What they said ... `... what it [the GST] does in relation to social justice is to provide a device to guarantee the revenue that is needed in the years ahead to deliver the services'
The Prime Minister, Mr John Howard
`Most of our income goes towards feeding the kids and food will be taxed and I don't think the tax rebates will be big enough'
A 38 year-old, currently unemployed, Tasmanian
In July, 1998, the Howard Government announced the new taxation system it would introduce if re-elected to government.
The central feature of this system is a GST, or goods and services tax, applied at the point of sale to most goods and services people buy.
The tax is to be set at 10 per cent of the pre-tax cost of the goods or services, though the government maintains that, for a number of reasons, this will not be the price-increase consumers face.
The tax has been opposed by a number of groups.
The Labor Party is totally opposed to a GST and has campaigned against it in the lead-up to the October 3 election. Both the Democrats and One Nation are also opposed to it, though the Democrats have indicated a willingness to negotiate if their conditions were met.
The scheme, as proposed by the Howard Government, has also been criticised by a range of welfare groups, including ACOSS (the Australian Council of Social Services).
Background information
Under Australia's current taxation arrangements, about 70 per cent of federal government revenue comes from taxes on income. (Some 50 per cent of federal government comes from personal income tax. This is the tax on their wages paid by the vast majority of employees. While about 15 per cent of federal government revenue comes from the income tax paid by companies on the profits they have earned.)
11 per cent of federal government revenue comes from wholesale sales tax. This tax is paid by the retailer to the wholesaler. The wholesaler is responsible for collecting the tax for the government.
Wholesale sales tax is ultimately past on to the consumer, because most retailers increase the price of the goods by the amount of the tax they have had to pay.
Food and clothing are exempt from wholesale sales tax, while other items are taxed at a rate ranging from 12 to 41 per cent.
Between 2 and 3 per cent of federal government revenue comes from payroll tax, a tax paid by employers on the wages they pay their employees. A similar amount is raised by federal banking taxes and by import duties. Import duties are taxes paid on goods being brought into the country either for sale or personal use.
The GST proposed by the Howard Government is a tax on most goods and services. A good is a commodity or item that is offered for sale, such as food, clothing or electrical equipment. A service is essentially work one person does for another for payment. Hairdressers, drycleaners, plumbers all provide services.
The GST has been set at 10 per cent. It is a tax paid by the consumer at the point of sale with the retailer acting as the tax collector for the government.
State governments currently have much more limited taxing powers than the federal government and rely on federal government grants to supply them with sufficient revenue to fund the education, health and other services for which they have responsibility.
A High Court ruling in 1997 further reduced the states independent revenue base by declaring they were unable to place taxes on goods such as tobacco. This ruling has increased the imbalance between the responsibilities the states carry and the amount of revenue they can independently call on.
There are a significant number of Internet sites which offer useful information on the GST debate and Australia's tax system in general.
Much of the information given above comes from a document produced by the Commonwealth Treasury. The document is titled, Pocket Brief to the Australian Tax System. It gives a detailed breakdown of the taxation revenues received by state and federal governments in the financial year 1995-96.
Though it is essentially a series of tables, it repays a thorough reading. For example, it figures suggest that the decline in taxation revenue relative to gross domestic product has not been as great as groups such as ACOSS (Australian Council of Social Services) have apparently suggested.
This document can be found at http://www.treasury.gov.au/Publications/Taxation/Pocket/Default.asp
The Institute of Chartered Accountants in Australia has an excellent sub-site dealing with the current tax reform debate. It can be found at http://www.icaa.org.au/taxreform/
It has click-throughs to both the Howard Government's and the ALP's tax packages. It also has an excellent set of links to major items in the Australian press, including some drawn from the Australian Financial Review, dealing with the tax reform issue.
It also links to general information on tax reform and some valuable discussions on the history of taxation in Australia. Some of this information and opinion is technical and quite demanding, but for those with a strong interest it rewards careful reading.
The Howard Government has supplied a number of information packages outlining some of the features of the proposed tax reforms and giving reasons why these changes are needed.
