The growth in two-way tourism does suggest that the GST should also be aligned with those of our major tourist destinations and trading partners.
A broader debate needed
But Australia needs more than just an increase in the GST rate.
The GST issue needs to be part of a broader tax debate. That includes a review of superannuation taxes, franking credits, capital gains taxes, negative gearing, residential property investment, and social security entitlements.
Australia also has to have a comprehensive look at the expenditure side – what is our focus and are we committed to funding public health care, aged care, education etc?
We have to have a proper debate where everything is put in context, otherwise any GST increase just creates more revenue which is mindlessly spent.
The solution is not just changing the GST; the solution is changing a whole lot of taxes so they’re better focussed, more productive and more supportive of the community and economic growth.
Raise the tax-free threshold
A key issue in any GST rise will be the impact on low-income earners.
A consumption tax is clearly regressive: low income earners are hit harder because they consume a higher proportion of their income.
Anyone earning up to $50,000 is probably paying $15,000 to $20,000 of that in basic rent which is GST free. Everything outside rent is probably consumed and now attracts 10% GST and in time would attract a 15 per cent tax.
Governments over time have used the word compensation to rectify the regressive nature of income tax; they should be using the word adjustments. An increase in GST payments that costs an income earner $1500 should also ensure there is an adjustment of the income tax rate.
We believe that adjustment for a higher GST should be made by raising the tax-free threshold. The tax-free threshold should be lifted from around $20,000 income per annum, to somewhere between $30,000 and $40,000.
Australia’s low income earners shouldn’t be filing tax returns and that would save the tax office substantial costs. They could focus on GST collections!
A tax break for savers
We do think there will be an adjustment to the GST in the next two to three years.
Investors need to be aware of the possible impact of a higher GST on inflation.
We already see at some point there will be inflation issues in Australia emerging from a weaker $A. A higher GST will add to those inflation issues.
At the moment savers are earning less than 3 per cent on term deposits and so they are barely covering inflation. But that interest is also being taxed, so savers are effectively going backwards in real terms.
It’s appalling we tax people for savings outside super when they are not even covering inflation. Yet at the same time people can get tax deductions for property investments through negative gearing.
We think there needs to be a proper investigation of the relative fairness of taxation and deductions. Certainly there should be no taxation handicap for people to save outside super and particularly when the GST is increased.