Right: Former Prime Ministers Paul Keating and John Howard were in accord over the need for a broad-based consumption tax, although the two ex-Treasurers sometimes denied this in the heat of political battle.
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Arguments in favour of charging a GST on food
1. Indirect taxes are more efficient than direct taxes
Direct taxes are those placed on income or profits. Indirect taxes, such as the GST, are essentially consumption taxes, placed on goods and services consumed. Direct taxes have been condemned as a disincentive to employees to become more productive as their increased income will only attract increased income tax. Similarly, increased company taxes have been condemned as a tax on productivity, discouraging manufacturers from expanding and so exerting a dampening influence on the economy.
Indirect taxes are also recommended as being easier for a government to collect and harder for a taxpayer to avoid. It is not possible, for example, to construct tax shelters or other devices to evade paying a consumption tax.
The Liberal member for Wannon, Dan Tehan, has stated, 'We all understand on both sides of the house that we have to tax people, and my view is that if we are going to tax people, we should do it as effectively and efficiently as possible.
All the economic evidence points to the more you rely on revenue from direct taxes such as company and income tax, the bigger the handbrake it places on your economy, whereas the GST is a growth tax.'
Mr Tehan added, 'If our tax system is to remain efficient and internationally competitive, then we have to reduce our reliance on direct taxes, such as income and company tax, and look to replace that with indirect taxes such as the GST.'
In an opinion piece published in The Australian Financial Review, Mr Tehan said broadening the GST would deliver up to $21.6 billion in extra revenue each year and enable further serious reductions in direct taxes.
Mr Tehan compared New Zealand's broadly applied consumption tax to Australia's limited one and argued that the broad-based indirect tax had allowed New Zealand to reduce direct taxation.
Mr Tehan stated, 'Since its introduction in 1986, New Zealand has raised its GST twice. It also recognised from the start that the only way to reap a full GST benefit is to have minimal exemptions.
Their GST covers 96 per cent of their consumption. Australia's only covers 47 per cent and is shrinking, down from 53 per cent a decade ago.
As a result, the Kiwis now enjoy a company tax rate of 28 per cent and a top marginal income tax rate of 33 per cent.'
2. Increasing revenue gained from the GST is necessary to allow states to fund schools, hospitals and other services
In January, 2013, a range of economists declared that in order for the states to meet growing demands for schools and hospitals, as well as other services they provide, the revenue derived from the GST would have to be increased.
AMP Capital's chief economist, Dr Shane Oliver, claimed that broadening the GST's base to cover all goods and services, including fresh food, was the most urgently needed tax reform. In return, states could remove payroll tax and stamp duty.
Dr Oliver stated, 'The tax base for the GST is too narrow and likely to grow too slowly to satisfy state revenue needs.'
Nigel Stapledon, the associate head of the University of New South Wales School of Economics, stated, 'An increase in the states' tax base is the key to genuine reform. That means an increase in the GST to allow dependence on the most inefficient taxes, such as property and transfer taxes, and gambling taxes, to be wound back.'
In September 2013, the Organisation for Economic Co-operation and Development released a paper, Tax Policy Landscape: Five Years after the Crisis, which showed that Australia's taxation revenue declined much more dramatically than in most OECD nations - primarily because of Australia's high dependency on company and income taxes, and low dependency on consumption taxes (the GST).
Company and income taxes are hit harder by economic downturns than consumption taxes. This makes direct taxes a less reliable source of states' revenue than the GST. It has been noted that the Victorian and NSW governments depend on the GST for about a quarter of their revenue, so the slower GST growth is hitting state budgets. Other states have also complained about their diminishing share of the state budget allocations made by the federal government.
State and territory finances have also come under pressure from revenue write-downs and the federal government's decision to cut budgeted funding for hospitals and schools.
3. Other countries in the world have a tax on food
Critics have argued that compared to many other countries Australia's GST is low and its non-taxing of fresh food items places it out of step with many other nations.
The concept behind consumption taxes such as a GST was developed by a French tax official in the 1950s. In some countries it is known as VAT, or Value-Added Tax. Today, more than 160 nations, including the European Union and Asian countries such as Sri Lanka, Singapore and China practice this form of taxation. Roughly 90 percent of the world's population live in countries with VAT or GST.