The home page for this tax reform information can be found at http://www.taxreform.gov.au/common/home.htm The treasurer, Peter Costello, has also supplied a detailed argument, outlining why the government believes the taxation system needs reform. This is a lengthy document, however it supplies more detailed criticism of the current taxation system than can be found in the government's information packages just referred to. The treasurer's position paper titled, Why Australia's Tax System Needs to be Reformed, can be found at http://www.treasurer.gov.au/Treasurer/Publications/Taxbook/TaxReform.asp
The Australian Labor Party has also set up a site outlining the details of its tax package and criticising the Howard Government's GST proposal. This site can be found at http://www.alp.org.au/campaign/policy/taxation The National Tax & Accountants' Association Ltd has put a number of media releases on the Internet, most of which appear to be critical of the Howard Government's GST proposal and/or supportive of the ALP's tax credits scheme.
The group claims to be independent and not aligned with any other body.
A hypertext list of their media releases can be clicked through to from the Association's home page. This can be found at http://www.ntaa.com.au
Arguments in favour of the GST proposed by the Howard Government
The first argument offered in favour of the Howard Government's GST is that it is needed in order to broaden Australia's tax base.
According to this line of argument Australia's tax base is shrinking. This point has been made by the Australian Council of Social Services (ACOSS).
ACOSS has claimed that in the ten years from 1986 to 1996 tax revenue declined from 27.1 to 25 per cent of gross domestic product.
ACOSS has therefore supported the introduction of a GST (not, however, in the form proposed by the Howard Government) as a means of maintaining the tax base.
A similar argument has been put by the federal Government which maintains that the system we currently have in place was introduced in the 1930s, is now outmoded and inefficient and does not generate sufficient revenue.
Those who are concerned about what is claimed to be Australia's shrinking tax base maintain that unless we are able to find a means of generating more revenue from taxation, future Australian governments will not be able to fund schools, hospitals and social service payments.
There are also those who are concerned that more, rather than less, taxation revenue is needed because the percentage of people relying on Government financial support has grown.
The Reverend Tim Costello, minister of the Collins Street Baptist Church, has claimed, `In 1971, 10 per cent of Australians received their primary income from social security. Today it is 26 per cent and therefore we need a tax system with the capacity to raise enough revenue to carry more poor people into the future.'
Reverend Costello has further argued that the current `tax system is largely unable to deliver the amount of tax needed to repair education and health, and to continue to fund social security.'
The Prime Minister, Mr Howard, has claimed, `... what it [the GST] does in relation to social justice is to provide a device to guarantee the revenue that is needed in the years ahead to deliver the services.'
The federal government has indicated that all revenues raised from a GST will go to the states to assist them in the provision of essential services such as schools, hospitals and roads.
Another argument offered in favour of a GST is that it is said to be difficult to avoid.
According to this line of argument, those on higher incomes will not be able to find means of legally side-stepping a consumption tax, like the GST, in the same way they are currently said to be able to avoid income tax or tax on business earnings.
This point has also been made by the Reverend Tim Costello.
Reverend Costello has claimed, `...it [the GST] is ... fairer than the present system, in which the rich pay so little.'
Thirdly, the government has defended itself against accusations that a GST should not be imposed on basic essentials, such as food, by claiming that unless as wide a range of goods and services as possible is included then a GST will be more difficult to administer and will have to be imposed at a much higher rate on those things that were taxed.
The Government has further argued that sensitive and necessary expenditure areas, such as payments for hospital services and school fees, will be exempted from the GST.
Fourthly, it is claimed that introducing a GST will allow for a total overhaul of the taxation system, particularly with regard to income tax.
According to this line of argument the current income tax schedule disadvantages many middle income earners because it taxes them at a rate that was originally intended to apply only to those on the highest incomes.
This position was apparently put in 1969 by Mr Paul Keating in his maiden speech to Parliament. Reverend Costello has cited Mr Keating as saying, `By leaving the income tax scales unchanged for 14 years, this Government has inflated the lower and middle incomes and has put workers in these categories into higher tax brackets.'
