The current goods and services tax (GST) tax base covers about two-thirds of private consumption expenditure. Exempt from the GST are basic food, water, sewage and drainage, health, education and childcare. Financial services are only input taxed, and arguably residential accommodation is concessionally taxed.
One of the proposals for reform of the Australian tax system is a larger and more comprehensive GST tax base. A broader tax base means a more neutral taxation of different consumption choice options and less distortions.
A larger GST as a component of a wider tax reform package involving a tax mix change with some substitution of consumption tax for income tax can also contribute to national productivity by reducing tax disincentives to save and invest—and the lower effective tax rates would reduce distortions to the chosen mixes of different savings and investment options caused by the current hybrid tax system.
Given the structural deficits of Commonwealth and state and territory governments with recent and future increases in government outlays on defense, NDIS (the National Disability Insurance Scheme), aged care and so forth, additional GST revenue is a potential contributor for longer term fiscal balance.
This article discusses some of the economic and political challenges facing reform proposals for a more comprehensive GST tax base. Expanding the base for each of the different now exempt or concessional GST taxed items is considered in turn, and then the increase in aggregate GST revenue for Commonwealth-state financial arrangements.
Basic food
Food was included in the GST tax base in the original proposal of 1999, but it was withdrawn as a condition for political support in the Senate.
There is no compelling equity or other arguments to exclude food from the GST but not other necessities such as clothing, housing, and energy.
Exempting food is a blunt way to achieve vertical equity. There is a general economic consensus that using some of the additional revenue generated by a more comprehensive GST tax base to offset the higher consumer price through higher social security payment rates and lower income tax rates for the lower to medium income levels is a more direct and effective way to maintain, if not increase, vertical equity.
Addition of food to the GST tax base, along with maintenance or improvement of vertical equity, would require as a part of the reform package a significant share of the additional GST revenue be allocated for expenditure by the Commonwealth government to increase social security payment rates and reduce low income tax rates in order to maintain the real purchasing power of households on low incomes.
For some taxpayers, an enlarged GST to include food would simplify the tax system and reduce tax compliance costs.
Similar arguments also apply to add expenditures on water, sewage and drainage to the GST tax base as for basic food above.
Education, health and childcare
More than half of education, health and childcare services are either supplied by the government for free or subsidised. Both the Commonwealth and states are involved, for example, state public schools and hospitals and Commonwealth Medicare and pharmacy subsidies.
Including these services in a more comprehensive GST tax base would involve collection of GST from both the Commonwealth and state governments.
A GST on private funded education, health and childcare services would increase the consumer prices for the private provided services relative to the private cost of government provided services. The higher relative prices of private provided versus public funded or subsidised services would shift some consumer choices from private options to public provided options. These decision changes increase Commonwealth and state government budget expenditures. Arguably, the reallocation of expenditures also incurs efficiency costs.
Another argument for the concessional GST treatment of education, health and childcare services is that these expenditures generate some external benefits associated with more productivity in the future.
Financial services
Financial services receive a concessional GST tax treatment. Currently, they are subject to GST taxation of inputs purchased, but no GST on value added.
Value added in the form of explicit user fees or more commonly as the difference between interest paid by the borrower and interest received by the lender is challenging to measure.
Residential property
Under the current GST, outlays on new residential properties and outlays on property repairs and maintenance are subject to the GST rather than a GST on imputed rent and paid rent.
The logic is that the up-front capital cost is a proxy for the discounted value of the future stream of accommodation services provided. The simplicity of operation of this up-front collection of value added applies also to other consumer durables, including clothing, motor vehicles and household furniture and appliances.
A key argument to shift to GST taxation of imputed rent and rent paid is that the property asset price appreciates over time and provides additional consumer valued services. Additional GST revenue would be collected.
But there are challenges. Measurement of imputed rent is challenging and involves additional administration costs for the Australian Tax Office and compliance costs for property owners. For many households, the annual payment of GST on imputed rent can add to financial, and especially liquidity shortage, problems.
Transition from the current upfront payment of GST on new buildings and on repairs and maintenance outlays to GST on imputed rent and to rent payments would be a form of double taxation.
Commonwealth-state financial arrangements
A larger GST revenue collection associated with a broader tax base and/or a higher tax rate will require significant changes to current Commonwealth and state (and territory) financial arrangements.
Under the current Commonwealth-state financial agreement negotiated under the A New Tax System Act of 2000, the Commonwealth administers and collects the GST revenue. All the revenue net of collection costs is allocated to the states as untied grants. With advice from the independent Commonwealth Grants Commission, the allocation between the states seeks to achieve horizontal fiscal equalisation—meaning each state has an equal capacity to provide per capita goods and services while levying a similar level of state taxes.
A different set of Commonwealth-state financial arrangements will need to be negotiated for the allocation of additional revenue generated with a larger GST tax base, particularly if the GST reform were to fund other components of a broader reform package.
Assuming an equity objective that the reform package at least maintains the current purchasing power of disposable incomes of those on lower incomes, some of the additional revenue will be required for additional Commonwealth expenditure on higher social security payment rates and lower income tax rates to offset the increase of consumer prices.
There are many options for use of the remaining additional GST revenue. The Commonwealth could use it to fund lower income tax rates as part of a tax mix reform package to shift a part of the tax burden from income to consumption.
Some of the additional revenue could also be allocated to the states to reduce their inefficient taxes, including stamp duty on insurance and payroll tax. Another option is for the Commonwealth and/or the states to use the additional GST funds to reduce their structural budget deficits.
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