Countries without a VAT tend to be small, with the notable exceptions of the United States and India (prior to 2005, when some state-level VATs were introduced; the 2006 budget speech announced the intention to adopt a central VAT in Indian.) Supporters of consumption taxes claim they are a valuable means of allowing economies to grow while generating sufficient taxation revenue to provide services.
Most indirect taxation in OECD (Organisation for Economic Co-operation and Development) countries is generated through various taxes on goods and services. Australia has the fourth lowest level for goods and services taxes and total indirect taxation in the OECD.
Australia's indirect tax burden relating to these items is 9.7 per cent of GDP which is significantly lower than the OECD average of 12.9 per cent. Australia's GST rate of 10 per cent is significantly below the unweighted OECD average of 17.6 per cent.
There is a range of rates used when applying consumption taxes in OECD countries. The rates vary from 25 per cent in Denmark, Hungary, Norway and Sweden, to 5 per cent in Japan. For members of the European Union, a minimum standard rate of 15 per cent is prescribed. Australia's GST rate is only 10 percent. Some economist recommending the inclusion of fresh food in the GST tax base claim that the only way of avoiding an increase in the rate of tax, that is to lift it beyond 10 percent, is to increase the number of goods and services upon which it is imposed.
Australia is one of only five countries (the others being Canada, Mexico, Ireland, and the United Kingdom) that apply a zero rate to certain food items. Most European countries apply reduced rates to various food items.
New Zealand is sometimes cited as a country with a comparable economy to Australia's which imposes a GST on fresh food. New Zealand's GST captures everything except housing, rents and financial transactions.
4. Those on low incomes could be compensated
It has been claimed that those on low incomes could have the impact of a tax on fresh food overcome by government-funded compensation.
The Liberal MHR for Wannon, Dan Tehan, who has proposed extending the GST to fresh food, has also argued in favour of compensation for the economically disadvantaged. Mr Tehan has stated, 'You would have a compensation package which would be applied directly to those that it would impact on. The OECD have made this point clear: you address welfare through direct welfare payments; you don't address welfare through exemptions to everyone in your tax system.'
Mr Tehan has further argued, 'This [impact of GST on fresh food] can be dealt with through compensation payments. Also, I'd make the point: if you have taxes in place which shackle our economy, over time they are regressive in nature because they limit employment and your ability to grow.'
In May 2014, the head of World Vision, Tim Costello, argued that the GST should be extended to as many goods and services as possible, including food, and that the poor should be compensated for its particular effects upon them.
Mr Costello stated, 'The preference in terms of simplicity and reducing cost is to have the broadest base possible and deal with it in the compensation.
The starting principle should be "don't exempt anything", because it's simpler and clearer and more transparent and then build that back into the compensation for those that are poor.'
Mr Costello said the GST was already affecting the poor. He cited the fact that the tax is levied on processed food but not fresh food as an example, saying poor people ate more processed food. He said a compensation package would have to include tax cuts for people on lower incomes as well as a reduction in payroll tax and stamp duty.
5. Extending the GST would be part of a general tax reform
The Prime Minister, Tony Abbott, has suggested that any discussion of expanding the base of the GST should take place as part of a much broader discussion of a reform of the taxation system and a reconsideration of respective state and federal responsibilities.
In a speech given at the Sir Henry Parkes Commemorative Dinner on October 25, 2014, Tony Abbott asked, 'Might the states be prepared to accept responsibility for broadening the indirect tax base [the GST]; might they be prepared to surrender some of their responsibilities to the Commonwealth; might there be new funding formulas that wouldn't solve the blame game but could at least give it a new and more realistic starting point?'
Prime Minister Tony Abbott has claimed that the federal government is open to reforms that 'improve' the states' indirect tax base with 'compensating reductions in income tax'.
The Prime Minister has stated that the Coalition 'is determined to avoid anything that increases the overall burden of tax'.
The states now spend about $230 billion a year but raise only about $130 billion, with the GST funding about $54 billion of the shortfall, and a further $46 billion coming from the Commonwealth through specific purpose payments or partnership agreements.
The Prime Minister has suggested that if more money were raised through the GST the federal government would be required to give less in grants to the states and so would be able to reduce the taxes that it had to impose. Key among the taxes being considered for reduction are company tax and income tax.
Thus some supporters of an extension of the tax base of the GST to include fresh food claim that this would have negligible impact on the cost of living as there would be reductions in other taxes.