The Howard Government has said that as part of its taxation reform package there will be significant income tax cuts from 1 July, 2000. It has been claimed that these cuts will mean tax rates will be lower and the income thresholds at which these new taxes will apply will be higher.
The Howard Government has claimed that these changes in income tax will deliver $13 billion each year in reduced taxation to Australian taxpayers.
According to this line of argument, the additional prices which consumers will have to pay for goods and services as a result of the GST will be nullified by a reduction in income tax.
The Howard Government has claimed that, therefore, under a GST and a reformed income tax schedule, all Australians would be financially better off.
Fifthly, it has also been claimed that the introduction of the GST will fund the abolition of a range of other taxes, including wholesales sales tax, stamp duty on leases, stamp duty on cheques, and provisional tax.
It has been claimed that the removal of taxes such as wholesales sales tax will significantly reduce the impact of a ten per cent GST.
The Government has indicated that the Australian Competition and Consumer Commission will be given additional powers so that it can ensure that businesses which have had their cost structure reduced by the removal of a range of current taxes, pass these savings on to the consumer.
Tim Colebatch, the economics editor of The Age, has noted that businesses which fail to pass on these price reductions `face fines of up to $10 million'.
The Howard Government has predicted that on average food prices will rise by 4.4 per cent and clothing prices by 6.6 per cent.
Sixthly, the Howard Government has also maintained that those on pensions and other forms of income support will be protected from the price rises associated with a GST.
The Government has indicated that all pensions and income support payments will rise by four per cent.
The Howard Government has also indicated that it will protect families from the impact of increased costs as a result of a GST.
Under the new income taxation scheme to be introduced, it is claimed that families will be able to earn more income before family payments (Government assistance for each child under 16) start to be reduced and the phasing out of family payments will occur at a slower rate.
The federal treasurer, Mr Peter Costello has claimed that Government assistance for children has been increased to $140 a year, with an extra $350 a year for single income families with a child under five. Mr Costello has also claimed that the proposed reductions in income tax will benefit families.
According to Mr Costello, `The average single-income family will be better off, after GST, by $40 to $50 per week from the Government's tax reforms.
The average dual income family will be better off, after GST, by $20 to $30 per week.'
Seventhly, the Howard Government has claimed that it will protect consumers from increases in the cost of petrol resulting from the introduction of a GST.
The Government has said it will reduce the excise (specific tax) currently imposed on petrol by 7 cents a litre. The Government has stated in its GST policy summary that `This is to ensure that the price of petrol need not rise under the GST.'
Mr Howard has also claimed that the Australian Competition and Consumer Commission would receive extra powers to stop petrol companies lifting the operating margin when a GST was levied on top of the existing fuel excise.
The Government has also maintained that its petrol pricing scheme will reduce costs for business. In its summary of the impact of the GST, the Government has claimed, `The current tax burden on freight and passenger transport will be reduced. The cost of all transport will come down and savings will be passed on to consumers, farmers and exporters.'
Eighthly, the Howard Government has predicted that its GST/tax reform scheme will boost the Australian economy as it will remove a significant number of taxes from Australian businesses.
In its simplified explanation of the GST, the Howard Government has claimed `The abolition of Wholesales sales tax and other taxes and the introduction of the GST will lower industry costs by more than $10 billion each year from 2001-02.'
Mr Howard has claimed that this will make Australian manufactures more competitive on the export market.
This view has also been put by the Melbourne Institute of Applied Economic and Social Research which has claimed that the Howard Government's GST would strengthen the economy and assist Australian manufacturers seeking export markets.
The Howard Government has also claimed that by reducing costs for Australian manufacturers, a GST would encourage employment as companies would be better able to invest, expand and take on extra staff.
Finally, the Howard Government has has pledged that the GST will not rise above 10 per cent and has claimed to have a mechanism in place to ensure that this will be the case.
Arguments against the GST proposed by the Howard Government
One of the major criticisms made about the GST is that it will not be equitable (that is, it will not impose an equal burden on all taxpayers).
According to this line of argument, those on higher incomes are affected less by a GST as they are better able to absorb an increase in the cost of living. They are also, it is claimed, able to direct a significant percentage of their income into saving.
Lower income families, it is argued, have less surplus income and thus tend to spend all or most of what they earn. Thus, it is claimed, any increase in the cost of goods and services will impact on them more heavily.
This point has been put by a 38 year-old, currently unemployed, Tasmanian, identified in The Australian as `Eric'. The man interviewed claimed, `Most of our income goes towards feeding the kids and food will be taxed and I don't think the tax rebates will be big enough.'
The second point made suggesting that the GST package is inequitable is that the pension increases and income tax reductions being offered to middle and lower income earners to reduce the impact of the GST are insufficient.
A number of organisations, including the Melbourne Institute of Applied Economic and Social Research, have claimed that for the GST to be equitable the Government would need to give more compensation to low income earners than is currently intended.
It has been noted, for example, that when previous Liberal Party leader, Mr John Hewson, proposed a goods and services tax, he intended that pensions would rise by eight per cent rather than the four per cent proposed by the Howard Government.
Thirdly, it has been claimed that the income tax reductions proposed by the Howard Government will most benefit the higher income earners, rather than lower and middle income earners.
Mr Ross Gittins, a columnist writing for The Age, has claimed, `Howard's tax cuts would deliver the greatest benefits to those very-high-income earners who have benefited most, and will benefit most, from the changing structure of our economy ...'
Fourthly, it is claimed that the GST will impact particularly heavily on low income families because it applies to food and other essentials.
This point has been made by a 36-year-old restaurateur, identified by the Australian as Jin. This man has claimed, `I don't like the GST, it'll affect low-income people because food is very important and it doesn't matter if you're rich or poor, you still have to eat.'
Critics of the Howard Government's GST proposal have argued either that it should not be applied to food and other necessities or that it should be set at a lower rate on these essentials.
This point has been made by Mr Martin Feil, a partner at Firestone and Feil, industrial policy advisers.
Mr Feil has claimed, `The tax on food doesn't follow overseas best practice. In most European countries any GST [on food] is significantly reduced below the general rate.'
Fifthly, it has been claimed that the pattern of spending of low-income earners differs from that of high- income earners in a way which will disadvantage the lower income group.
Tim Colebatch, the economics editor for The Age, has claimed that Australian Bureau of Statistics figures suggest that high income groups spend 41 per cent of their income on goods and services that will rise in price under a GST and 35 per cent of their income in areas that will either remain the same price or become cheaper.
In contrast, Mr Colebatch claims, the Bureau's figures suggest low income groups spend 48 per cent of their income in areas that will be more expensive under a GST and only 28 per cent of their income in areas that will be the same price or cheaper after a GST is applied.
Mr Colebatch has claimed that the overall impact of the GST would be to `increase the relative tax burden on low and middle income earners'.
Sixthly, it has also been suggested that the GST would be inequitable as it would place a heavier burden on those living in the country. There are two main reasons offered to support this claim.
Firstly, it is argued, those who live in the country necessarily have to travel greater distances each day than those who live in cities because the services they need to access, such as schools, shops, banks and hospitals are usually further from them.
It is claimed that the need to travel greater distances means that country people are particularly vulnerable to increases in the cost of petrol.
Critics of the GST have claimed that the probable increase country people will face in the cost of petrol will place an unequal tax burden upon them.
According to this line of argument, the Government's plan to reduce the petrol excise by 7 per cent before applying the 10 per cent GST will not prevent a rise in petrol prices which will affect country people more severely.
Mr Lauchlan McIntosh, the executive director of the Australian Automobile Association, has argued that the Government will be unable to control the cost of petrol because the excise charged on petrol is tied or indexed to the national cost of living. Mr McIntosh has claimed that as the GST will increase the cost of living, it will also boost the Government excise which will mean inevitable petrol price increases when a GST is imposed on top of that.
Mr McIntosh has also claimed that a GST will increase the discrepancy between city and country petrol prices.
According to this line of argument, as petrol is already more expensive at country outlets, a GST imposed on the higher country retail price will simply boost that price further.
Secondly, it has been claimed that country people will be disadvantaged because a GST will mean more expensive STD phone calls. (The Government has indicated that the GST will not apply to local phone calls, however, the same assurance has not been given about STD calls.)
The Victorian Farmers' Federation President, Mr Peter Walsh, has stated, `... it's another thing that disadvantages people who live in rural Victoria.'
Seventhly it has been claimed that a GST would be inequitable because it would disadvantage the physically disabled.
According to this line of argument, the physically disabled already have to pay between $2,000 and $10,000 a year in additional expenses to meet the cost of disability aids, home maintenance and greater use of public transport and taxis.
Currently, it is maintained, only the most vital of the additional goods and services disabled people need to purchase are exempt from the GST. Therefore, it is claimed, disabled people will be additionally disadvantaged by the imposition of the goods and services tax.
Those who hold this position maintain that the assistance with purchasing disability aids and the increased transport concessions the government has offered will be swallowed up by the cost increases.
It has been maintained that disabled people in employment will be particularly hard hit because they qualify for fewer concessions and yet often required more goods and services than the home-bound person.
In addition to being inequitable, it has also been claimed that the GST will have a number of other socially undesirable consequences.
Firstly, it has been claimed, for example, that the GST is likely to disadvantage families with children.
According to this line of argument, the figures on which the Government has based its estimates significantly under-rate the cost of rearing children and thus the extent to which this cost would be increased by a GST.
Tom Colebatch, the economics editor of The Age, has claimed that according to the Government's figures a typical childless couple on $50,000 a year will pay $14.26 a week in GST. Add one child to their home and their GST bill rises to $14.56. Add two and it hits $14.86. Add three and it rises to $15.16
Just 30 cents a week for a child? What a gift! ...
Of all the claims so far in the campaign, this is one of the silliest. Any parent knows children add to the cost of living.'
Mr Colebatch has gone on to claim that given the apparent unreliability of the Government's figures the electorate cannot assume that families with children will be adequately compensated via income tax concessions or family payments.
Secondly, it has been claimed that the GST will have the additional social disadvantage of penalising those undertaking formal education.
It has been claimed that this penalty will be felt both by families with primary and secondary school age children and by teenagers and adults undertaking tertiary education.
According to this line of argument a GST will make it more expensive for parents to put their children through school and more expensive for people to obtain tertiary and other qualifications. Those who hold this view point out that most of the equipment students need to purchase will be taxed.
Thirdly, there is concern expressed that a GST will make hospitals more expensive to operate.
One Melbourne respondent to an Age on-line survey claimed, `The Howard GST will be disastrous for education and health. Howard claims he has exempted these areas, but goods and services used by schools and hospitals will be slugged.'
There have also those who believe that a GST will place an excessive burden on all retailers who will effectively become government tax collectors. This fear was apparently expressed by a significant number of the 270 people who responded to The Age's invitation to give their views on the GST on-line.
This view was put by an electrical equipment retailer from southern NSW whose opinion was quoted in The Australian.
The retailer stated, `For small business a GST would not be good, we would become a nation of tax collectors and I don't see why we should do that - as it is we already have to collect superannuation on their behalf.'
Finally there are those who are concerned that the GST will not remain at a flat 10 per cent. They believe that once a GST has been introduced the Government cannot guarantee that the rate will not be increased in the future.
This point was made by the leader of the Opposition, Mr Beazley, who in a televised debate against the Prime Minister, Mr Howard, noted that those European countries which had introduced a form of GST had been unable to hold it at its initial levels.
Further implications
If the Howard Government wins the election scheduled for October 3, 1998, a GST will be introduced in July, 2000.
Only then will it be seen what impact a GST will have on the cost of living for all Australians and the extent to which income tax reductions, increased pensions and other payments will nullify its effect.
It will also be interesting to note what impact the GST has on the balance of responsibilities between the states and the federal government.
It has been suggested that by making over to the state governments the proceeds of any GST the federal government is seeking a means to make state governments solely responsible for the provision of services such as education and health.
If this is what the Howard Government intends it will represent a major change in direction for federal-state relations and a change that may not be wholly welcomed by the states.
If the Labor Party should win the next election then it is all but certain that a GST will not be introduced.
The Labor Party has opposed this tax so strongly that it is difficult to imagine it being able to propose its introduction once elected to government.
The ALP is also intending to make some alterations to Australia's taxation system, but not, however, the sort of comprehensive changes planned by the Howard Government.
Instead, the Opposition is proposing a system of tax credits to relieve the income tax burden on middle and lower income earners.
The ALP does not seem to believe that Australia's tax base is shrinking in the way the Howard Government maintains. This view appears to be have been supported by The Age's economics editor, Tim Colebatch.
However, there are others, including ACOSS, who have criticised the ALP's plans as unable to be funded over the long term.
Both parties have been criticised for their apparent failure to effectively address the whole-scale tax avoidance apparently practised by the very wealthy.
There has also been some speculation as to what would be the fate of the Howard Government's tax package were it to win the next election, without a clear majority in the Senate.
All other parties are opposed to the GST so it may not come into effect if there is a hostile Senate. Recently, however, the Australian Democrats have indicated that if the GST did not apply to food, their representatives in the Senate would be prepared to negotiate a compromise on other features of the tax.
The Government is currently maintaining that no compromise would be acceptable; however, were it to win without a clear majority in the senate, a second Howard Government might be more willing to negotiate.
Sources The Age
1/9/98 page 8 news item by Phillip Hudson, `GST is good for the economy, not battlers'
2/9/98 page 13 comments by Tim Costello, `Why Howard's is better'
2/9/98 page 13 comment by Martin Feil, `...But compared to Fightback! It's a cop-out'
4/9/98 page 1 news item by Michael Gordon & Brendan Nicholson, `Welfare attack cheers Howard'
4/9'98 page 7 news item by Brendan Nicholson, `ACCOS cold on tax plan'
5/9/98 page 11 comment by Tim Colebatch, `Is the tax system really crumbling?'
7/9/98 page 8 news item by Tim Colebatch, `Expert says GST will hit families'
8/9/98 page 8 news item by Phillip Hudson, `Car groups urge fuel tax freeze'
8/9/98 page 13 comment and analysis by Tim Colebatch, `The cost of kids exposes the coalition's rubbery figures'
9/9/98 page 10 comments compiled by Margaret Easterbrook, `Voters express their views on GST'
9/9/98 page 19 comment by Ross Gittins, `The perfect tax recipe: one part Howard, one part Beazley, mix'
11/9/98 page 10 news item by Paul Heinrichs, `Together, but miles apart on tax'
15/9/98 page 13 comment by Tim Colebatch, `In our great debate the worm turns toward a GST'
The Australian
1/9/98 page 6 comments from five first-time voters, compiled by Madeleine Coorey, `Ballot box debutants split on GST but sceptical of parties'
2/9/98 page 7 comments from five low income earners, compiled by Penelope Green, `Battlers' message: scrap the GST, convince us on the rest'
4/9/98 page 5 comments from five small business operators, complied by Claire Harvey, `GST okay, but low-income earners have to be looked after'
4/9/98 page 5 news item by George Megalogenis, `Welfare lobby says Labor needs GST'
5/9/98 page 4 comments from five professional women, compiled by Georgina safe, `Tax takes back seat to equity'
8/9/98 page 5 comment by George Megalogenis, `The truth is a little taxing for both sides'
9/9/98 page 8 news item by John Kerin, `Disabled face tax loss'
10/9/98 page 4 news item by Sid Marris, `Social justice stirs PM's tax passion'
The Herald Sun
4/9/98 page 4 news item by Karl Malakunas, `Labor welfare blow'
6/9/98 page 10 news item by David Luff, `Petrol price row erupts'
10/9/98 page 13 news item by David Luff, `Petrol fuels dissent'
11/9/98 page 10 news item by David Luff, `Money chief blasts GST'
12/9/98 page 14 news item by Michael Harvey & Genevieve Lally, `Tax to hit STD calls'
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